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Serving people
in the non-standard
credit market
Annual Report and Financial Statements 2014
Provident Financial plc
Annual Report and Financial Statements 2014
About us
1 Our mission
2 The markets we serve
3 Highlights
4 At a glance
6 Our social purpose
7 We help people
8
Financial highlights
Strategic
report
10 Chief Executive’s review
14
Our business model
18 Our strategy and performance
24 Our marketplace
30 Corporate responsibility
Governance
Introduction from the Chairman
Our directors and officers
77
78
80 Leadership
84
88
Effectiveness
Shareholder engagement
Remuneration
109 Directors’ remuneration report
110 Remuneration policy
116 Annual Report on Remuneration
Financial
statements
130 Consolidated income statement
130 Consolidated statement
of comprehensive income
130 Earnings per share
131 Balance sheets
132 Statements of changes
in shareholders’ equity
Shareholder
information
194 Information for shareholders
A
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2 Consumer Credit Division
40 1 Vanquis Bank
48
60 3 Moneybarn
68
Financial review
Risks
Audit committee and auditor
90 Risk advisory committee
93
97
101 Nomination committee
104 Directors’ report
134 Statements of cash flows
135 Statement of accounting policies
142 Financial and capital risk management
147 Notes to the financial statements
187 Independent auditor’s report
Cautionary statement
All statements other than statements of historical fact included in this document, including,
without limitation, those regarding the financial condition, results, operations and business of
Provident Financial plc and its strategy, plans and objectives and the markets in which it operates,
are forward-looking statements. Such forward-looking statements which reflect the directors’
assumptions made on the basis of information available to them at this time, involve known and
unknown risks, uncertainties and other important factors which could cause the actual results,
performance or achievements of Provident Financial plc or the markets in which it operates to be
materially different from future results, performance or achievements expressed or implied by
such forward-looking statements. Nothing in the document shall be regarded as a profit forecast
and its directors accept no liability to third parties in respect of this report save as would arise
under English law. In particular, section 463 of the Companies Act 2005 limits the liability of the
directors of Provident Financial plc so that their liability is solely to Provident Financial plc.
Our mission
Provident Financial plc
Annual Report and Financial Statements 2014
1
Our mission is to be the
leading non-standard
specialist lender in our
chosen markets, acting
responsibly in all our
relationships and playing
a positive role in the
communities we serve.
About us 2
The markets we serve
We’re here to serve
a particular market
The UK non-standard credit market is made up of
around 12 million people who, for a variety of reasons,
from relatively low income to a poor credit history,
are not well served by the mainstream credit market’s
products and services.
Our customers look for:
> Smaller sums – typically less than a mainstream provider
would lend.
> High levels of contact with their lender – our customers
like someone to talk to about their loan.
> Understanding – our customers usually have little leeway
in their income, so, if they experience problems during
the term of their loan, they want to talk to someone
who understands their situation and can offer a solution.
With some of our products this can even mean the ability
to reschedule repayments at no extra cost to the
customer whatsoever.
Read more on our marketplace
on pages 24–27
Provident Financial plc Annual Report and Financial Statements 2014 Highlights
3
2.4m
Number of customers
3,555
Number of employees
7,700
Number of self-employed agents
£1.8bn
Year-end receivables
£124.5m
Total tax contribution
£2.4m
Community investment
Provident Financial plc Annual Report and Financial Statements 2014About us 4
At a glance
The group has
three divisions,
covering four
distinct types
of non-standard
lending
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
Non-standard credit cards
Home credit
Online lending
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Read more on our products
and divisions on pages 40–67
Non-standard car finance
Provident Financial plc Annual Report and Financial Statements 2014
5
Vanquis Bank
Vanquis Bank is the leading supplier of credit cards
in the non-standard credit market. We provide new
customers with a low credit limit and only increase
it when we have sufficient experience of the customer
handling their account responsibly. We maintain a
high level of contact with customers, from the initial
call welcoming the customer to Vanquis Bank and
continuing throughout our relationship.
1.3m
UK customers
£151.0m
UK profit before tax
1,150
Employees
£150–
£3,500
Range of credit limits
Read more on Vanquis Bank on pages 40–47
Provident
Provident offers home credit loans, typically
of a few hundred pounds, through a network of
7,700 local agents who call each week at 1.1 million
customers’ homes in the UK and Ireland. Agents are
primarily paid commission on what they collect, not
what they lend, so it is in their interests not to lend
more than customers can repay. The total amount
repayable is fixed at the outset, so there are no
extra charges whatsoever.
Satsuma
Satsuma is our online instalment loan product.
We give new customers an initial loan of between
£100 and £1,000 and collect repayments by continuous
payment authority, either once a week or once a month,
on a day agreed with the customer. Existing customers
can borrow up to £2,000. Our UK-based call centre
is always there to discuss any issues customers may
have. Just like our home credit product, the total amount
repayable is fixed at the outset, so there are no extra
charges whatsoever.
Moneybarn
Moneybarn is the market leader in the provision
of car finance for people in the non-standard credit
market. Moneybarn is able to help those who may
have had problems with credit in the past but who
are now over them to get to work.
1.1m
Customers
2,230
Employees
£103.9m
Profit before tax1
£100–
£2,500
Loan range
Read more on Provident on pages 52–55
21,000
Customers
£100–
£2,000
Loan range
Read more on Satsuma on pages 56–57
22,000
Customers
£15.0m
Profit before tax1,2
115
Employees
£4,000–
£25,000
Loan range
Read more on Moneybarn on pages 60–67
1. Before exceptional costs and, in the case of Moneybarn, prior to the amortisation of acquisition intangibles.
2. Pro forma profit for the year ended 31 December 2014, after applying the group’s lower cost of funding to pre-acquisition results.
Provident Financial plc Annual Report and Financial Statements 2014About us 6
Our social purpose
No business can operate sustainably in today’s world without a compelling social purposeProvident Financial’s social purpose is financial inclusion for those who are not well served by mainstream credit products or are excluded altogether.To do this, we provide non-standard credit customers with appropriate amounts of credit, maintain close contact with them throughout the term of their loan and work with them sympathetically if they experience difficulties. Terms and conditions are designed to meet their particular needs and rigorous checks are made to ensure customers can afford the repayments.We have been doing this successfully since 1880.The non-standard credit marketThe UK non-standard credit market comprises around 12 million people who, for a variety of reasons, are not well served by the mainstream credit market, either because they would not be accepted by a mainstream lender, or because mainstream credit products would not suit their particular needs.The main reasons that a customer will turn to the non-standard market is that they have a relatively low income, they have a poor credit history because of past problems, or have a limited credit history, or have no credit history at all. Specialist non-standard lenders such as Provident Financial have the expertise to serve non-standard consumers in a responsible manner.Provident Financial plc Annual Report and Financial Statements 2014 We help people
7
We help people who are either excluded from the
mainstream credit market, or whose needs are not
well met by mainstream credit market products, to
finance the things they need to get on with their lives.
Helping Anna
create a new home for her family
Helping Tracy
get the lowest prices
Read more on pages 16–17
Read more on pages 22–23
Helping Tony
get to work
Helping Jane
pay for her best friend’s operation
Read more on pages 28–29
Read more on pages 38–39
Provident Financial plc Annual Report and Financial Statements 2014About us 8
Financial highlights
Generating consistent returns
We have consistently delivered sustainable growth since the
demerger of our international business in 2007, which has benefited
all of our stakeholders. In 2014, we once again demonstrated the
strength of our customer proposition and delivered another strong
financial performance.
Adjusted profit before tax1 (£m)
£234.4m
+19.5%
2014
2013
2012
234.4
196.1
178.4
Adjusted earnings per share1 (p)
132.6p
+18.4%
2014
2013
2012
132.6
112.0
100.4
2011
2010
157.2
140.0
2011
2010
86.9
76.2
Statutory profit before tax (£m)
£224.6m
+23.1%
2014
2013
2012
Dividend per share (p)
98.0p
+15.3%
Gearing (times)
2.4 times
2011
2010
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010
Customer numbers (’000)
2.4m
2014
2013
Employee costs (£m)
£158.4m
2012
2011
2010
2014
2013
2012
2011
2010
2011
2010
2014
2013
2012
2011
2010
2014
2013
2012
2011
2010
Basic earnings per share (p)
126.5p
+21.4%
2013
2012
2014
224.6
182.4
194.0
157.2
137.5
Dividend cover1 (times)
1.35 times
98.0
85.0
77.2
69.0
63.5
2.4
Return on assets1,2 (%)
15.1%
Community investment (£m)
£2.4m
2014
2013
2012
2011
2010
Total tax contribution3 (£m)
£124.5m
2014
2013
2012
2011
2010
3.0
3.2
3.2
3.3
2,445
2,635
2,738
2,520
2,413
158.4
158.6
127.0
135.7
130.1
126.5
104.2
108.9
86.9
74.3
1.35
1.32
1.30
1.26
1.20
15.1
14.2
14.5
14.2
14.3
2.4
2.0
1.9
1.6
1.5
124.5
109.3
110.2
102.4
85.0
1 Stated prior to the amortisation of acquisition intangibles and exceptional costs. 2 Adjusted profit before interest after tax as a percentage of average receivables. 3 Comprises both direct and indirect taxes.
Provident Financial plc Annual Report and Financial Statements 2014
Provident Financial plc
Annual Report and Financial Statements 2014
9
Strategic report
10 Chief Executive’s review
14
Our business model
18 Our strategy and performance
24 Our marketplace
30 Corporate responsibility
2 Consumer Credit Division
40 1 Vanquis Bank
48
60 3 Moneybarn
68
Financial review
S
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Strategic report
10
Chief Executive’s review
What we do and why
we are successful
Introduction
We have had an excellent year in 2014.
Our performance has been very strong
and we have made great progress
in further developing our businesses
to ensure that we always provide our
customers with the right products
and the right experience throughout
the whole customer journey.
Peter Crook
Chief Executive
93%
84%
Home credit customer satisfaction
Vanquis Bank customer satisfaction
15.3%
57.0%
Increase in dividend per share
Total shareholder return in 2014
Provident Financial plc Annual Report and Financial Statements 2014 What we do and why
we are successful
11
4. We have a robust funding model:
We have developed a funding model whereby we
borrow long but lend short. Our funding sources
are diverse, ensuring that we are not overly reliant
on one funding source and that we will be able
to serve our customers through thick and thin.
These attributes mean that we lend responsibly
to our customers, receive high customer
satisfaction levels and have been able to deliver
strong growth in both earnings and dividends
since the demerger of the international business
in 2007. Our Total Shareholder Return (TSR)
over this period equates to £20.65 per share
or annualised TSR growth of 17%. In short, we
are good at what we do and I am very proud
of the contribution we make to society and all
our stakeholders.
A year of strong performance
and business development
2014 has been an excellent year both in terms
of performance and the development of the
group. We have delivered adjusted EPS growth
of 18.4% and increased the full-year dividend by
15.3%. Compared with a year ago, we now have
a broader mix of businesses following the recent
acquisition of Moneybarn and the development
of Satsuma, our online direct repayment loans
business. Both of these businesses should
contribute materially to the medium-term growth
prospects of the group. It is not only our strong
performance which is pleasing. I am delighted
with the progress each business has made
in transitioning to the new Financial Conduct
Authority (FCA) regulatory regime and continuing
to develop our products and service to meet the
needs of our customers.
“We provide much needed
access to credit for those
who might otherwise
be financially excluded.
We have been doing this
for over 130 years and
are proud of what we do.
Provident Financial has a very long track record
of serving non-standard consumers. We are
successful because we have a specialist model
which puts customer outcomes at the forefront
of everything we do. I am often asked how we
differentiate ourselves from other businesses
and other lending models and how we manage
to deliver such high levels of customer satisfaction
yet still deliver good returns for our shareholders.
I believe that there are four fundamental attributes
which are the backbone of our success:
”
1. We focus solely on serving
the non-standard credit market:
We provide much needed access to credit
for those who might otherwise be financially
excluded. We have been doing this for over
130 years and are proud of what we do.
Our customers can be sure that when they
borrow from us they are dealing with a business
that genuinely understands them and can use its
significant knowledge and experience, built over
decades, to serve them in the best possible way.
2. We lend responsibly, meeting
the specific needs of consumers
in the non-standard market:
Lending responsibly is in our DNA. We offer
simple and transparent products with no hidden
charges. Our manageable weekly or monthly
payments ensure that our products are affordable.
We are able to do this as each of our businesses
has bespoke underwriting procedures, based
on our historical experience, to ensure that
we properly assess affordability and manage
credit risk.
3. We have a tailored
business model to serve
non-standard consumers:
We maintain close contact with our customers
throughout our relationship with them. Whether
it’s the weekly home visit by an agent in home
credit, the welcome call in Vanquis Bank or
through our various contact centres, we make
sure that customers always have someone to talk
to. When customers get into difficulty, we have
active and personalised approaches to helping
them get back on their feet, including a range of
forbearance measures. Customers know that
they’ll get a sympathetic and appropriate response
from us.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report 12
Chief Executive’s review continued
“The home credit product
fits low-income customers
like a glove; it is simple
and transparent with
manageable weekly
payments.
”
Vanquis Bank
Vanquis Bank has once again performed strongly
in 2014, increasing UK profits by 32.8% to
£151.0m. Continued investment in the customer
acquisition programme has generated record new
account bookings of 430,000, up from 411,000 in
2013. Vanquis Bank now serves 1.3m customers
as more and more non-standard consumers are
valuing the utility of owning a credit card in today’s
modern, digital age. Our high level of service
throughout the customer journey ensures that
our customer satisfaction level of 84% remains
significantly higher than mainstream banks.
Vanquis Bank continues to deliver strong growth
and, against unchanged credit standards,
our marketing programmes are successfully
delivering an increased flow of new customers
from the target audience. This has resulted in us
reassessing the medium-term potential for the
UK customer base from between 1.3m and 1.5m
customers to between 1.5m and 1.8m customers
with an expected average customer balance of
approximately £1,000.
We have recently made the decision to withdraw
from the pilot credit card operation in Poland.
This reflects our conclusion that the timeframe
required to develop a business of sufficient scale
to achieve the group’s target returns is too long
and therefore not the best use of the group’s
capital. Accordingly, we have commenced the
process of winding down the Polish operation.
This includes running off the receivables book in
an orderly manner which is expected to be largely
completed in 2015. We do not expect there to
be a material cost from winding down the pilot
operation in 2015.
Consumer Credit Division (CCD)
CCD has made very good progress during 2014
in positioning itself as a more broadly-based
lending business whilst delivering stable profits.
Last year we set ourselves a number of actions
to reposition the home credit business as a
smaller but leaner, better-quality, more modern
business focused on returns. These included:
(i) tightening the underwriting and implementing
standardised collections processes throughout
the organisation to improve the quality of the
receivables book; (ii) rightsizing the cost base to
maintain profitability; and (iii) deploying technology
throughout the field organisation to improve
efficiency and effectiveness and deliver high
levels of compliance. I am delighted that the whole
CCD team has worked tirelessly this year to
successfully deliver against each of these actions.
The home credit product fits low-income
customers like a glove; it is simple and transparent
with manageable weekly payments rather than
large one-off bullet payments and customers
know they get a sympathetic response when
times are tough. The business has very high
levels of customer satisfaction of 93% and I am
very pleased we have stabilised the business
and will continue to serve our customers in the
right way whilst other more short-term business
models come and go.
Satsuma is a very exciting opportunity in
the space between Vanquis Bank and home
credit. The continued dislocation caused by the
regulatory changes to the payday loans market
provides an excellent opportunity to develop a
sustainable business with a strong market position
capable of delivering the group’s target returns.
We have invested heavily in our underwriting,
systems, processes, governance and management
team during 2014 and we are well placed to
further develop an excellent business through
2015 and beyond.
Satsuma has many of the features of home credit
adapted for the online world. With affordable
weekly or monthly repayments, no additional
charges, close contact with our customers and
a range of forbearance measures for those who
get into difficulty, I believe it is the most customer-
centric product in the market and a much better
alternative for customers than payday lending.
Read more on Vanquis Bank
on pages 40–47
Read more on Consumer Credit
Division on pages 48–59
Provident Financial plc Annual Report and Financial Statements 2014
“Moneybarn’s ethos is
to help its customers
get to work by lending
responsibly and providing
them with the finance
to buy a car.
”
13
Moneybarn
We acquired Moneybarn, the UK’s largest
non-standard vehicle finance group, in August
2014 and it is our first acquisition since the
demerger of the international business in 2007.
We have very exacting criteria for assessing
potential new acquisitions, including the
sustainability of the product offering, the quality
of the management team, a market-leading
position, growth potential and high returns.
Moneybarn is the first business to meet all
of these criteria.
Founded in 1992, Moneybarn provides car
finance to non-standard customers in the UK,
operating mainly through brokers with additional
distribution sourced through independent car
dealers and from its website directly to customers.
The business offers secured car loans through
conditional sale agreements. Moneybarn’s ethos
is to help its customers get to work by lending
responsibly and providing them with the finance
to buy a car. This fits perfectly with the group’s
own ethos of financial inclusion.
The acquisition of Moneybarn broadens the
product offering to the group’s target customer
base and creates a third leg of earnings that
complements the organic growth opportunities
available to the group. Moneybarn’s new
business volumes had been constrained prior
to acquisition due to funding restrictions but
have picked up significantly following acquisition.
Moneybarn is highly scalable given the strength
of its relationships with brokers, its market-leading
credit decisioning and the strength of the group’s
balance sheet and I am delighted with the
start made by the business under the group’s
ownership. We intend to develop the product
offering at Moneybarn and take advantage of the
synergies with the group’s existing businesses,
including enhancements to underwriting and
collections capabilities, the development of a
business-to-consumer proposition and leveraging
the Vanquis Bank customer base.
Our investment case
The investment case for Provident Financial
is very attractive:
> Winners in the non-standard credit market
will be larger, well-funded specialist lenders
with sustainable business models like us;
> We have an attractive mix of businesses:
> Strong, profitable and capital generative
growth in Vanquis Bank;
> A cash-generative home credit business
with a focus on returns;
> Potential for strong growth in Moneybarn
through developing the under-served
non-standard vehicle finance market;
> Opportunities for growth with Satsuma in
the segment of the market between home
credit and Vanquis Bank; and
> The potential for growth into other forms
of non-standard lending.
> The transition to the FCA and payday regulation
is causing dislocation in the non-standard credit
market which provides new opportunities
for responsible lending businesses such as
Provident Financial;
> Our management teams are highly skilled
and experienced, particularly in serving the
non-standard credit market;
> We have a robust balance sheet and prudent
funding; and
> We generate sufficient capital to support
planned growth and business development
without compromising our progressive
dividend policy.
Our excellent track record, consistent strategy,
robust business model and strong market
position mean that we are in a very good position
to further develop our businesses in 2015
and deliver another year of success for all of
our stakeholders.
Peter Crook
Chief Executive
Read more on Moneybarn
on pages 60–67
Read more on our markets
on pages 24–27
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
14
Our business model
A non-standard credit
market business model
All the businesses within our group
have a common approach and focus
on the non-standard credit market,
while also adapting what they do
to closely suit the needs of their
particular customers.
At the core of our group is a long
history and experience in lending a
hand where others don’t and seeking
to increase financial inclusion.
Our focus has always been on better
customer outcomes in markets typically
poorly served by mainstream lenders
who either reject our customers or
try to serve them with products and
approaches not best suited to their
needs. Our businesses and group
therefore manage the inherent customer
conduct, credit and reputation risks
better than others through
specialisation and close attention
to what customers want and need.
What allows us to do what we doWhat we do for our customersThe value this createsWhat our businesses provideProvident Financial plc Annual Report and Financial Statements 2014 A non-standard credit
market business model
15
Each of our three divisions delivers products created to meet particular needs within the non-standard credit market.
1 Vanquis Bank
2 Consumer Credit Division
3 Moneybarn
Non-standard credit cards
Home credit
Online instalment credit
Non-standard vehicle finance
Read more on pages 40–47
Read more on pages 48–59
Read more on pages 60–67
Overarching purpose to
lend where others don’t and
increase financial inclusion.
130 years of experience
in serving non-standard
customers.
Specialisation and focus
on non-standard credit.
Track record, strong
reputation and prudent
accounting and governance.
Commitment to corporate
social responsibility.
1. Offer simple transparent and suitable products,
tailored to non-standard customer needs.
3. Learn, refine and improve what we offer based
on our experience with non-standard customers.
2. Take a different approach to managing the customer
relationship, tailored to non-standard customer needs.
4. Do the right thing for customers with responsibility,
sustainability and compliance fundamental to
our proposition.
Financial inclusion and good outcomes for customers.
Growing returns for shareholders.
Consistently high levels of customer satisfaction.
Further capital for investment.
Access to funding through the cycle.
Making a positive difference in the communities we serve.
Careers for over 3,500 employees.
Work for 7,700 self-employed agents.
What allows us to do what we doWhat we do for our customersThe value this createsWhat our businesses provideProvident Financial plc Annual Report and Financial Statements 2014Strategic report Anna
Helping Anna create a new home for her family
“With one child, space in our old flat was tight, but we knew there would be
no way we could stay there once we found out we were expecting our second.
The upfront costs on the new place wiped out all of our savings, leaving us
no money to buy the washing machine we needed. With Satsuma, we could
borrow the right amount without the debt hanging over our head for ages.
And without a single penny in extra charges when we had to miss a couple
of payments, I would definitely use them again.”
Strategic report 18
Our strategy and performance
Our
strategy and
performance
Why we use these KPIs:
The group uses a number of KPIs
to assess progress against each of
its strategic objectives, including both
financial and non-financial measures.
Our performance during 2014,
measured using these KPIs, together
with our plans for 2015, are set out
on the following pages.
These KPIs are helpful in assessing
progress but are not exhaustive
as management also takes account
of a wide range of other measures
in assessing performance.
1
Strategy
Growing high-return businesses
in non-standard markets
> Maintain strong growth in Vanquis Bank within the
UK non-standard credit card market, whilst seeking
opportunities to utilise the existing business model
to expand into other markets and products;
> Continue to update the home credit business within
CCD and maximise returns whilst developing an
online loans business to generate sustainable growth;
> Unlock the growth potential within Moneybarn in
the non-standard vehicle finance market; and
> Extend our product offerings to ensure that we
have the appropriate range of products for our
chosen markets.
KPI descriptions:
Adjusted profit before tax – Profit before tax, the amortisation
of acquisition intangibles and exceptional costs.
Return on assets (ROA) – Adjusted profit before interest after tax
as a percentage of average receivables.
Return on equity (ROE) – Adjusted profit before tax as a percentage of
average equity. Equity is stated after deducting the group’s pension asset,
net of deferred tax, and the fair value of derivative financial instruments,
and the proposed final dividend.
Risk-adjusted margin (RAM) – Revenue less impairment as
a percentage of average receivables.
Adjusted earnings per share – Profit after tax, excluding the
amortisation of acquisition intangibles and exceptional costs, divided by
the weighted average number of shares in issue, excluding own shares
held by the group.
Dividends per share – The total dividend per share, comprising
the interim dividend per share paid and the proposed final dividend
per share.
Gearing – Borrowings (based on contracted rates of exchange and
excluding deferred arrangement fees) less the liquid assets buffer,
including liquid resources, divided by equity. Equity is stated after
deducting the group’s pension asset, net of deferred tax and the
fair value of derivative financial instruments, in line with the group’s
banking covenants.
Customer satisfaction – The percentage of customers surveyed
who are satisfied with the service they have been provided with.
Investment in the community – The amount of money invested in
support of community programmes, money advice programmes and
social research.
Total shareholder return – The change in the the group’s share price,
together with any dividend returns made to shareholders.
Provident Financial plc Annual Report and Financial Statements 2014 Adjusted profit before tax (£m)
Group ROA (%)
Group ROE (%)
2014
2013
151.0
103.9 5.8
234.4
113.7
102.5
196.1
2012
71.3
122.9
178.4
2011
44.2
123.6
157.2
2010
26.7
123.7
140.0
Vanquis Bank – UK
CCD
Moneybarn
Group
2014
2013
2012
2011
2010
15.1
14.2
14.5
14.2
14.3
2014
2013
2012
2011
2010
19
47
49
48
46
45
Group profit before tax up 19.5% to £234.4m
(2013: £196.1m):
Higher group ROA of 15.1% (2013: 14.2%),
reflecting improved returns at CCD.
> Continued strong growth and favourable margins
at Vanquis Bank generated a 32.8% growth in
UK profit before tax to £151.0m (2013: £113.7m);
> CCD delivered stable profits of £103.9m
(2013: £102.5m) reflecting the impact of
improved margins and cost reductions
offsetting the impact of a 20.5% reduction
in the receivables book; and
> Encouraging start from Moneybarn,
contributing a profit before tax of £5.8m
in the four months post acquisition.
ROE of 47% (2013: 49%), lower than 2013 due
to the impact of the £120m equity raised to fund
the Moneybarn acquisition.
Returns – Vanquis Bank – UK (%)
Returns – CCD (%)
Returns – Moneybarn (%)
69.1
20141
12.9
24.6
2014
2013
2012
2011
15.5
15.5
14.0
12.7
2010
11.2
ROA
RAM
33.2
34.2
34.8
35.0
33.9
2014
18.1
2013
15.1
2012
16.3
2011
16.0
2010
16.3
ROA
RAM
58.9
59.6
60.1
61.7
Moderation in the RAM to 33.2% (2013: 34.2%)
reflects the impact of the reduction in the revenue
yield following the changes made to the Repayment
Option Plan (ROP) product in mid-2013.
Continued strong returns, delivering a stable
UK ROA of 15.5% (2013: 15.5%), with the benefit
of operational leverage offsetting the reduction
in the RAM.
Significant uplift in the RAM to 69.1%
(2013: 58.9%) due to the marked improvement
in the quality of the receivables book from
tighter underwriting and the drive to implement
standardised arrears and collections processes.
ROA strengthened to 18.1% (2013: 15.1%),
resulting from the transition to a smaller but
leaner, better-quality, more modern business
focused on returns.
What it means for us in 2015
Vanquis Bank
> Continue to invest in the customer acquisition
programme, maintaining the growth in customer
numbers and receivables at similar levels;
> Further develop the channels to market to mitigate
any increase in competition;
> Maintain a tight stance on underwriting and credit
line increases;
> Deliver a RAM in the range of 31% to 32%, after
allowing for the impact of the changes made to the
ROP product and its sales process in the third quarter
of 2013 and European legislation reducing intercharge
fees; and
> Ensure an orderly run-off of the Polish
receivables book.
CCD
> Continue the programme of updating the home
credit business through the further roll-out of
technology, standardisation of processes and
the development of the people programme;
> Continue to develop the product and marketing
proposition in Satsuma to capture the growth
opportunity available in the online instalment
loans market;
> Complete the pilot of glo and assess whether
the business is capable of delivering the group’s
target returns;
> Further strengthen the RAM by maintaining a
tight underwriting stance and further embedding
the standardised collections and arrears
management processes;
> Maintain tight cost control, subject to investment
in business development activities; and
> Seek to grow profits at a modest level.
ROA
RAM
Pro forma RAM and ROA of 24.6% and 12.9%
in 2014.
1 Represents pro forma full-year results restated to apply
the group’s lower cost of funding to pre-acquisition results.
Moneybarn
> Capture the growth opportunity in the non-standard
vehicle finance market by growing the customer
base from 22,000 to 30,000;
> Invest in the cost base to support growth and
strengthen governance and controls to be in line
with the rest of the group; and
> Continue to investigate and test product extensions
beyond the current model, including lower value
vehicles, commercial vehicles and relationships
with prime finance businesses.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report 20
Our strategy and performance continued
2
Strategy
Generating high shareholder returns
> Generate sustainable growth in profits and dividends to deliver
increasing shareholder returns; and
> Maintain a dividend cover of at least 1.25 times.
What it means for us in 2015
> Deliver further earnings per share and total shareholder
return growth; and
> Maintain a minimum dividend cover of at least 1.25 times.
3
4
Strategy
Maintaining a secure funding
and capital structure
> Maintain borrowing facilities which, together with Vanquis Bank’s
retail deposits programme, meet contractual maturities and fund
growth over at least the next 12 months;
> Maintain a maximum gearing ratio of 3.5 times to ensure alignment
with the minimum dividend cover target of 1.25 times and the
group’s growth plans, whilst maintaining a comfortable surplus
of regulatory capital over the capital requirements set by the
Prudential Regulation Authority (PRA); and
> Continue to diversify the group’s sources of funding.
What it means for us in 2015
> Maintain capital and gearing at prudent levels;
> Continue to manage the flow of retail deposits in
Vanquis Bank to ensure the headroom on the group’s
committed facilities is maintained at an appropriate,
but not excessive, level;
> Review and consider issues into the retail bond and
private placement markets to support the growth in
Moneybarn and Satsuma; and
> Effectively manage the transitional arrangements within
the Capital Requirements Directive IV (CRD IV) for
regulatory capital and liquidity reporting to the PRA.
Strategy
Acting responsibly and with integrity
in all we do, specifically:
> Operating our core business of lending to our customers in a
responsible and sustainable manner, putting their needs at the heart
of everything we do;
> Acting responsibly and sustainably in all our stakeholder relationships
in order to:
–Create a working environment that is safe, inclusive and meritocratic;
–Treat our suppliers fairly;
–Support our communities;
–Proactively engage with the investment community on sustainability
matters; and
–Minimise the environmental impacts of our business.
What it means for us in 2015
> Maintain or improve customer satisfaction levels in both
Vanquis Bank and CCD;
> Develop a formal customer feedback process
in Moneybarn;
> Maintain an investment of 1% of group profit before tax in
the community through various community programmes,
money advice programmes and social research;
> Embed Moneybarn into the group’s
community programme;
> Continue to effectively manage the transition of all of our
businesses from regulation by the Financial Services
Authority (FSA) and Office of Fair Trading (OFT) to the
PRA and Financial Conduct Authority (FCA); and
> Continue to place positive customer outcomes at the
forefront of our product and service offering.
Provident Financial plc Annual Report and Financial Statements 2014 Adjusted earnings per share (p)
Dividend per share (p)
Total shareholder return (%)
2014
2013
2012
2011
2010
132.6
112.0
100.4
86.9
76.2
2014
2013
2012
2011
2010
98.0
85.0
77.2
69.0
63.5
25.4
2014
2013
2012
2011
2010
1.0
15.1
21
57.0
51.9
Adjusted earnings per share up 18.4% to 132.6p
(2013: 112.0p), a lower rate than the 19.5% growth
in adjusted profit before tax as a result of the
impact of the 5.9m placement of shares for the
acquisition of Moneybarn, partly offset by the
reduction in the statutory rate of UK corporation
tax from 23% to 21% on 1 April 2014.
Dividend per share increased by 15.3% to 98.0p
(2013: 85.0p), supported by the group’s growth
in earnings and strong capital generation resulting
in a dividend cover of 1.35 times (2013: 1.32 times).
Strong annual total shareholder return of 57.0%
in 2014 (2013: 25.4%).
Gearing (times)
2014
2013
2012
2011
2010
2.4
3.0
3.2
3.2
3.3
Gearing reduced to 2.4 times (2013: 3.0 times),
compared with a maximum target of 3.5 times
and a banking covenant of 5.0 times. This reflects:
(i) the Moneybarn acquisition was almost wholly
funded by an equity issue in order to preserve
the group’s regulatory capital; and (ii) the
shrinkage of the home credit receivables book
following the repositioning of the business.
Renewal of committed bank facilities of £382.5m
in January 2014 and option exercised in January
2015 to further extend the maturity of the facilities
from May 2017 to May 2018.
Vanquis Bank’s retail deposits programme
increased from 51% of Vanquis Bank’s UK
receivables to 53% during 2014.
Headroom on committed facilities of £112m at
31 December 2014 which, together with the
retail deposits programme at Vanquis Bank and
the extension of bank facilities in January 2015,
ensures there is sufficient headroom to fund
projected growth and contractual maturities
until May 2018.
Comfortable regulatory capital surplus against
the capital requirements set by the PRA.
Customer satisfaction (%)
Community investment (£m)
2014
2013
2012
2011
2010
84
88
89
84
84
Vanquis Bank
CCD
93
93
92
91
91
2014
2013
2012
2011
2010
2.4
2.0
1.9
1.6
1.5
Customer satisfaction of 93% for CCD (2013: 93%)
and 84% for Vanquis Bank (2013: 88%).
Invested a total of £2.4m in various community
programmes, money advice programmes and
social research (2013: £2.0m).
Provident Financial plc Annual Report and Financial Statements 2014Strategic report Tracy
Helping Tracy access the lowest prices
“I always found it frustrating before I had my Vanquis Bank credit card that
things were cheaper online but that I couldn’t access them. When it came
to buying toys for my kids at Christmas for example, I hated having to pay
over the odds when money was tight just because I didn’t have a plastic card.
Now that I have a credit card I can look for the best deals and make my
money go a lot further. I make sure I keep my credit limit low so that I never
have to worry about overspending.”
Strategic report 24
Our marketplace
The evolution of the
non-standard credit market
Over the last seven years, since the demerger of the
group’s international business in 2007, the non-standard
credit market has evolved significantly. The credit crisis,
together with the rapid increase in internet usage, has
meant that customer behaviours and preferences have
changed and product propositions have had to adapt
in response. More recently, regulatory intervention in
the rapidly growing payday lending sector has resulted
in market dislocation.
In 2007, the non-standard credit market
represented around 10 million consumers and
was made up of about £100bn of advances per
annum. The home-collected segment of the
market was around 3 million consumers in 2007.
The direct repayment segment of this market
represented around 7 million consumers and
was dominated by more mainstream business
models and products, although both mainstream
businesses and non-standard credit specialists
were present in the market. The largest lending
format was instalment loans with customers
mainly sourced through brokers or a branch
network. Loans were typically between £2,000
and £10,000 over a duration of three years or
more. Headline APRs were less than 100%,
although there were also likely to be additional
fees for Payment Protection Insurance (PPI)
and default charges. Vanquis Bank represented
a relatively small part of the direct repayment
market in 2007 as the business was still
relatively new.
The home-collected segment of the market
is little changed in terms of size, with around
3 million addressable consumers being served
by four larger companies and 500 smaller, local
operators. This part of the market is not showing
any growth and, at the margins, newer formats
such as rent-to-own and online lending are
reducing the flow of quality new customers into
the market.
The credit crisis and much tighter underwriting
standards adopted by mainstream lenders mean
that the non-standard market in 2014 continued
to look quite different. The target audience has
increased from approximately 10 million to
12 million consumers but annual advances have
reduced from £100bn in 2007 to around £70bn,
representing the general reduction in consumer
lending following the credit crisis. The market has
started to grow again more recently.
The biggest area of change is in the direct
repayment segment of the market which has
grown from around 7 million consumers to
9 million. This market is now dominated by
specialist non-standard lenders providing much
smaller loans at higher APRs, with customers
typically being recruited online.
The retrenchment of more mainstream lenders
or failure of some other lenders provided growth
opportunities for credit card providers and payday
lenders. In particular, Vanquis Bank has prospered
within the non-standard credit card market,
growing its customer base from around 300,000
customers in 2007 to 1.3 million in 2014.
More recent regulatory interventions in response
to the rapid growth of payday lending have
resulted in significant falls in supply of these
products as many providers have exited the
market. The tighter Financial Conduct Authority
(FCA) regime for this sector, along with a
cap on the total cost of credit from 2 January
2015, have forced incumbents to change their
offers and reduce their prices. This has caused
significant dislocation and created opportunities
for responsible lenders able to continue to serve
these customers.
Provident Financial plc Annual Report and Financial Statements 2014 The evolution of the
non-standard credit market
25
The UK credit
market in 2007
49m
The UK credit
market in 2014
52m
c.33m
Prime
Borrowers that are deemed
to be the most credit-worthy.
c.33m
Prime
Borrowers that are deemed
to be the most credit-worthy.
c.7m
Near-prime
Borrowers who have
somewhat weakened credit
histories and a greater
risk of loan default than
prime borrowers.
Non-standard credit market
c.9m
Direct repayment
m
9
4
t
e
k
r
a
m
t
i
d
e
r
c
K
U
c.6m
Near-prime
Borrowers who have
somewhat weakened credit
histories and a greater
risk of loan default than
prime borrowers.
Non-standard credit market
c.7m
Direct repayment
Market competitors
PFG consumer brands
Black Horse
Capital One
Beneficial Finance
Barclaycard
Citifinancial
Monument
HFC
Welcome
Ocean Finance
m
2
5
t
e
k
r
a
m
t
i
d
e
r
c
K
U
.
m
0
0
s
r
e
m
o
t
s
u
c
G
F
P
c.3m
Home-collected
Home credit
Shopacheck
Loansathome4u
Morses Club
c.3m
Home-collected
Market competitors
PFG consumer brands
Motor finance
Advantage Finance
Moneyway
First Response
Non-standard
credit cards
Capital One
Aqua
Barclays
Online lenders
Wonga
Quick Quid
Pounds to Pocket
Sunny
Home credit
Shopacheck
Loansathome4u
Morses Club
.
m
6
2
s
r
e
m
o
t
s
u
c
G
F
P
> Over £100bn of advances per annum;
> Market dominated by mainstream models and products;
> Headline prices less than 100% APR with additional fees
for PPI and default charges;
> Mix of mainstream and specialist competitors; and
> Regulation by the Office of Fair Trading (OFT) and the
Financial Services Authority (FSA) for banks.
> Approximately £70bn of advances per annum
but growing;
> Specialist models and products dominate;
> More transparent APRs in excess of 100% and into
the thousands but with no PPI;
> Transition to the FCA and tighter payday regulation has
caused dislocation which provides new opportunities
for responsible lending businesses; and
> Satsuma fills the under-served part of the direct
repayment market between Vanquis Bank and
home credit.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
26
Our marketplace continued
Provident Financial plc
Annual Report and Financial Statements 2014
Market opportunity – Satsuma
Market opportunity – Moneybarn
The dislocation of the online high-cost short-term credit (HCSTC)* market
Over the last few years the online HCSTC market and competitive environment has changed dramatically,
despite the continued consumer demand for access to small-sum, short-term credit.
Demand for HCSTC is estimated to be at least four times that for home credit.
Online HCSTC market
Read more about Satsuma
on pages 56–57
Payday loansPayday loansPayday loansPayday loans‘Flexible’, ‘revolving’ productsInstalment loansInstalment loansInstalment loansInstalment loansPrior to the conclusion of the OFT compliance review in 2013, the online market was dominated by payday lending.Concerns regarding upfront underwriting, rollovers and the abuse of Continuous Payment Authorities (CPAs) led to a full regulatory review of the market.Around half of the 50 payday lenders reviewed by the OFT have since exited the market.FCA analysis suggests that between September 2013 and August 2014, although applications rose by 20%, loan values fell by 35% and loan volumes by 40% as acceptance rates halved.Instalment loans started to emerge as an alternative to payday loans during this period.Instalment loans are now the most dominant product in the online HCSTC market.Satsuma has always operated below the new price cap level and no major changes have been required throughout the OFT review, CMA inquiry and new FCA regime.Satsuma aims to have a top-three market position in the online HCSTC market in the next two to four years.* The FCA defines HCSTC as a regulated credit agreement (including peer-to-peer), where the APR is equal to or exceeds 100%; and either the credit is to be provided for a short term, or due to be repaid or substantially repaid within 12 months, but is not secured by a mortgage, charge or pledge and is not provided by a community finance organisation and is not a home credit loan, a bill of sale loan or an overdraft.‘Flexible’, or ‘revolving’ products were introduced by some lenders.The FCA noted that some flexible product variants were “not genuine running account credit”, which resulted in all providers withdrawing their recently introduced products.The FCA expects the price cap introduced on 2 January 2015 to result in a further 4% reduction in loan values, 39% reduction in firm revenue and 43% reduction in operating profits, with the potential for only two or three larger online lenders to survive if firms are unable to adapt.Office of Fair Trading (OFT) compliance review (culminating March 2013) and subsequent Competition and Markets Authority (CMA) inquiry (from June 2013)New FCA rules and regime (finalised February 2014, and came into force from April 2014)Further market exits likely, along with evolving product formats to which the FCA may react with further rules and/or guidance.FCA price cap on HCSTC (finalised November 2014, and came into force from 2 January 2015)Satsuma enters the market in November 2013
Market opportunity – Satsuma
Market opportunity – Moneybarn
Provident Financial plc
Annual Report and Financial Statements 2014
27
Moneybarn competes in the UK non-standard, dealer-purchased,
used car finance market
Around half a million used cars are bought by non-standard consumers in car dealerships each year
worth around £3bn…
Market value
Market sales volume
Read more about Moneybarn
on pages 60–67
…of these only around 50,000 are
bought and financed by non-standard
consumers, securing the loan on
the value of their car, which in total
amounts to around £326m.
Moneybarn currently originates
about 10,000 new deals per year,
accounting for approximately
20% by volume of the market
for non-standard vehicle finance.
The market opportunity, strong
broker relationships and the access
to the group’s funding lines means
that Moneybarn has strong
growth prospects.
As recently as 2007, prior to the credit crunch, the non-standard car finance market was
two to three times this size, served by large specialist lenders and more mainstream finance groups.
Dealers
Web
Dealers with in-house brokers
Dealer-supplied brokers
Internet-supplied brokers
MB direct
Moneybarn deal processors
Moneybarn serves this market primarily through a mix of internet and dealer-based brokers
nUsed car salesFinance secured on carc.£40bnc.£27bnc.£10.6bnUsed car salesFinance secured on carc.7mc.1mThrough car dealersFinanced by non-standard consumersc.£3bnc.£326mThrough car dealersFinanced by non-standard consumersc.4mc.50,000To non-standard consumersTo non-standard consumersc.0.5mStrategic report
Tony
Helping Tony get to work
“Anyone who’s been out of work for a while will tell you that you’ll do just
about anything to get back into a job. When a role I knew I could do came up,
I was determined to get it, even though it would mean having to commute.
I got the job, which was great, but I then had to figure out a way to get there.
Moneybarn gave me the chance I needed to get a reliable car. There’s simply
no way I would have this job without that chance.”
Strategic report 30
Corporate responsibility
Acting responsibly and with integrity
Our CR strategy commits us to:
> Operate our core business of lending to our customers
in a responsible and sustainable manner, putting their
needs at the heart of everything we do.
> Act responsibly and sustainably in all our other
stakeholder relationships in order to: create a working
environment that is safe, inclusive and meritocratic;
treat our suppliers fairly; support our communities;
proactively engage with the investment community on
sustainability matters; and minimise the environmental
impacts of our business.
“At the beginning of 2014,
we felt it was time to
review our corporate
responsibility strategy,
one of the elements of the
group’s overall business
strategy, which has stood
us in good stead and
guided our approach
to CR since 2007.
Following discussions
with stakeholders from
inside and outside the
financial services industry,
we created a CR strategy
that supports our stated
social purpose and
recognises the need to
address wider social,
environmental and ethical
challenges and
opportunities.
Peter Crook
Chief Executive
”
Provident Financial plc Annual Report and Financial Statements 2014
Acting responsibly and with integrity
31
Case study
Engaging with stakeholders and
reviewing Provident Financial
CR strategy
In March 2014, Provident Financial convened
a roundtable discussion with its peers on
CR in financial services. The session was
facilitated by Corporate Citizenship and
attended by representatives from a range of
financial services companies. The purpose of
the roundtable was to discuss best practice,
important challenges and key learnings for CR
professionals in the financial services sector
and use the findings to inform the next iteration
of the CR element of the group’s overall
business strategy. The results of the roundtable
were used during 2014 to help review and
revise Provident Financial’s CR strategy, and
ensure that there is continual improvement
in the overall performance of the group’s
CR programme.
Key areas of focusAs a specialist lender that offers an increasingly more diverse range of products to the non-standard credit market, it is essential that we lend responsibly to our 2.4 million customers. This is our most important corporate responsibility and is something we have been doing since 1880. As such, we understand the needs of those who are either excluded from the mainstream credit market, or whose needs are not well met by mainstream credit market products, and have unrivalled experience of providing products and services that are tailored to meet these needs. But this commitment to act responsibly and sustainably extends well beyond ensuring that we lend in a responsible manner. It is also about ensuring that we systematically manage the other social, environmental and economic issues that are material to our business activities. This encompasses how we treat employees, agents and suppliers, as well as supporting and investing in the many communities we serve, and minimising our impacts on the environment.Lending responsibly and sustainably to our customersFor Provident Financial, responsible lending is about developing and delivering products that meet the needs of our customers. Our Vanquis Bank credit cards, home credit loans and Satsuma loans and Moneybarn car finance loans all share the same responsible lending characteristics: they are simple and transparent financial products delivered through a friendly and personal service, and they demonstrate high levels of understanding of customers who experience difficulties.CR reportingWe also publish a stand-alone, annual CR report which sets out a full account of our social, environmental and economic performance. Our 2014 CR report will be published during the summer of 2015. Further information on our CR reports can be found at www.providentfinancial.comCR governance and managementOverall responsibility for our CR programme rests with Peter Crook, Provident Financial’s chief executive. CR and community affairs are regularly considered by the Provident Financial plc board. A corporate affairs activity report is presented at each board meeting. The group’s executive committee, which includes the executive directors and senior management, and is chaired by Peter Crook, reviews and approves the CR programme and budget. Ongoing management of the CR programme is undertaken by Provident Financial’s CR manager, community affairs manager and community affairs executive, who are supported by a number of working groups which are made up of representatives drawn from our subsidiary businesses.Provident Financial plc Annual Report and Financial Statements 2014Strategic report
32
Corporate responsibility continued
Vanquis Bank
Consumer Credit Division
Moneybarn
The Vanquis Bank credit card has initial credit
limits as low as £150, which are smaller than
those of mainstream credit cards. This enables
the bank to observe and understand the
behaviour of customers before granting
any further lending, in a responsible and
sustainable manner.
The bank’s bespoke underwriting processes
have been developed over the last twelve
years. We have a conservative approach to
risk, reflected in our decline rates of around
75%. Our credit-granting scorecards are
based on our extensive experience of dealing
with non-standard credit market consumers.
We are also able to offer customers a range of
extra features through our optional Repayment
Option Plan. This includes features such as
Account Freeze, Payment Holiday, Lifeline,
Payment Reminders, and Over-limit Alerts,
to help our customers to get back on track.
Vanquis Bank customers
1.3m
84%
Vanquis Bank customer satisfaction
Our Provident home credit loans are for small
sums, are simple and transparent, and have their
costs fixed at the outset, which means there
are no additional charges or fees whatsoever.
Repayments are collected on a weekly or monthly
basis by a self-employed agent in the customer’s
home. While credit scoring systems are used
in the lending process, agents are ultimately
responsible for making the final decision as to
whether to lend. They are also paid commission
primarily on what they collect, not what they lend,
which means they lend only what a customer
can afford to repay. High levels of contact are
maintained with customers through the agent
visits in their homes. This enables customers to
raise any difficulties or queries they might have
at an early stage and agree an appropriate course
of action to resolve them.
Our Satsuma online instalment loan product
shares many of the responsible lending
characteristics of our home credit loans. All of
the costs are fixed upfront and there are no
additional charges or fees, even if customers’
circumstances change and payments are missed.
Underwriting is based on the processes used
by Vanquis Bank and for home credit loans, and
is supplemented with external credit bureau
data, and behavioural and social information.
Repayments are collected via Continuous
Payment Authority (CPA), based on a pre-agreed
amount on a pre-agreed date. If a repayment is
missed, the customer is contacted immediately
to discuss their situation; the CPA arrangement
is never abused.
Moneybarn offers secured car loans in a
responsible manner through conditional sales
contracts. This means that the vehicle is owned
by Moneybarn until the final instalment has been
paid by the customer. The primary source of
new customer leads is through a network of
well-established brokers who earn commission
for each lead they provide which results in a
loan being issued.
Moneybarn’s underwriting processes are
highly automated which allows for rapid
profiling and approval of customers, providing
us with a competitive advantage. Its credit
science is based on a combination of external
credit bureau data, company-specific
proprietary scorecards and policy rules.
The underwriting process includes robust
affordability assessments, including obtaining
proof of income, to ensure that lending takes
place only when it is responsible to do so.
Collections are normally made through fixed
monthly direct debit payments. If a customer
gets into financial difficulties during the term of
the loan, the customer services team will work
closely with the customer to help them get
back on track. This may include a temporary
payment arrangement for short-term financial
difficulties. However, for those customers that
demonstrably can no longer afford the ongoing
repayments, the most appropriate exit strategy
is often through the repossession and sale
of their vehicle to settle their loan before the
vehicle depreciates further. This means that
the customer often gets a cash sum when
the vehicle is sold.
Read more on Vanquis Bank
on pages 40–47
Read more on Consumer Credit
Division on pages 48–59
Read more on Moneybarn
on pages 60–67
Provident Financial plc Annual Report and Financial Statements 2014
33
Playing a positive role in
the communities we serve
3
2
Total
£2.4m
1
What our community project
partners say
“We feel we are truly
in partnership with
Provident. They not
only give us money,
but they support and
care in so many ways.
Brendan Conboy
Chief Executive – The Door
”
Creating a safe, inclusive
and meritocratic workplace
Our 3,555 employees enable us to continually
meet the needs of our 2.4 million customers.
They are behind the development and delivery
of our products, and are a key stakeholder.
The success of our business relies on attracting
and retaining talented individuals. We aim to
provide a working environment that encourages
employees to reach their potential, and trains
and develops them to meet their personal goals.
Through this, we continue to respond to the needs
of our customers, which means our business
will flourish.
Through our people departments, we provide
training and development to our employees and
implement policies on issues such as diversity
and health and safety. Our people departments
are also integral in the implementation of our
CR strategy across our businesses.
Treating our suppliers fairly
Part of our corporate responsibility involves
treating our suppliers fairly and using our
purchasing power to make sustainable
procurement decisions. In 2014, our annual
spend on products and services was
£143.9 million (2013: £129.2 million). This level
of spend gives us the potential to encourage
and support our suppliers to become
more sustainable.
We are committed to paying our suppliers
promptly as we recognise that late payment can
cause serious cash flow problems, especially
for small businesses. Our businesses do not
have standard payment terms for suppliers.
Rather, we have individually negotiated payment
terms with each of our suppliers, although
the terms are typical of the wider market.
We endeavour to ensure that suppliers are paid
in accordance with the agreed payment terms.
The company’s primary social benefit is a direct one, in making available financial products and services that meet the particular needs of the people that are not well served, or are excluded altogether, by mainstream credit providers. However, we also recognise that we have a duty to be a good corporate citizen and invest in programmes that support the needs of non-standard credit market customers and those living in local communities. As such, we have committed to investing a minimum of 1% of profit before tax (as measured under the London Benchmarking Group’s guidelines) in such programmes.Indirect help for non-standard credit market customersAs part of our commitment to help non-standard credit market customers, we work with and provide financial support to a wide range of free and voluntary money advice organisations to help those who may have problems repaying their debts to us and others, and to increase the quality and availability of free, independent money advice in the UK. We support Advice UK, Citizens Advice, Step Change Debt Charity, Institute of Money Advisers, Money Advice Liaison Group, Money Advice Scotland, Money Advice Trust, and National Debtline. We also work with more specialised providers on a range of financial education initiatives and help finance publicly-available, independent research to help understand the financial behaviour of those on modest incomes.MaleFemaleProportion of male/female company directors (%)7129Proportion of male/female employees in senior management positions (%)7030Proportion of male/female employees (%)4852Provident Financial plc Annual Report and Financial Statements 2014Strategic report2014 community investment figures1 Cash £2,103,9462 Management costs £257,4053 Value of employee time £53,544Community involvement in numbers in 201431,517 people benefited directly from the support provided by projects we funded19,432 people accessed new services and activities 30,539 people developed new skills as a result of their involvement in the programmes
34
Corporate responsibility continued
Playing a positive role in
the communities we serve
Supporting local communities
Through the group’s companies and brands,
we support local community projects
which seek to help those living in deprived
communities. Our aim is to not only provide
financial help but to get our staff involved in the
projects too. This helps motivate and develop
our staff and leverages the financial support we
give so that even more is achieved. Our projects
are spread throughout communities in the UK
and Ireland, and in Kenya where we support
a local education project. The programmes
invest in local community projects by providing
cash support and creating opportunities for
our staff to get involved. Our cash support
can be a one-off investment to a project or a
longer-term investment for three years or more.
The projects we support on a longer-term basis
are mapped out on the page opposite.
£2.4m
invested in community programmes, money advice
and social research
“ I want to thank you for
organising the amazing
group of volunteers
who took part in the
Osmani Fun Day. It was
great to see the whole
school benefiting.
Maya Alexander
Corporate Volunteering Coordinator – Kids Company
”
Responding to community needs
Through the Good Neighbour and Active Community programmes, as at the end of 2014 we had
committed long-term support (three years or more) to 48 projects across the UK and Ireland.
Case study
Yorkshire Dance
(a Good Neighbour partner)
Our support is funding Rebuzz, a grass-
roots dance development project for boys in
Rotherham, South Yorkshire. Through a series
of outreach projects, in the first year, over
400 boys have had the opportunity to work with
inspirational artists in the field of contemporary
dance. The project has been able to engage
boys who would otherwise not get involved in
dance, developing new skills and increasing their
confidence and aspirations.
The project has had some notable achievements
in its first year. Rebuzz was chosen to present
work in the foyer at West Yorkshire Playhouse
as part of the Fresh Fringe. The group was also
selected by Youth Dance England to perform
in the National U.Dance Fringe in Nottingham.
There have already been many individual success
stories, which are echoed in the positive feedback
from both school teachers and parents alike.
Some of the older boys are beginning to focus
on developing their leadership skills by running
lunchtime dance clubs for their younger peers
and taking up shadowing opportunities within
the outreach programme.
Case study
Bradford Youth
Development Partnership
(an Active Community partner)
Our work with Bradford Youth Development
Partnership (BYDP) demonstrates perfectly our
aim of supporting grass-roots organisations and
creating opportunities for employees to develop
the charity and themselves through volunteering.
The first thing we did together was fund a role
which will help manage the business side of
the charity and work with us to build a mutually
beneficial relationship.
We offered executive expertise to encourage the
management team to think more strategically
and be creative in how best to support the young
people in Bradford.
We then went on to fund a local community event
to raise the profile of BYDP. The Summer Blast,
a ‘pop up’ event set up in the centre of Bradford,
was a fun, interactive day for children and
parents and provided publicity for BYDP’s work.
It also gave us a chance to offer skills-based
volunteering with our communications team
who produced all of the materials for the event.
We also provided them with funding to join the
Bradford Chamber of Commerce with the aim of
securing further work experience opportunities
for young people in the Bradford area not in
employment, education or training.
Provident Financial plc Annual Report and Financial Statements 2014
35
Local community projects and
organisations with long-term funding
Good Neighbour projects (CCD)
1 Aberlour, Elgin
2 Boomerang, Dundee
3 Scottish Youth Hostel Association, Stirling
4 Oasis at Wallacewell, Glasgow
5 The Royal Lyceum, Edinburgh
6 Venchie Children and Young People’s Project,
Edinburgh
7 Made4U in ML2, Wishaw
8 Scholemoor Beacon, Bradford
9 Joshua Project, Bradford
10 Holmewood Executive, Bradford
11 Sedbergh Youth and Community Centre,
Bradford
12 Bradford and District Senior Power, Bradford
13 Participate Projects, Bradford
14 One in a Million, Bradford
15 Immanuel Project, Bradford
16 Bradford City Women’s Football Club, Bradford
17 Bradford City Football Club Community Stand,
Bradford
18 Sycamore Project (Zac’s Bar), Bolton
19 Northfield Sports Association, Bootle
20 Yorkshire Dance, Rotherham
21 Harvey Girls, Burton on Trent
22 Sycamore Adventure, Dudley
23 Mowmacre Young People’s Play and
Development Association, Leicester
24 Project for the Regeneration of Druids Heath,
Birmingham
25 The Door, Stroud
1
2
5
6
4
3
7
33
34
35 36
37
39
38
40
16 17
17 8
9
41
16
15
42
10
11
18
19
14
12
13
20
21
22
24
23
25
26
30
27
43
28
29
48
47
44
46 45
31
32
33 REACH Across, Londonderry
26 Riverfront Theatre, Newport
34 Hostelling International Northern Ireland, Belfast
27 Youth Network MK CIC, Milton Keynes
35 Early Focus Project, Dublin
28 Battersea Arts Centre, London
36 Solas Project, Dublin
29 Ahoy Centre, Deptford
37 Ballymun Music Programme, Dublin
30 Baggator, Bristol
31 St Petrock’s, Exeter
38 Laois Partnership, Portlaoise
39 An Oige, County Wicklow
32 Young People Cornwall, Truro
40 OLL St Saviours Boxing Club, Limerick
Active Community projects
(Vanquis Bank)
41 Bradford Youth Development Partnership,
Bradford
42 The Outward Bound Trust, Bradford
43 Kids Company, London
44 Byron Primary School, Gillingham
45 New Road Primary School, Chatham
46 Sure Start All Saints, Chatham
47 Sure Start Lordswood, Chatham
48 Phoenix Junior Academy, Chatham
In addition, Vanquis also funds Hatua,
a local education project in Kenya
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
36
Corporate responsibility continued
Engaging with the
investment community
on sustainability matters
We continue to engage with the socially
responsible investment (SRI) community through
our participation in the main global sustainability
indices and by responding to SRI analysts’
enquiries. This is one way we can demonstrate
our commitment to running our business
responsibly and sustainably. For example,
during 2014:
> We continued to be a constituent of the
FTSE4Good Index series. Following the
September 2014 review of the FTSE4Good
Advisory Committee, Provident Financial
achieved an overall environmental, social and
governance (ESG) rating score of 99, just one
point away from the maximum possible score.
> We were included within the Vigeo World 120
index (the 120 most advanced sustainability
performing companies in the European,
North American and Asia Pacific regions),
the Vigeo Europe 120 index (the 120 most
advanced sustainability performing European
companies) and the Vigeo United Kingdom
20 index (the 20 most advanced UK companies
based on their sustainability performance).
> For the ninth successive year, Provident
Financial maintained its inclusion in both
the Dow Jones Sustainability World Index
(DJSI World) and Dow Jones Sustainability
Europe Index (DJSI Europe).
Minimising our
environmental impacts
The environmental management system that has
been in operation across our business for over
a decade allows us to manage systematically
our impacts on the environment by:
> Identifying and understanding the
environmental impacts of our activities
> Defining environmental responsibilities for staff
> Measuring and monitoring our environmental
management performance and setting targets
> Identifying opportunities to continually improve
our environmental management performance
Our head office in Bradford continues to
be formally certified to the international
environmental management standard ISO
14001: 2004.
Greenhouse gas (GHG)
emission reporting
We are required to disclose the annual amount of
GHG emissions from activities for which we are
directly responsible, including combustion of fuel
or operation of any facility, and for which we are
indirectly responsible, such as the electricity and
heat we purchase for our own use. During 2014,
these emissions accounted for 5,994 tonnes
of CO2e.
The scope 1 emissions reported relate to our
fleet of company cars and the gas used in our
offices, and the scope 2 emissions are associated
with the electricity we purchased during 2014.
We have also reported the associated GHG
emissions for which we are indirectly responsible,
but occur from sources we do not own or control,
which are associated with our scope 1 and 2
emissions. These are referred to as scope 3
emissions and relate to GHG emissions associated
with the extraction, refining, distribution, storage,
transport and retail of the fuel we use.
Provident Financial plc Annual Report and Financial Statements 2014
37
Carbon offsetting
While we aspire to keep levels of business
travel to a minimum, it is an important part
of how our businesses operate. That said, we
recognise that the emissions that result from our
business travel activities can be environmentally
damaging. This is why we measure and monitor
the business journeys our staff make by plane,
train and in cars, and also the fuel used in our
fleet of company cars, in order to calculate the
GHG emissions associated with the group’s
business travel activities. We then offset these
GHG emissions by investing in renewable
energy projects.
During 2014, our business-related journeys
accounted for 4,194 metric tonnes of CO2e.
These emissions were offset through the
purchase of Gold Standard carbon credits in
the Soma-Polat wind farm project in the Manisa
and Balikesir provinces of Turkey. The project,
which consists of 119 wind turbines, is expected
to generate 467,364 MWh of electricity per year,
resulting in a total reduction of almost 2 million
tonnes of carbon emissions during the first
seven years of the project. The project also
provides a range of environmental and social
benefits. On top of the significant reduction of
GHG emissions, by reducing the burning of
fossil fuels the project will improve air quality in
the region. It also employs full-time staff from
local communities. A further benefit is provided
by the project through the planting of 2,500
trees to compensate for the approximately
300 trees that were removed during the
project’s construction.
Total
4,194
2013: 4,322
GHG emissions 01 January to 31 December 2014 (tonnes of CO2e)*1 Direct (scope 1) CO2e emissions 1,7972013: 2,4872 Indirect (scope 2) CO2e emissions 3,0662013: 3,0503 Associated indirect (scope 3) CO2e emissions 1,1312013: 884321* Our emissions are reported in accordance with the WRI/WBCSD Greenhouse Gas (‘GHG’) Protocol. We use an operational control consolidation approach to account for our GHG emissions and use emission conversion factors from Defra/DECC’s GHG Conversion Factors for Company Reporting 2013. Our GHG emissions are calculated using energy use data accessed via meters and energy suppliers, and from records of fuel use. The emissions associated with Vanquis Bank’s pilot credit card operation in Poland are excluded from the data disclosed above.5,994Total scope 1 and 2 (and associated scope 3) emissions in tonnes of CO2e2013: 6,421 tonnes3.24Scope 1 and 2 (and associated scope 3) intensity ratio (kg of CO2e/£1,000 of receivables)2013: 4.00 kg of CO2e/£1,000 of receivablesBusiness travel GHG emissions (tonnes of CO2e)1 Air travel 2962013: 208 2 Rail travel 412013: 56 3 Car travel – own vehicles 1,6182013: 1,823 4 Company car fuel use 1,5292013: 1,495 5 Extracting, refining and transportation of raw fuel associated with business travel 7102013: 74051432Provident Financial plc Annual Report and Financial Statements 2014Strategic report
Jane
Helping Jane pay for her best friend’s operation
& Max
“Last year I got the devastating news that my dog, Max, had been hit by a car.
After a tense wait in the vet’s surgery, the vet managed to save Max, but one
of his back legs was in need of a serious operation. There was no way I could
pay for the operation all at once so I contacted Provident to see if I could
borrow the money and pay it back weekly. My agent Sheila was a godsend
and talked me through the whole process. I was able to save Max, safe in the
knowledge that my repayments were manageable.”
Strategic report 40
Vanquis Bank
1 Vanquis Bank
Introduction
Vanquis Bank is the leading provider of
credit cards to people in the non-standard
credit market. We promote financial
inclusion, bringing credit cards to people
who are typically declined by mainstream
credit card providers. In doing so, we help
people to establish or rebuild a credit history
and enable those in the non-standard credit
market to share in modern buying methods
such as online shopping, that can only really
be achieved with card-based products.
Michael Lenora
Managing Director
Vanquis Bank
Non-standard
credit cards
£151.0m
UK profit before tax
1,150
UK employees
£1.1bn
UK year-end receivables
1.3m
UK customers
£150–£3,500
Range of credit limits
Provident Financial plc Annual Report and Financial Statements 2014 1 Vanquis Bank
41
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
Our strategy
Our strategy at Vanquis
Bank is to be the leading
non-standard credit
card provider in the
UK, delivering positive
customer outcomes,
sustainable growth and
high shareholder returns.
To deliver our strategy, we continue to focus on:
> Clear credit management objectives to ensure
that we maintain a good quality receivables
portfolio with stable levels of impairment;
> Providing customers with a responsive,
high-quality service throughout their time with
Vanquis Bank, commencing with the unique
welcome call to all new customers;
> Offering very straightforward and transparent
credit card products with no balance
transfers, teaser introductory rates, reward
schemes, cashback or other features typical
of mainstream lenders;
> Providing customers with the appropriate credit
limit and no more, thereby maintaining relatively
high levels of credit line utilisation to minimise
the level of contingent liability;
> Ensuring that our operations are efficient and
effective across all aspects of the customer
experience from identifying and welcoming
new customers, to ongoing customer service,
collections processes and dealing fairly with
customers who get into difficulty;
> Developing our products and distribution
channels relevant to the markets in which
we operate;
> Treating our customers fairly, managing
conduct risk and ensuring that we comply
fully with all applicable regulation;
> Developing our retail deposits programme;
and
> Maintaining a minimum risk-adjusted margin
(revenue less impairment as a percentage
of average receivables) of at least 30%.
“ For many customers, this is the first time they have
used a credit card and so they are sometimes a little
anxious about how it all works. I like knowing I can
make a difference to them, talking things through
on the phone and making sure they are comfortable.
We make sure their credit limit is not too high and
send them text reminders when payments are due
to stop them being charged unnecessary interest.
Helen, Chatham call centre
”
Provident Financial plc Annual Report and Financial Statements 2014Strategic report 42
Vanquis Bank continued
Provident Financial plc
Annual Report and Financial Statements 2014
How the Vanquis Bank credit card works
How the Vanquis Bank credit card works
Vanquis Bank operates a business
model based on our common approach,
but adapted to closely suit the needs
of consumers in the non-standard
credit card market.
What we do for our customersWhat allows us to do what we doThe value this creates How the Vanquis Bank credit card works
How the Vanquis Bank credit card works
43
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
Specialisation and focus on non-standard credit cards.
650 contact centre staff in two UK locations.
Full deposit-taking PRA and FCA regulated bank.
Over 10 years of direct experience in the UK non-standard
credit card market since foundation.
Management team with depth of experience in non-standard
credit cards.
VISA card issuer status.
World-class collections capabilities.
Industry standard outsourced credit card systems.
1 Simple non-standard credit card products with no prime offer,
no teaser rates, no balance transfers, no reward programmes
and no cashback offers.
3 Adopt a responsible and prudent ‘low and grow’ approach
to extending small amounts of credit starting from £150,
up to a maximum of £3,500.
2 Close customer contact from the outset, with a welcome call
and multiple forms of immediate communication in the event
of any issues arising.
4 Offer optional Repayment Option Plan (ROP) only after
a customer has their card to allow them to manage any
short-term payment difficulties smoothly and painlessly.
Financial inclusion and rebuilding of credit history for over
1.3 million credit card customers.
Stable risk-adjusted margins through the cycle.
Improving credit scores whilst providing access to small credit
lines over an average of four years with Vanquis Bank.
Strong growth from foundation in 2003 to over 1.3 million
customers as competitors struggled with appropriate models
and access to funding.
High levels of customer satisfaction.
Good, safe returns for depositors.
What we do for our customersWhat allows us to do what we doThe value this createsProvident Financial plc Annual Report and Financial Statements 2014Strategic report 44
Vanquis Bank continued
We have 12 years of experience in
lending responsibly to our chosen
target market. Our success is based
on a clearly defined strategy and
our tailored approach to serving
customers in the non-standard
credit market.
What is Vanquis Bank?
In many ways Vanquis Bank looks and
operates like any other credit card provider:
> We are Visa-branded;
> Our cards are accepted at over
15 million locations;
> Customers enjoy up to a 56-day interest
free period on new purchases;
> We use the internet for applications and
customer service;
> We accept standard payment methods and
issue customer statements; and
> We have contact centres to support
our customers.
Our customers spend at many of the major
merchants used by prime credit card providers,
such as Tesco, Asda, Sainsbury’s, Argos,
Amazon and PayPal. However, our target
customers have a very different profile to prime
credit card users. Whilst they are typically
employed, their incomes of between £20,000
and £35,000 are, on average, lower than a prime
customer and most will have a credit profile
which means they have limited access to, and
use of, other forms of borrowing compared with
prime customers. They are also much less likely
to be home owners, with some three quarters
living in rented accommodation.
Our customers value a Vanquis Bank credit card
for a variety of reasons:
> It provides them with access to credit for the
first time if they have a ‘thin’ credit history and
no previous experience of taking out credit;
> They are seeking to rebuild their credit history
after problems in the past;
> They value the inherent utility of a credit card,
particularly accessing discounts and lower
prices on the internet;
> Our customers often have a lack of trust in
high street banking, having been declined or
experienced financial difficulty in the past
with high street banks; and
> They value our high personal contact model.
We have 12 years of experience in lending
responsibly to our chosen target market.
Our success is based on a clearly defined strategy
and our tailored approach to serving customers
in the non-standard credit market.
Why we are successful
Our success is built on our tailored approach,
comprising a number of important strands which
together provide us with a significant competitive
advantage in our marketplace.
1. Our proposition
The Vanquis Bank credit card looks and feels the
same as any other credit card but importantly we
ensure that our product is straightforward, easy
to understand and that there is no confusion or
ambiguity in the eyes of customers. Accordingly,
our core products do not offer short- term balance
transfer offers, lower “teaser” or introductory rates
which then turn into higher rates after a short
period, rewards programmes which lock customers
in or cashback offers to incentivise spending.
Our customers can also be reassured that
Vanquis Bank, as a retail deposit-taking bank,
is fully regulated by both the Financial Conduct
Authority (FCA) and the Prudential Regulation
Authority (PRA) and has the support of a listed
parent with a strong capital and liquidity position.
As a result, we have well established and robust
governance processes, including the oversight
by three independent non-executive directors,
to ensure that the business is operated in an
appropriate and responsible manner.
Our product is designed to provide non-standard
consumers with what they want – a sensible
amount of credit provided in a responsible and
sustainable way that helps them build or repair
their credit score.
2. Innovating our channels to market
We have always successfully used the internet
and direct mail channels to recruit new
customers, and these continue to be our major
source of new leads providing around 85% of new
account bookings in 2014. However, we continue
to develop new distribution channels to ensure
that we remain the leading player in the market.
Towards the end of 2014, we commenced a pilot
of a credit card with another high street retailer.
This follows on from the successful launch of the
Argos credit card in 2012 and we will continue
to seek other retail partners in the future. We are
also successfully using a face-to-face channel,
whereby a Vanquis Bank representative introduces
potential customers to the Vanquis Bank credit
card. This is typically in high street or shopping
centre locations, where there is sufficient footfall
of potential Vanquis Bank customers.
Provident Financial plc Annual Report and Financial Statements 2014
45
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
market in this way. This ‘low and grow’ approach
has allowed the average customer balance to
progress to £846 (2013: £780) whilst underlying
credit quality has continued to improve.
4. High customer contact
The relationships with our customers are much,
much closer than those of mainstream lenders.
We genuinely value our customers and continue
to develop new propositions to enhance levels
of contact. Customers excluded by mainstream
card issuers appreciate the more regular contact
provided by Vanquis Bank, including the higher
level of help and support provided from our
contact centres in Chatham and Bradford.
High customer contact has helped us to maintain
some of the highest levels of customer satisfaction
in the industry with nine out of ten customers
saying they would recommend Vanquis Bank.
It is always our aim to treat customers fairly and
quickly resolve any complaints that arise. This is
reflected in the metrics published by the Financial
Ombudsman Service (FOS) which show that of
all complaints made to FOS, Vanquis Bank has a
much better record than prime card issuers with a
consistently high percentage resolved in its favour.
5. Collections processes
Collections are clearly an extremely important
aspect of our business and we continue to
develop new and innovative collection strategies.
We employ highly trained collections teams and
our telephone-based operations use leading-
edge technology and techniques. This includes
the use of SMS texting to remind customers
that their payment is due and contacting a
customer immediately via telephone if they miss
a payment. All of our processes are designed to
help customers stay on track so that they can
continue to enjoy the use of their credit card as
well as supporting the collections performance
of the business. Our success is demonstrated by
our ‘promise kept’ rate – the number of payments
actually received from a promise given by a
customer – which is currently in excess of 75%,
which we believe is ‘best in class’.
Our employees are trained to manage the
accounts of customers who are identified
as vulnerable and support them accordingly.
For those customers that get into financial
difficulty, we have a range of payment plans to
meet their differing requirements, helping them to
get back on track. In addition, we offer customers
an ROP product which, for a monthly fee, allows
customers choosing to take ROP the ability to
freeze their account for up to two years if they
lose their job or experience certain other financial
difficulties. ROP also allows those customers to
have one default fee per annum waived and is
very flexible as it can be cancelled at any time
with one month’s notice. These features allow
customers to have greater peace of mind around
their financial circumstances.
“ I started my own business
a couple of years ago,
which has been going
well for the most part.
My Vanquis Bank card
helps me to smooth out
the peaks and troughs in
my personal expenditure,
allowing me to concentrate
on my business.
Paul, London
”
We supplement our core Vanquis Bank credit card
proposition with its 39.9% representative APR with
a number of other brands at varying price points
to increase our marketing reach. Aquis, Chrome,
Black Diamond and Granite are all brand names
which we currently use to attract new customers
with APRs ranging from 29.8% to 59.9%.
Our continued success in developing our channels
to market has resulted in us delivering record
new account bookings of 430,000 in 2014, up
from 411,000 in 2013, against unchanged credit
standards. In light of this, we have reassessed
the medium-term potential size of the business,
increasing the customer target to between 1.5m
and 1.8m customers with an average balance
of approximately £1,000 from a previous target
of between 1.3m and 1.5m customers with an
average balance of between £800 and £1,000.
3. Underwriting capability
Our bespoke underwriting processes have been
developed over the last 12 years. We have a
conservative approach to risk which is reflected in
our decline rates of around 75%. We have created
multiple scorecards for each channel to market
based on our extensive experience of dealing
with non-standard consumers. When a customer
applies, we first combine their application data
with external credit reference data and process
the information through our scorecards.
We supplement the underwriting process with
a welcome call from one of our contact centre
representatives. This distinguishes Vanquis Bank
from other card providers and provides us with
the opportunity to gather additional information
which is useful to help manage the customer’s
account as well as establish a more personal
relationship. It is an important element in verifying
customer circumstances, including affordability,
and of completing the underwriting process.
Central to our proposition is our ‘low and grow’
strategy. Our typical initial credit lines start
between £150 and £1,000 which allows us to
observe and understand the behaviour of our
customers before granting any further lending in
a responsible and sustainable manner. This allows
those customers with a good payment record who
can afford it to progressively improve their credit
score and gain access to further credit during their
time as a Vanquis Bank customer. Our maximum
customer credit limit is currently £3,500.
Vanquis Bank has developed an unparalleled
expertise in lending to the non-standard credit
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
46
Vanquis Bank continued
Our employees are trained to
manage the accounts of customers
who are identified as vulnerable
and support them accordingly.
For those customers that get into
financial difficulty, we have a range
of payment plans to meet their
differing requirements, helping
them to get back on track.
Financial performance
Vanquis Bank generated a profit before tax of £140.4m in 2014 (2013: £106.1m) analysed as follows:
UK
Vanquis Bank has performed strongly in 2014,
reporting UK profit before tax 32.8% higher than
2013. Further strong growth in the receivables
book together with delinquency running at record
lows have enabled the UK business to deliver a
consistent return on assets of 15.5% (2013: 15.5%).
Demand for non-standard credit cards
continues to be strong. Despite some increase
in the marketing activity of competitors,
further investment in the customer acquisition
programme has allowed the business to deliver
record new customer bookings of 430,000
(2013: 411,000), reflecting an acceptance rate of
25% (2013: 25%) against unchanged underwriting
standards. As a result, customer numbers ended
the year at nearly 1.3m, up 17.7% on the prior year.
The growth in customer numbers, together with
the credit line increase programme to customers
who have established a sound payment history,
generated a 27.0% increase in year-end receivables
to just under £1.1bn. The growth in receivables
benefited from the introduction of upgraded credit
line increase scorecards in March, following the
decision to enhance the sourcing of credit bureau
data. Returns from the ‘low and grow’ approach
to extending credit remain consistently strong and
are underpinned by average credit line utilisation
of between 70% and 75% which delivers a strong
stream of revenue whilst maintaining a relatively
low level of contingent risk to the business from
undrawn credit lines.
Against unchanged credit standards, Vanquis
Bank’s marketing programmes are successfully
delivering an increased flow of new customers
from its target audience. This has resulted in
a reassessment of the medium-term potential
for the UK customer base from between 1.3m
and 1.5m customers to between 1.5m and 1.8m
customers with an expected average customer
balance of approximately £1,000.
The risk-adjusted margin has reduced by 1.0%
to 33.2% over the past 12 months, comprising
a 3.1% reduction in the revenue yield and a
2.1% reduction in the rate of impairment as
explained below.
Although UK unemployment has shown a
reduction over the last year, Vanquis Bank has,
and will continue to, apply tight credit standards.
The result is that the rate of delinquency has
fallen to a new all time low for the business
and produced a 2.1% reduction in the rate of
impairment since the start of the year. Over the
same period, the improving quality of the book
has seen the revenue yield from interest and late
and over limit fees reduce by a similar amount.
Year ended 31 December2014 £m 2013 £m Change % Profit/(loss) before tax:– UK 151.0 113.7 32.8 – Poland (10.6)(7.6)(39.5)Total Vanquis Bank 140.4 106.1 32.3 Year ended 31 December2014 £m 2013 £m Change % Customer numbers ('000)1,293 1,099 17.7 Year-end receivables1,093.9 861.3 27.0 Average receivables967.2 739.1 30.9 Revenue465.6 378.8 22.9 Impairment(144.9)(126.3)(14.7)Revenue less impairment320.7 252.5 27.0 Risk-adjusted margin133.2% 34.2% Costs(130.0)(104.3)(24.6)Interest(39.7)(34.5)(15.1)Profit before tax151.0 113.7 32.8 Return on assets215.5% 15.5%1 Revenue less impairment as a percentage of average receivables.2 Profit before interest after tax as a percentage of average receivables.Provident Financial plc Annual Report and Financial Statements 2014
47
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
As previously reported, during the second half of
2013 Vanquis Bank changed the timing of the sale of
its ROP product from the customer welcome call to
the activation call, which is approximately one week
later, and also made a number of enhancements
to the product’s features. As expected, these two
changes have resulted in a moderation in the
revenue yield earned by the business, and is the
primary reason for the reduction of 1.0% in the
risk-adjusted margin since December 2013.
In February 2014, Visa reached an agreement
with the European Commission to reduce
the interchange fees charged by credit card
companies to retailers. Lower cross-border rates
came into effect during 2014 and lower domestic
rates are likely to come into effect in the last
quarter of 2015. Interchange revenue is a less
significant source of income for Vanquis Bank
than for more mainstream credit card providers.
The impact was not significant in 2014 but is
expected to be £2m in 2015, increasing to a full
year impact of around £9m by 2016, based on
current volumes, as the reduced fees on domestic
transactions take effect.
Based on current delinquency trends, the
changes made to the ROP product and the recent
changes to interchange fees, the risk-adjusted
margin is expected to moderate to between 31%
and 32% during 2015 and remain above the target
of 30% thereafter.
Cost growth of 24.6% was well below receivables
growth as the business continues to benefit from
operational gearing. As previously reported,
the business has relocated its central London
premises to 20 Fenchurch Street in order to
accommodate future growth. The lease on
the new property commenced in April and
the business incurred additional property
costs of approximately £3m in 2014, of which
approximately £2m was in respect of the new
head office property.
Interest costs of £39.7m (2013: £34.5m) increased
by 15.1% during 2014, compared with growth in
average receivables of 30.9%. This reflects the
reduction in Vanquis Bank’s blended funding
rate, after taking account of the cost of holding
a liquid assets buffer, from 6.4% in 2013 to
5.6% in 2014, due to the progressive benefit
from taking retail deposits. Assuming market
rates remain unchanged, Vanquis Bank’s overall
funding rate is expected to reduce further in 2015
as the proportion of funding provided by retail
deposits increases.
Poland
The Polish pilot credit card operation has
vigorously tested the Polish market since
May 2012. This has included deploying talent
from the UK business, recruiting senior Polish
management with extensive local knowledge
of marketing and sales channels and testing
multiple revolving credit products and distribution.
However, we have recently concluded that the
timeframe required to develop a business of
sufficient scale to achieve the group’s target
returns is too long and therefore not the best
use of the group’s capital. Accordingly, we have
made the decision to withdraw from Poland and
undertake an orderly run-off the receivables book.
Our conclusion to withdraw was based on a
number of factors. Firstly, the main distribution
channel remains through high street brokers
rather than through online or direct marketing
which are better suited to attracting credit card
customers. As a result, the progress of the pilot
in recruiting new customers has been slower
than originally anticipated. Secondly, the credit
reference data required to underwrite customers
is fragmented, of variable quality and relatively
expensive to collect. Finally, the regulatory
environment remains uncertain, particularly in
relation to the capping of non-interest charges
at a time when the cap on interest rates set at
four times the Lombard rate is just 12%.
At the end of 2014, the Polish pilot operation
had 59,000 customers (2013: 25,000) and
a receivables book of £15.5m (2013: £5.3m).
The cost of the pilot during 2014 amounted to
£10.6m (2013: £7.6m). We do not anticipate any
material costs from withdrawing from the pilot
operation during 2015 as the infrastructure
leveraged significantly from the existing
UK platform.
Looking ahead
2014 has been another excellent year for
Vanquis Bank with further strong growth in UK
customers, receivables and profits. Our customer
satisfaction remains high at 84% and we also
completed the move to new London headquarters
at 20 Fenchurch Street during the year which will
continue to provide the capacity for future growth.
We expect 2015 to be a further year of strong
growth. We will continue to invest in developing
our channels to market and growing the customer
base and receivables in a sustainable and
responsible manner. However, we remain focused
on delivering high shareholder returns and we
will not seek growth at the expense of diluting our
returns or impacting our high levels of customer
satisfaction. Even though the UK recovery is well
underway, we will maintain the tight underwriting
that has served us so well over recent years.
Looking beyond 2015, we expect the demand for
non-standard credit cards in the UK to remain
strong. The strength of our new booking volumes
and the continued development of our channels
to market, against unchanged credit standards,
has meant that we have reassessed our
medium-term potential. We have increased
our medium-term target to between 1.5 and
1.8 million customers, up from the previous target
of between 1.3 and 1.5 million, with an average
balance of approximately £1,000. However, we
do not view these targets as the ‘end game’ and
will seek to continually enhance the potential for
the business through developing our channels
to market and product proposition. The rate of
progress towards our targets will be dictated
by future economic conditions, the potential
emergence of increased competition and
maintaining a minimum risk-adjusted margin
of 30%.
The future for Vanquis Bank remains very bright:
> We have a core proposition which is tailor-
made for the non-standard market, offering
limited amounts of credit in a responsible,
straightforward and sustainable way. We allow
those consumers who may find it difficult
to obtain credit elsewhere the opportunity to
participate in modern day life through the utility
offered by a credit card. Helping customers
to repair or build their credit history is central
to our proposition; and
> We are a profitable, growing, capital-generative
business and we continue to see excellent
growth opportunities for the business in the
UK. Vanquis Bank will continue to be a major
contributor to the future growth of the group’s
dividends and the overall returns provided
to shareholders.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
48
Consumer Credit Division
2 Consumer Credit Division
Introduction
The Consumer Credit Division (CCD)
specialises in the provision of relatively
small loans to people in the non-standard
credit market. Provident, our home-collected
credit business, which stretches back to the
company’s foundation in 1880, satisfies the
demand of those who prefer a face-to-face
service. Satsuma, our online weekly-instalment
loans business, brings the benefit of small loans
to those who prefer to handle their loans online
but who still sometimes want personal contact.
Mark Stevens
Managing Director
Consumer Credit Division
£103.9m
Profit before tax1
2,230
Employees
Home credit
£0.6bn
Year-end receivables
1.1m
Customers
£100–2,500
Online lending
Loan range
1. Stated prior to exceptional costs.
Provident Financial plc Annual Report and Financial Statements 2014 2 Consumer Credit Division
49
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
Our strategy
1
In the second half of
2013, in the face of
difficult market conditions
and given the evolution
of the non-standard
market, we developed
a new strategy to
reposition CCD over
a two-year period.
Update our home credit business
and drive for returns
Our aim is to cement our market leadership in
the home credit segment of the non-standard
market by:
> Creating a smaller but leaner, better-quality,
more modern business focused on returns;
and
> Investing in people and technology to enable
better customer service, standardisation of
best practice, better collections performance,
market-leading compliance standards and
an efficient cost base.
The strategy involves the
evolution to a broader lending
business, not just a home credit
provider. Our new strategy has
four elements:
2
Success in online loans with
Satsuma
We aim to achieve a top-three market position
within the medium term in the growing online
segment of the non-standard loans market by:
> Applying our proven customer-centric
approach;
> Using the best capabilities of CCD and
Vanquis Bank to get the model right;
> Benefitting from payday market dislocation
and clear, tighter regulations; whilst
> Achieving returns as good as home credit.
3
Continued product development
We will continue to seek out and pilot new
opportunities to serve non-standard consumers
with other products and services by deploying
our considerable expertise and customer-centric
business model. Our guarantor loans pilot
commenced in 2014.
4
Delivering positive customer
outcomes
Our strategy is underpinned by:
> Lending responsibly and providing our
customers with the right products and
services in order to maintain our high levels
of customer satisfaction; and
> Using all available information and technology
to maintain high levels of compliance with
applicable laws and regulations.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report 50
Consumer Credit Division continued
How the Consumer Credit Division works
CCD operates a business model based
on our common approach, but adapted
to closely suit the needs of non-standard
consumers in the home credit and
online instalment markets.
What we do for our customersWhat allows us to do what we doThe value this createsProvident Financial plc Annual Report and Financial Statements 2014 How the Consumer Credit Division works
51
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
130 years of experience with home credit.
Nationwide coverage.
The vast majority of 7,700 self-employed agents using
smartphones to conduct their round.
Over 1 million visits per week to over 3% of UK households.
2,230 staff in 300 branches using technology effectively.
Long experience with non-standard customer needs as they
move on from home credit.
Understanding of the fundamentals of lending that work for
customers from home credit experience (small manageable
payments, no penalties and transparent pricing).
Prices that are below the high-cost short-term credit (HCSTC)
price cap from the outset.
1 Simple cash-based loans
that come to the customer
with nothing extra to pay,
ever, no matter what
happens.
2 Weekly home visit from
self-employed, largely
female, agents who collect
and lend.
3 Skill and judgement
of agent increasingly
bolstered by sophisticated
affordability assessment
and credit scoring systems.
4 Weekly personal
assessment of all customer
situations and forbearance
where necessary at no
extra cost to the customer
whatsoever.
1 Simple online loans with
manageable payments and
nothing extra to pay, ever,
no matter what happens.
2 Close contact from the
outset with a representative
on the phone whenever a
customer needs to talk to
somebody.
3 Sophisticated credit scoring
and affordability systems
using a range of data
sources to aid a responsible
and sustainable ‘low and
grow’ approach to lending.
4 No fees, charges or added
interest whatsoever, along
with forbearance when
needed and a personal
approach to online lending.
Financial inclusion and in-built discipline and control for over
1 million customers.
Better outcomes for customers, helping them to manage their
tight budgets.
Help for customers coping with cost of living pressures while
wages remain subdued.
Lending that is far better suited to non-standard customer needs
than typical online and ‘payday’ lending.
Improving quality of book as customer numbers fall.
Stable returns in a mature market.
Very high customer satisfaction.
For customers for whom the home credit market is not suitable,
a responsible and sustainable alternative to typical ‘payday’ and
‘payday-style’ lending and lender practices.
Strong growth opportunity in a market with large demand, poorly
served by mainstream lenders and increasingly constrained
‘payday’ lenders.
What we do for our customersWhat allows us to do what we doThe value this createsProvident Financial plc Annual Report and Financial Statements 2014Strategic report 52
Consumer Credit Division continued
Provident
We are the largest home credit
business in the UK and Ireland.
Every week, 7,700 local agents
visit the majority of our 1.1 million
customers, to issue loans and
collect repayments. Even after
130 years, the business continues
to fill a vital need for customers,
providing access to credit for
those who might otherwise be
financially excluded and helping
when others don’t.
Why home credit works
Our home credit business is the group’s
longest-running business, stretching back to the
company’s foundation in 1880. It is a business
that has stood the test of time, serving customers
through thick and thin, including two world wars
and numerous economic cycles.
We are the largest home credit business in the
UK and Ireland. Every week, 7,700 local agents
visit the majority of our 1.1 million customers, to
issue loans and collect repayments. Even after
130 years, the business continues to fill a vital
need for customers, providing access to credit
for those who might otherwise be financially
excluded and helping when others don’t.
In 2014, we merged our Greenwood Personal
Credit business into our Provident Personal Credit
business. At the same time, we took the opportunity
to rebrand our home credit operations under one
brand – ‘Provident’ – and to support the rebrand
with TV advertising. We also ensured that our
new logo includes reference to our business being
established in 1880 which customers find very
reassuring, particularly at a time when many
alternative lenders have rapidly come and gone.
We aim to promote the Provident brand more
during 2015 to ensure that non-standard
consumers looking for small loans recognise
the benefits of borrowing from Provident.
Whilst we have rebranded our home credit
business we have not changed the essence of
our product or the way we serve our customers.
The home credit service fits the needs of
customers ‘like a glove’:
1. The products are simple and transparent with
all costs included up front and no additional
fees or charges whatsoever. For those
managing on a tight budget, it’s important to
know that the amount to be repaid is fixed
at the start and will never go up.
2. The affordable weekly repayments suit those
managing on tight weekly budgets and the
agent’s regular visit is not only convenient
for the customer but also acts as a useful
reminder to put the money aside for
the repayment.
3. Forbearance is core to our product offering
so that when customers get into difficulty they
know they’ll get a sympathetic response which
could mean either making a reduced payment
or missing a weekly payment altogether,
depending on the circumstances.
4. The Provident service is face-to-face, with
loans being delivered to customers’ homes
by self-employed agents who then usually call
every week, or in some cases every month,
to collect repayments. Agents often live in the
same communities as their customers and
understand their needs, developing an intimate
knowledge of their circumstances through the
weekly visit. Whilst central underwriting is also
used, agents make the final lending decision
as they can assess customer capacity and
character in the home. Importantly, agents
are paid commission primarily on what they
collect, not what they lend, so they have no
reason to lend more than their customers can
afford to repay.
Provident’s service is one that customers trust
and positively want to use, which helps to
explain why our customer satisfaction rates are
consistently high. 93% of customers say they are
satisfied with the Provident home credit service,
and the vast majority say they would recommend
Provident to family or friends.
Provident Financial plc Annual Report and Financial Statements 2014 Provident
53
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
“ I’ve been a Provident
agent for years and so
I’ve seen all the fads
come and go. What has
never changed is what
customers value –
no charges for late
payments, small amounts
repaid weekly and simple,
transparent products.
Sue, Bradford
”
A pilot of a lending app to support electronic
loans documentation commenced in May and
has now been extended to over 35% of agents.
The app eliminates paper, saving a significant
amount of agent and back office time, and allows
the business to better enforce and evidence
compliance. We anticipate 100% use of the
lending app by the end of 2015.
In April, tablet devices were rolled out to field
managers and have received very positive
feedback. These devices effectively provide
managers with a ‘mobile office’ and are starting
to free up time, currently spent on office-based
administration, for supporting and motivating
agents as well as assisting with arrears cases.
Progress against our strategy
The transition of the home credit business to a
leaner, better-quality, modern business managed
for returns involved the identification of five key
areas for change. We identified that if we could
successfully implement these changes then
2013 would be the baseline year for profits.
2014 would be a year of further change before
we completed the transformation programme
during 2015. This would then allow us to have a
solid foundation to develop the business in 2016
and beyond.
It is very pleasing that the home credit business
has made excellent progress during 2014 against
each of these areas:
1. ‘One Best Way’
Historically, there have been differing working
practices spanning the 300 branches across
the UK and Ireland. The absence of sharing best
practice resulted in significant variations in branch
and manager performance. Whilst there is still
progress to be made, we have made great strides
during 2014 in standardising our ways of working,
particularly in arrears management, which has
been assisted by the deployment of technology
and investing in developing our best people, all
of which is described further below.
2. Technology & apps
The programme of work to develop our
technology through the use of smartphone
and tablet apps to standardise best practice,
access significant efficiency gains across the
field operation and implement market-leading
compliance as regulation migrates to the Financial
Conduct Authority (FCA) is running well ahead
of plan.
In February, the Android version of the collections
app was released to supplement the iOS version
which was rolled out from September last
year. Over 95% of agents are now using their
smartphones to conduct their round, up from
around 30% at the start of the year, and much
higher than the 80% target we set ourselves at
the start of the year. We plan to have all of our
agents using the collections app by the end of
the first quarter in 2015. As well as standardising
best practice, we estimate that the collections
app saves approximately two to three hours
of agent time a week, allowing them to spend
more time with customers, as well as improving
collections performance, arrears management
and evidencing high levels of compliance.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report 54
Consumer Credit Division continued
Over 95% of agents are now using
their smartphones to conduct
their round, up from around 30%
at the start of the year, and much
higher than the 80% target we set
ourselves at the start of the year.
3. Collections focus
Historically, the business has delivered stable
credit quality with the ratio of revenue to
impairment remaining in a tight range of between
32% and 34%. However, in 2013 the ratio
increased beyond this range due to a deterioration
in the arrears profile during the first nine months
of the year. As a result, underwriting standards
for new customers were materially tightened in
September 2013 and the business commenced
the process of standardising arrears and
collections processes, including a focus on early
intervention and the better integration of field and
central collections activities.
As a result of these decisive measures, the
business experienced a marked improvement
in the quality of the receivables book in 2014
with the ratio of impairment to revenue reducing
significantly from 38.7% in 2013 to 30.0% in 2014.
We anticipate further improvements in credit
quality in the future as the standardised arrears
processes become further embedded throughout
the field organisation.
The implementation of tighter credit standards
has resulted in a material contraction in the
receivables book. In 2013, receivables reduced
by 14.9% and have reduced by a further 20.5%
in 2014, resulting in an overall 32.4% reduction
over a two-year period. This compares with
our initial estimate of a 25% reduction over the
two-year period.
Update
home credit
and deliver
better returns
1. ‘One Best
Way’
2. Technology
and apps
3. Collections
focus
4. Much lower
costs
5. Performance
through
people
We are creating a smaller but leaner, better-quality, modern, more profitable home credit business focused on returns.Provident Financial plc Annual Report and Financial Statements 2014
55
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
“ Everyone knows kids
don’t come cheap and
there always seems
to be something extra
to pay for! I’ve used
Provident to buy school
uniforms and last year
we were able to get the
boys new beds. It might
not sound like much,
but it has made a big
difference to our family.
Emma, Leeds
”
5. Performance through people
The profitability of an agency increases markedly
as the agent gets more experience. As a result,
we have significantly changed the way we
attract, induct and support agents to drive higher
retention and reduce agent turnover. We have
also been combining agent rounds to remove
less profitable agencies, which are a key driver
of agent turnover as the agent’s commission is
often insufficient for their needs. These changes
have resulted in a significant improvement in
agent turnover and a halving in the number of
vacant agencies.
We have introduced a new development agenda
throughout the business to recruit, retain and
develop better leaders in our management
team. Formal leadership training for managers
throughout the business is now well established
and has been extremely well received. This will
continue to pay dividends in the future.
The reduction in field administration employees
in June 2014 was made possible by the
programme to deploy technology throughout the
field operation running well ahead of schedule.
The headcount reductions, together with other
savings and volume reductions, have reduced
the CCD cost base by over £28m during 2014.
This has allowed the business to invest in
developing Satsuma and the regulatory agenda
whilst delivering stable profits.
4. Much lower costs
To ensure that profit levels in the business were
at least maintained following the contraction in the
receivables book, it was not only necessary for
the quality of receivables to improve but the cost
base needed to be reduced to reflect the lower
volume of business.
Whilst job losses are always regrettable, during
2013 and 2014 we have implemented three
phases of cost reduction:
Phase 1 – 180 field managers left the business
in June 2013.
Phase 2 – 340 field and head office employees
left in December 2013.
Phase 3 – 225 field administration employees
left in June 2014.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
56
Consumer Credit Division continued
Satsuma
We believe that Satsuma is a
business capable of delivering
returns comparable to the Provident
home credit business and, very
importantly, delivering good
customer outcomes. We believe
that a Satsuma loan is the best
customer proposition in the market,
closely aligned with home credit.
Win in
online
lending
1. Best customer
proposition
2. Broad
marketing
reach
3. Best in class
underwriting
4. Best in class
collections
Data-led
continuous
improvement
Satsuma, our online direct repayment loans
product, was launched in November 2013 as
part of the repositioning of the CCD business to a
broader-based lending business. Since its launch,
we have been focusing on building our capability
in order to develop a sustainable business with
a strong market position capable of delivering the
group’s target returns.
We believe that Satsuma is a business capable
of delivering returns comparable to the Provident
home credit business and, very importantly,
delivering good customer outcomes. We believe
that a Satsuma loan is the best customer proposition
in the market, closely aligned with home credit,
and we are supporting it with a front-of-mind
marketing proposition. Our underwriting and
collections capability have been developed
significantly over the last 12 months and we
believe that they provide us with a competitive
advantage in the fast-growing non-standard online
loans market. Our experience through 2014 has
shown us that the demand for online instalment
loan products is strong and we are very excited
about the excellent opportunity for Satsuma in
this market.
At 31 December 2014, Satsuma had 21,000
customers (2013: 9,000) and a receivables book
of £5.0m (2013: £1.8m).
Market opportunity
The online loans market is estimated to be at least
four times the size of the home credit market
and is growing as customer preferences change.
With the backdrop of clearer, tighter regulation
around payday lending from 1 July 2014,
there has been a shift in demand from payday
loans to instalment loans as the restrictions on
the use of rollovers and continuous payment
authorities by payday lenders has taken effect.
We have already seen a number of smaller
payday loan companies exiting the market and
larger operators are reconfiguring their business
models. We expect that the introduction of a rate
cap on high-cost short-term credit providers from
2 January 2015 will lead to a further shift towards
instalment loans.
Target customer
Satsuma addresses those applicants of sufficient
credit quality whose preference is to access
small-sum credit online and make weekly or
monthly repayments direct from their bank
account without the need for an agent visit. It is
specifically aimed at the significant audience of
non-standard consumers in the segment of the
market between Vanquis Bank and our Provident
home credit business.
We will use our competitive advantage to achieve a top-three market position within two to four years.Provident Financial plc Annual Report and Financial Statements 2014 Satsuma
57
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
4. Collections
During 2014, we successfully embedded our
collections processes into the excellent collections
capabilities of Vanquis Bank. Their contact centre
representatives in Chatham are now engaged at
an early stage to optimise collections performance
and work closely with our customers. This will
include using all aspects of their technology to
contact customers either through the use of their
contact centre and SMS capabilities, trace activity
for customers where no contact can be made
and, very importantly, utilising their extensive
range of forbearance measures for those
customers whose circumstances have changed.
Just like all of the group’s businesses, working
closely with our customers to ensure the best
possible outcome is a fundamental part of our
business and one which distinguishes us from
the majority of other lenders in this market.
We are very pleased with the progress made
during 2014.
When we launched Satsuma we expected default
rates to be higher than home credit, reflecting
the benefit of the agent relationship within the
home credit business model, despite the credit
standing of a home credit customer being lower.
However, as a result of our significant investment
and development of our underwriting and
collections capability during 2014, our default
rates are currently running marginally ahead
of our original forecast.
We will use our competitive advantage in the
following areas to achieve a top-three market
position within two to four years:
1. Proposition
The product proposition of Satsuma is based
closely on the proven home credit customer-
centric proposition. There are no extra charges
whatsoever, even if payments are missed.
Customers can have contact with a telephone
representative and there are a number of
forbearance procedures in place for those
who get into financial difficulty. We believe that
Satsuma meets customer needs better than
payday lending and other instalment loan
products currently in the market.
We initially launched the product with a maximum
permitted loan amount of £300 for new
customers and £800 for existing customers.
However, as we have developed our underwriting
and collections capability, we have recently
increased these amounts to £1,000 for new
customers and £2,000 for existing customers,
subject to individual affordability checks.
We aim to further develop our product proposition
in 2015. In particular, we will shortly be
introducing a monthly product in addition to our
current weekly product, to reflect that a number
of our customers are paid monthly and would
therefore prefer to pay via a monthly instalment
rather than a weekly one.
2. Marketing
We have positioned Satsuma with a broad
marketing reach. Our main focus is the
open market but we are also targeting those
consumers who do not want the home credit
agent service, paid-up former customers of
home credit and also those customers declined
by Vanquis Bank who are not suitable for open-
ended revolving credit. In addition, customers
applying for a Satsuma loan who do not meet the
higher underwriting criteria or cannot be remotely
verified, are referred to home credit.
We are supporting the open market proposition
with memorable front-of-mind branding and
significant marketing spend. This includes a
distinctive, customer-focused website which
has a fresh look and feel and TV advertising.
Our TV advertising to date has been based on
the ‘singing Satsuma’ with two different adverts
focused primarily on building the brand name.
Throughout 2014, we have trialled the adverts
on numerous different TV stations and at different
times of day to fine-tune our advertising strategy
and improve response rates. We have also
supplemented this with radio advertising on a
regional basis. We have been very pleased with
how the Satsuma brand name has developed
with non-standard consumers and we have
now changed the focus of our TV advertising
to promote the core features of the Satsuma
product and service rather than on brand name
awareness-building. Our third TV advert was
launched in January 2015.
3. Underwriting
Our initial underwriting combined the unique
proprietary knowledge of issuing weekly
loans in the home credit business and
remote non-standard credit in Vanquis Bank.
We supplemented this with external bureau
data and have refined our scorecards for
different sources as the business has developed.
In October, we implemented enhanced
affordability assessments as required by the
FCA. These require lenders to verify customers’
incomes and consider outgoings as part of the
overall credit process. In November, we launched
a new decision engine and scorecard which
will allow us to include behavioural and social
data in our credit decisioning going forward.
The business has already experienced an
improvement in conversion rates which has, in
turn, allowed a step-up in marketing. As a result,
weekly new business volumes increased by 50%
in December. Consistent with both our Provident
home credit business and Vanquis Bank, we are
adopting a prudent ‘low and grow’ approach to
issuing further credit.
Our conversion rate of applications has been
steadily improving throughout the year and,
following the implementation of the new
scorecard in November, our current conversion
rate has increased materially. We expect the
conversion rate to improve further and this
will be an important driver in determining the
potential size of the Satsuma business.
Just like other Provident Financial businesses, we
maintain close, ongoing personal contact with our
customers through our telephone representatives
which gives us a unique customer insight and
provides our customers with peace of mind,
knowing that they always have someone they
can talk to.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report 58
Consumer Credit Division continued
Guarantor loans – glo
In May 2014, as part of our continuing strategy to
develop CCD into a broader lending business, we
launched a pilot into the guarantor loans market
to test whether a product could be established
which is capable of delivering the group’s target
returns. The guarantor loans market is currently
dominated by one large provider but it is a
market that has seen considerable growth over
recent years.
The guarantor loans proposition is additional and
complementary to home credit and Satsuma,
comprising larger, longer loans of between
£1,000 and £7,000 repayable over a period of
between one and five years. The customer is
supported by a family member or friend with a
good credit record who is prepared to guarantee
the loan if the customer’s circumstances change.
CCD’s proposition offers customers competitive
pricing and a very customer-centric approach to
forbearance, including the high levels of personal
service that the group deploys in all its offerings.
We initially trialled the guarantor loans pilot
under the brand name of ‘Tandem’ using only
the broker channel. Since its launch, we have
significantly developed the customer application
and underwriting process through a test and
learn approach to improve the overall customer
journey. In addition, in November we launched
a direct to consumer proposition through the
development of a customer-friendly website and
rebranded ‘Tandem’ as ‘glo’, short for ‘guarantor
loan option’. This was supported by a small
investment in marketing spend, including a TV
and radio campaign to test the level of demand
and our ability to access the market opportunity.
The results of the pilot will be evaluated during
the first half of 2015.
CCD – Financial performance
CCD generated a profit before tax and exceptional costs of £103.9m in 2014 (2013: £102.5m)
as set out below:
CCD delivered profit before tax and exceptional
costs 1.4% up on last year. This reflects strong
execution against a challenging programme
of work to transition the home credit business
to a smaller but leaner, better-quality, more
modern business focused on returns, whilst
investing in the Satsuma online loans proposition.
The success in delivering the strategy has
resulted in a significant increase in CCD’s return
on assets from 15.1% in 2013 to 18.1% in 2014.
Whilst the disposable incomes of home credit
customers have increased modestly over the last
year, customer confidence remains relatively low.
Accordingly, the demand for credit from better-
quality, existing customers has remained relatively
subdued for the majority of the year. In addition,
the tighter credit standards implemented during
the final quarter of 2013 have continued to restrict
the recruitment of more marginal customers into
the business. Consequently, customer numbers
reduced by 29.1% during 2014 but the quality
of the receivables book improved materially.
This resulted in sales levels running 19% lower
than the previous year during the first 10 months
of the year. As expected, the anniversary of tighter
credit standards saw the year-on-year sales
shortfall moderate to around 9% during the last
two months of the year, with the business also
benefitting from the rebranding of the home credit
business to ‘Provident’ in November and the
associated TV advertising campaign.
Receivables at the end of 2014 were 20.5%
lower than the prior year, less marked than
the reduction in customer numbers due to
the shedding of marginal customers and the
corresponding focus on better-quality established
customers. The revenue yield remained robust at
98.8%, up from 96.0% in 2013, due to a modest
shift in mix towards shorter-term, lower-risk,
higher-yielding lending.
Year ended 31 December2014 £m 2013 £m Change % Customer numbers ('000)1,071 1,511 (29.1)Year-end receivables588.1 740.0 (20.5)Average receivables598.5 725.8 (17.5)Revenue591.1 697.1 (15.2)Impairment(177.5)(269.7)34.2 Revenue less impairment413.6 427.4 (3.2)Revenue yield198.8% 96.0% Impairment % revenue2 30.0% 38.7% Risk-adjusted margin369.1% 58.9% Costs(275.8)(285.6)3.4 Interest(33.9)(39.3)13.7 Profit before tax4103.9 102.51.4Return on assets518.1% 15.1%1 Revenue as a percentage of average receivables.2 Impairment as a percentage of revenue.3 Revenue less impairment as a percentage of average receivables.4 Profit before tax is stated before an exceptional cost of £3.4m (2013: £13.7m) in respect of a business restructuring. 5 Profit before interest and exceptional costs after tax as a percentage of average receivables.Provident Financial plc Annual Report and Financial Statements 2014
59
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
The implementation of standardised arrears and
collections processes coupled with tighter credit
standards produced a significant improvement in
arrears during 2014 and resulted in the ratio of
impairment to revenue reducing from 38.7% in
2013 to 30.0% in 2014.
The increase in revenue yield and reduction in
impairment produced a significant strengthening
in the risk-adjusted margin from 58.9% in 2013
to 69.1% in 2014.
Business performance is benefiting from
the programme of cost savings implemented
primarily during 2013, which secured a year-
on-year reduction in the cost base of 3.4%.
This was achieved after reinvesting approximately
£17m of the previously announced gross cost
savings of £28m in enhancing IT, business and
people development processes to support the
repositioned home credit business, embedding
the governance and regulatory framework
required to transition CCD to the FCA and funding
the start-up of Satsuma.
The programme to deploy technology throughout
the field operation to support an improvement in
productivity and reinforce compliance continues
to run well ahead of schedule. This allowed a
reduction in the field administration workforce of
225 in 2014 and resulted in cost savings of £2m
in the second half of the year, rising to £4m in
2015, with no impact on customer service levels.
An exceptional restructuring cost of £3.4m has
been incurred in 2014 in respect of associated
redundancy costs (2013: £13.7m).
CCD – Looking ahead
2014 has been a year of excellent progress
against our new strategy. CCD has undergone
a transformational amount of change in deploying
technology, standardising processes, launching
new products, developing underwriting and
collections capabilities, investing in systems and
controls to deliver high standards of compliance
with regulation and developing our people and
talent. Yet we have also achieved an important
goal which we set at the start of the year – we
have delivered stable year-on-year profits and
an increase in the return on assets.
In home credit, the transition to a leaner, better-
quality, more modern business is running
ahead of schedule. This has been an excellent
achievement from all of our employees who have
made this possible. The home credit market is
mature but we are well placed to deliver excellent
returns for our shareholders whilst continuing
to serve our customers for many more years
to come.
In Satsuma, we have developed strong capabilities
at every part of the customer journey. We have
utilised our core skills in both CCD and Vanquis
Bank to lend responsibly and begin to build a
sustainable business. The investment we have
made in 2014 puts the business on a very sound
footing and we believe it will achieve a monthly
break-even during 2015 and then make a full-year
profit contribution from 2016 onwards. We are
confident that we will achieve a top-three market
position over the next two to four years.
Interest costs in 2014 were 13.7% lower than last
year reflecting the 17.5% reduction in average
receivables which has been partly offset by an
increase in the funding rate for the business from
6.8% to 7.1%. The increased funding rate reflects
CCD absorbing a greater proportion of the higher-
cost, fixed-rate, longer-duration borrowings as the
average retail deposits held by Vanquis Bank has
increased during the year.
All of our actions in CCD are driven by the
ethos of lending responsibly and providing
our customers with the right products and
services. Maintaining our high levels of customer
satisfaction continues to be central to our
business. We have a clear, focused and deliverable
strategy and we have a strong management team
with a combination of in-house experience and
proven external track records to deliver it.
CCD remains a highly profitable and cash-
generative business and the bedrock of the
group’s high dividend payout ratio.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
60
Moneybarn
3 Moneybarn
Introduction
Moneybarn is the market leader in the
provision of finance to buy cars for
people in the non-standard credit market,
very often to help them get to work.
Through careful consideration of customers’
applications and comprehensive affordability
assessments, Moneybarn is able to help
those who may have had problems with
credit in the past but who are now over
those problems.
Peter Minter
Managing Director
Moneybarn
£15.0m
Profit before tax1,2
115
Employees
Non-standard
car finance
£151.7m
Year-end receivables
£9,000
Average loan
22,000
Customers
1. Pro forma result for the year ended 31 December 2014 based on applying
the group’s lower cost of funding to pre-acquisition results.
2. Stated prior to amortisation of acquisition intangibles and exceptional costs.
Provident Financial plc Annual Report and Financial Statements 2014 3 Moneybarn
61
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
Our strategy
Moneybarn’s strategy is
to develop its position as
the leading non-standard
car finance provider in
the UK, delivering positive
customer outcomes,
sustainable growth and
high shareholder returns
that meet the group’s
minimum thresholds.
To deliver our strategy, we continue to focus on:
> Maintaining clear and consistent credit
management objectives to ensure that we
maintain a good quality receivables portfolio
with stable levels of impairment;
> Offering straightforward and transparent
vehicle finance products with no product
add-ons or hidden charges;
> Treating our customers fairly throughout
their relationship with us, managing conduct
risk and ensuring that we comply fully with
all applicable regulation; and
> Ensuring that we deal in a responsible and
consistent way with customers who get
into financial difficulty.
> Using the group’s balance sheet strength and
funding lines to access the significant growth
opportunity that exists in the non-standard
vehicle finance segment in the UK;
> Maintaining our strong relationships with
brokers and securing a position of primacy
where appropriate;
> Developing our product proposition and
our channels to market to access additional
growth opportunities;
> Capitalising on the synergies available through
the group’s expertise in credit, marketing and
collections as well as its customer footprint;
> Continuing to invest in and develop our
IT infrastructure to maintain our market-
leading credit decisioning and a smooth
customer journey;
“ I’m proud to be part of an organisation that really
makes a difference to our customers’ lives.
Understanding whether a customer can afford a loan
really is important to us and gets the relationship off
to the best start. We understand that circumstances
can change and if this happens it’s great to be able
to work with a customer to help them get back on
track. I love the fact that we’re making a difference.
Will, Moneybarn Customer Services Team
”
Provident Financial plc Annual Report and Financial Statements 2014Strategic report 62
Moneybarn continued
How Moneybarn loans work
Moneybarn operates a business model
based on our common approach,
but adapted to closely suit the needs
of consumers in the non-standard
used car finance market.
What we do for our customersWhat allows us to do what we doThe value this createsProvident Financial plc Annual Report and Financial Statements 2014 How Moneybarn loans work
63
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
Market-leader in non-standard used car finance with over 20 years
of experience in the car finance market.
Strong broker relationships maintained and built by consistent
lending through the cycle.
Provide finance for used cars, the primary use of which is to travel
to work, bought through dealerships.
Simple broker commission structures.
Focus on non-standard customers, less well served by mainstream
and manufacturer-tied lenders.
1 Simple hire purchase car finance with no add-ons or
insurances focused on the needs of the non-standard
second-hand car buyer.
2 Customer relationships established with a welcome call and
maintained with individual discussions when issues arise.
3 Investment in automation and credit scoring systems
where appropriate, building market-leading service levels
with acceptance in principle decisions within four seconds
of application.
4 Fairness is at the centre of all discussions with customers,
always looking to keep the customer in their car if possible
and looking for the best outcome for them overall.
Better outcomes for customers – helping people get to work.
More suitable product than unsecured lending.
Low level of upheld Financial Ombudsman Service (FOS) complaints.
Strong growth opportunity in a market with large demand,
poorly served by mainstream lenders through the cycle.
Primacy with key brokers to access the best leads available.
High levels of customer satisfaction.
What we do for our customersWhat allows us to do what we doThe value this createsProvident Financial plc Annual Report and Financial Statements 2014Strategic report 64
Moneybarn continued
We believe that Moneybarn is a
great fit with the rest of the group.
It is very well-positioned to take
advantage of the strength of the
group’s balance sheet and funding
lines as well as benefiting from
the credit and marketing skills and
customer footprint that reside in the
group’s other businesses to deliver
significant growth going forward.
1. The non-standard vehicle
finance market
Moneybarn is the largest provider of non-standard
vehicle finance in the UK, with an approximate
market share of between 20% and 25%.
Direct competition comes from around 10 other
providers, the largest of which are Moneyway,
First Response and Advantage.
The non-standard vehicle finance market shrank
considerably as a result of the credit crunch, as
lenders reduced their lending, collapsed or exited
the market. It has recovered in recent years but
remains less than half of the size it was in 2007.
It is estimated that approximately half a million cars
were purchased by non-standard individuals in
the UK in 2013, of which about 10% were funded
through car finance products with the remainder
being funded through cash, loans from families
and friends or other forms of credit such as
personal and guarantor loans. Growth in future
demand is supported by a number of factors
including customer needs, an overall under supply
of non-standard car finance and the better value
of specialist car finance relative to many other
non-standard funding options.
We believe that there is considerable unmet
demand in this market and that the market size
will be determined principally by supply-side
factors. Moneybarn, under the group’s ownership,
is very well placed to take advantage of this
market opportunity.
An introduction to Moneybarn
Moneybarn is Provident Financial’s first acquisition
since the demerger of the international business
in 2007. The business shares the same ethos as
the group’s other businesses in providing access
to credit for those who may find it difficult to
source credit from other lenders.
The business was originally established in 1992
and initially started out life providing finance to
aspirational owners of more expensive vehicles.
The average amount lent was approximately
£20,000. However, the business model changed
significantly around the time of the credit crunch
to focus on lower-value, more mainstream vehicle
purchases. Significant investment was made
in developing a bespoke IT platform to support
efficient and effective broker and customer
relationships and the management team was
strengthened. The business was also successful
in securing funding through the recession, unlike
many of its competitors.
From 2010, the business enjoyed strong growth
but from 2013 its origination of new loans became
increasingly restricted by the funding constraints
resulting from its ownership structure. In order
to allow the management team to realise the
growth opportunity in the non-standard car
finance market, the owners decided to sell the
business to Provident Financial in August 2014.
The consideration was £120m which was satisfied
by an equity placing of Provident Financial shares.
We believe that Moneybarn is a great fit with the
rest of the group. It is very well-positioned to take
advantage of the strength of the group’s balance
sheet and funding lines as well as benefit from the
credit and marketing skills and customer footprint
that reside in the group’s other businesses to
deliver significant growth.
“ I had a few credit problems in the past when my
marriage broke down. Even though that was a few
years ago and I’ve now sorted everything out, I still
found it very difficult to get a car loan. That’s why
it was so refreshing when Moneybarn gave me the
help I needed.
Pete, Telford
”
Provident Financial plc Annual Report and Financial Statements 2014
65
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
“ We often have
conversations with our
customers who have
had difficulties with
their finances in the
past, but we find by
being approachable,
straightforward and
honest, it incentivises
them to do the same.
Jenny, Moneybarn
”
Moneybarn typically requires customers to pay
a deposit and has historically lent up to the trade
value of the vehicle. We have also recently started
lending between trade and retail value. Historically,
the loan has been required to be greater than
£5,000 and the vehicle to have mileage of less
than 100,000. The minimum loan amount was
very recently reduced to £4,000 and we continue
to explore opportunities to develop and extend
our product offering.
2. Customers
Our customers are very similar to Vanquis Bank
customers. They have a thin or impaired credit
history and often find it difficult to access credit
from more prime lenders. They have an average
age of approximately 40, are employed or self-
employed and have an income level around the
national average of £25,000. They are more likely
to be male than female.
Surveys of our customers show that they are
very satisfied with the service provided by
Moneybarn and our complaints levels are very
low. Like the rest of the group, this is an intrinsic
part of our business model and strategy.
3. Product
We offer secured car loans in a responsible
manner through conditional sales contracts.
Formally, the vehicle is owned by Moneybarn
until the final instalment has been paid by
the customer. Over 90% of our deals are for
used vehicles.
The car is typically used by our customers for
everyday necessities such as travelling to work
rather than for leisure purposes. Our ethos is to
help ordinary people get to work. Currently, all of
our lending is against cars and we don’t provide
credit for other vehicle classes, such as light
commercial vehicles. Product diversification will
be explored for future growth potential.
Our contracts are typically for between four
and five years with instalments paid monthly.
The average value of a loan is approximately
£9,000 and the representative APR is 32%.
We do not sell any ancillary products, such as PPI
or GAP insurance, and we do not have hidden
fees or charges, demonstrating a strong cultural
fit with the group.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
66
Moneybarn continued
An important part of our success
at Moneybarn is our people.
We have an experienced and
respected management team who
are all remaining with the business
under the Provident Financial
umbrella. They are very well
supported by our passionate and
motivated employees who play
a vital role in ensuring that we
serve our customers in the best
possible way.
4. Distribution channels
The primary source of our new customer leads
is through a network of well-established brokers.
They value our service levels, technology and the
excellent relationships that we forge with them.
This is reinforced by approximately 60 staff based
within brokers dedicated to Moneybarn business.
Brokers earn commission for each lead that they
provide which results in a loan being issued.
Customers using a broker can source their vehicle
from any car dealership.
We also source leads through independent car
dealers and a very small number from our own
website www.moneybarn.com. We do not have
our own dealership network which sells vehicles.
We only provide finance.
Going forward, we aim to explore synergies
with the group to develop a more well-defined
business to consumer proposition and, in
particular, seek to develop the synergies available
with the Vanquis Bank customer base.
5. Underwriting and collections
We believe that we have developed market-
leading credit decisioning. Our underwriting
is highly automated which allows for rapid
profiling and provisional approval of customers,
providing us with a competitive advantage.
Our credit science is based on a combination of
external credit bureau data, our own proprietary
scorecards and policy rules. The underwriting
process includes robust affordability assessments,
including obtaining proof of income, to ensure that
we only lend when it is responsible to do so.
Collections are normally made through fixed
monthly direct debit payments. If a customer
gets into financial difficulties during the term of
the loan, then our customer services team will
work closely with the customer to help them
get back on track. This may include a temporary
payment arrangement for short-term financial
difficulties. However, for those customers that
demonstrably can no longer afford the ongoing
repayments, the most appropriate exit strategy
is often through the repossession and sale of
their vehicle to settle their loan before the vehicle
depreciates further.
We believe that our approach to collections is
clear and fair and surveys of our customers
support this.
Our default rates and collections performance
have remained very consistent since the change
in focus of our business in 2010. Our impairment
charge represents approximately 3% of
receivables. Consistent with Vanquis Bank, we
recognise an impairment provision as soon as
one contractual monthly payment is missed.
6. Infrastructure
At Moneybarn we have a highly scalable IT
platform that supports the end-to-end customer
journey. We were the first lender in the market to
adopt automated underwriting decision making.
Our IT system is completely bespoke, having been
developed in house, and our in-house IT team is
able to respond quickly to business requirements
and ensure that we remain at the forefront
of technology.
We have a strong cultural appetite for compliance
and meeting our regulatory obligations.
Paramount to this is treating customers fairly.
The new and used car finance market is now
regulated by the FCA and we are well underway
in implementing our transition plan in order to
submit our application for full authorisation in the
first half of 2015.
An important part of our success at Moneybarn
is our people. We have an experienced and
respected management team who are all
remaining with the business under the Provident
Financial umbrella. They are very well supported
by our passionate and motivated employees who
play a vital role in ensuring that we serve our
customers in the best possible way.
We are currently investing in our people and
additional headcount to support our future
growth, meet the higher regulatory standards
under the Financial Conduct Authority (FCA) and
to bring our governance processes more in line
with those of the rest of the group.
Provident Financial plc Annual Report and Financial Statements 2014
67
Provident Financial Group
1
Vanquis Bank
2
Consumer Credit Division
3
Moneybarn
Non-standard
credit cards
Home credit
Online lending
Non-standard
car finance
Financial performance
Moneybarn has contributed a profit before tax, amortisation of acquisition intangibles and exceptional
costs of £5.8m in the four months following its acquisition. The results for the four months, together
with the pro forma results for the 2014 financial year restated to apply the group’s lower cost of funding
to pre-acquisition results, are set out below:
The business is investing in additional headcount
to support future growth, meet the higher
regulatory standards under the FCA and to bring
governance processes in line with those of the
rest of the group. Headcount has increased
from 90 at the end of August to 115 at the end
of December and is expected to increase to
approximately 150 by the end of 2015.
Moneybarn is a high returns business and
generated a pro forma return on assets of
12.9% for 2014 as a whole.
Moneybarn has performed well, delivering
results in line with the internal plans established
immediately on acquisition. New business
volumes have picked up significantly as a result
of access to the group’s funding. This has allowed
the extension of the product offering to lend up
to retail value, reinforcing Moneybarn’s primacy
across its broker network. Average monthly
volumes in the last four months of the year were
approximately 1,000 compared with around 730
in the first eight months of the year and around
670 in the corresponding four-month period
last year.
Default rates have remained stable and are
consistent with the levels incurred in the previous
18 months. This has enabled the business to
deliver a risk-adjusted margin for 2014 as a
whole of 24.6%, in line with the ratio of 25%
communicated at the time of the acquisition.
Looking ahead
2014 has been a significant year in Moneybarn’s
history. Becoming part of the Provident Financial
group offers us exciting opportunities for further
growth and for us to help more non-standard
credit market consumers get access to the car
they need for everyday life. The increased volume
of new business written over the last four months
of the year is very encouraging and leaves us well
placed as we enter the new year.
2015 is set to be another exciting year as the
business is embedded within the group and we
take advantage of the growth opportunity available
to us. The team’s main priorities for 2015 are:
> Using the group’s balance sheet strength and
funding lines to accelerate growth and capture
the market opportunity available in the non-
standard car finance market;
> Continuing to develop our product proposition
by extending lower-value lending and other
potential channels;
> Exploring the potential synergies available with
the rest of the group in credit, marketing and
collections, as well as bringing the benefits of
Moneybarn vehicle finance to the Vanquis Bank
customer base;
> Investing further in our infrastructure and IT
to support our growth targets, ensure that our
IT capability remains a competitive advantage
and bring our governance and controls up to
the very high standard across the rest of the
group; and
> Effectively managing the process of obtaining
full authorisation from the FCA and continuing
to ensure that our business produces positive
customer outcomes.
We are delighted with the start that Moneybarn
has made since becoming part of the group.
The highly scalable platform, the strong broker
relationships and the quality and enthusiasm
of our management team and employees gives
us confidence that we will develop into a very
important contributor to the future growth in
the group’s earnings.
Post-acquisition Four months ended 31 DecemberProforma1Year ended 31 December2014 £m2014 £m Customer numbers ('000)22 22 Year-end receivables151.7 151.7 Average receivables143.4 135.1 Revenue13.8 38.0 Impairment(1.2)(4.7)Revenue less impairment12.633.3 Risk-adjusted margin224.6% Costs(4.2)(11.1)Interest(2.6)(7.2)Profit before tax35.815.0 Return on assets412.9% 1 Restated to apply the group’s lower cost of funding to pre-acquisition results. 2 Revenue less impairment as a percentage of average receivables.3 Profit before tax for the four months ended 31 December 2014 is stated before the amortisation of acquisition intangibles of £2.5m and an exceptional cost of £3.9m in respect of acquisition-related expenses.4 Profit before interest, the amortisation of acquisition intangibles and exceptional costs, after tax as a percentage of average receivables.Provident Financial plc Annual Report and Financial Statements 2014Strategic report
68
Financial review
Financial review
The group’s financial strategy is to invest in
businesses that generate a high return on capital
in order to provide high returns to shareholders.
To support the delivery of this strategy, the group operates
a strict financial model that aligns dividend policy, gearing
and growth plans.
The financial model has been developed to ensure that
the group maintains a robust capital structure, providing
a comfortable level of headroom against banking
covenants, including the gearing covenant of 5.0 times,
and the regulatory capital requirements set by the
Prudential Regulation Authority (PRA).
The strong capital generation of the businesses in which
the group invests supports the distribution of up to 80%
of its post-tax earnings by way of dividend. This allows the
business to retain sufficient capital to support receivables
growth consistent with management’s medium-term
growth plans and a maximum gearing ratio of around
3.5 times. The financial model is underpinned by the
group’s consistent application of prudent and appropriate
accounting policies.
“ Delivering high returns
remains at the heart
of the group’s financial
model and drives the
group’s strategy.
Andrew Fisher
Finance Director
”
How this works in practice: >2014 ongoing pre-tax profit amounts to £254m (prior to the amortisation of acquisition intangibles and exceptional items and after including Moneybarn pro forma profits for the full year and excluding Vanquis Bank Poland losses) which equates to a profit after tax of £200m (tax at 21.8%); >Dividend cover in 2014 is 1.35 times which amounts to dividends of £148m (£200m/1.35).; >Equity retained in the business to fund growth equals £52m (£200m less £148m); >Target gearing ratio of 3.5 times allows debt funding of £181m (£52m multiplied by 3.5); >Provides total funding and capital for receivables growth of £233m (£52m plus £181m); and >Pre-tax profit in excess of £254m allows dividends to be increased and receivables growth in excess of £233m.High returns businessesDividend policyCover ≥ 1.25xGearing≤ 3.5x versus covenant of 5.0xGrowthSupports receivables growth of £230m+Provident Financial plc Annual Report and Financial Statements 2014 Financial review
69
15.1
14.2
14.5
14.2
14.3
ROA* (%)
2014
2013
2012
2011
2010
*Prior to amortisation of acquisition intangibles and exceptional items.
ROE* (%)
2014
2013
2012
2011
2010
47
49
48
46
45
*Prior to amortisation of acquisition intangibles and exceptional items.
Returns
Delivering high returns remains at the heart
of the group’s financial model and drives the
group’s strategy.
Following the acquisition of Moneybarn and the
development of Satsuma, management is now
assessing the relative performance of each
business through a return on assets (ROA)
measure. This ensures that the returns being
generated by each business are not distorted
by differences in the capital structure of each
business and allows for better comparability.
The group calculates ROA as profit before
interest, amortisation of acquired intangibles and
exceptional costs, after tax divided by the average
receivables during the period. Table 1 sets out
the calculation of ROA in 2014 and 2013.
The table excludes Moneybarn as it has only
been under the group’s ownership for four
months. However, the business generated an
ROA of 12.9% for 2014 as a whole. The table also
currently shows the returns being generated by
the Consumer Credit Division (CCD) as a whole
as it is both difficult to separately allocate the CCD
cost base to each business and it is meaningless
to provide a separate ROA for Satsuma in this
early stage of its development.
Vanquis Bank delivered an ROA of 15.5% in 2014,
in line with 2013. The benefit from operational
leverage has offset the impact of a lower margin
following the changes made to the timing of the
sale of Repayment Option Plan (ROP) and a
number of its product features during the third
quarter of 2013.
CCD’s ROA has strengthened from 15.1% to
18.1% in 2014 as the measures to improve
margins through tighter underwriting and better
collections processes, together with the cost
reduction measures, have generated stable
year-on-year profits on a smaller, better-quality
receivables book. The ROA has been delivered
despite the investment in building the capability
at Satsuma and enhancing IT, business and
people development processes to support
the repositioned home credit business, and
embedding the governance and regulatory
framework required to transition CCD to the
Financial Conduct Authority (FCA).
The group’s overall ROA has increased from
14.2% in 2013 to 15.1% in 2014, reflecting the
improvement in CCD returns.
The group continues to calculate return on equity
in order to assess the overall returns being
generated for shareholders.
The group calculates ROE as profit after tax
(prior to the amortisation of acquisition intangibles
and exceptional costs) divided by average equity.
Average equity is stated after deducting the
group’s pension asset net of deferred tax, the
fair value of derivative financial instruments, and
the proposed final dividend, consistent with the
calculation of the group’s regulatory capital base.
Table 2 sets out the calculation of ROE in 2014
and 2013.
The group’s ROE of 47% in 2014 is lower than
49% in 2013, principally due to the £120m of
equity raised to fund the acquisition of Moneybarn
to preserve regulatory capital.
Table 2: Calculation of ROE£m 2014 2013 Adjusted profit before tax1234.4196.1Tax(50.4)(44.6)Adjusted profit after tax184.0151.5Shareholders’ equity613.0416.8Pension asset(56.0)(29.2)Deferred tax on pension asset11.25.8Hedging reserve3.45.1Proposed final dividend(91.6)(73.6)Adjusted equity480.0324.9Average adjusted equity391.1311.8ROE47%49%1 Stated prior to the amortisation of acquisition intangibles of £2.5m (2013: £nil) and exceptional costs of £7.3m (2013: £13.7m).Table 1: Calculation of ROA20142013£mVanquis Bank (UK)CCDGroupVanquis Bank (UK)CCDGroupAdjusted profit before tax1151.0103.9234.4113.7102.5196.1Interest39.733.977.734.539.374.2Adjusted PBIT190.7137.8312.1148.2141.8270.3Taxation (21.5%/22.7%)(41.0)(29.6)(67.1)(33.6)(32.2)(61.4)Adjusted PBIAT149.7108.2245.0114.6109.6208.9Average receivables967.2598.51,623.9739.1725.81,468.6ROA15.5%18.1%15.1%15.5%15.1%14.2%1 Prior to the amortisation of acquisition intangibles of £2.5m (2013: £nil) and exceptional costs of £7.3m (2013: £13.7m).Provident Financial plc Annual Report and Financial Statements 2014Strategic report 70
Financial review continued
Acquisition of Moneybarn
The group completed the acquisition of
Moneybarn, the UK’s largest non-standard
vehicle finance business, on 20 August 2014
for consideration of £120m. The consideration
was satisfied by the payment of £120m in cash
on completion to the Moneybarn shareholders,
funded through the proceeds of a placing of new
ordinary shares in Provident Financial plc with
institutional investors.
The goodwill arising as a result of the acquisition
amounted to £71.2m as follows:
Proceeds from equity placing
Net liabilities on acquisition on an
IFRS basis
Fair value adjustments:
Intangible asset
– broker relationships (1)
Expected losses on receivables
(2)
Debt break costs (3)
Tax (4)
Fair value of net assets
Goodwill
£m
£m
120.0
(2.3)
75.0
(3.8)
(5.0)
(15.1)
48.8
71.2
Prior to acquisition, Moneybarn reported under
UK GAAP. A detailed conversion of Moneybarn’s
financial statements to IFRS has been completed
post acquisition which reduced Moneybarn’s
net assets on acquisition by approximately £11m,
principally in respect of: (i) higher impairment
provisions due to the impact of discounting future
expected cash flows at the effective interest
rate; and (ii) a change in policy in respect of the
deferral of the acquisition costs of new accounts.
The fair value adjustments applied to Moneybarn’s
IFRS net liabilities comprise:
1. £75.0m has been attributed to the fair value
of Moneybarn’s existing broker relationships
which are an important influence on the
revenue-generating capacity of the business.
The intangible asset has been calculated based
on the discounted cash flows associated with
Moneybarn’s core broker relationships and
will be amortised over an estimated useful life
of 10 years. Moneybarn’s trading results and
the group’s earnings are disclosed both prior
to, and after, the effect of the amortisation of
acquisition intangibles to show the underlying
profitability of the business.
2. An adjustment to receivables of £3.8m
has been made to reflect the fair value
of the receivables book. This adjustment
principally relates to the expected losses on
those accounts which are not yet in arrears
and therefore have not yet attracted an
impairment provision under IAS 39 ‘Financial
instruments: Recognition and measurement’.
Expected losses are currently only taken
account of as part of the calculation of
fair value on acquisition of a receivables
book in accordance with IFRS 3 ‘Business
combinations’. Expected loss provisions have
not been established on new Moneybarn
accounts originated post acquisition in line
with both the group’s accounting policies
and IAS 39.
3. The existing Moneybarn borrowings were
refinanced shortly following acquisition,
utilising the group’s existing committed
facilities at a substantially lower cost of funds.
The fair value of debt on acquisition has been
increased to include the break costs of £5.0m
which were incurred in settling Moneybarn’s
existing debt.
4. The tax effect of the above adjustments
of £14.1m together with £1.0m of additional
potential liabilities which were not provided
against at the acquisition date have been made.
The goodwill of £71.2m represents the benefit
of the group’s lower cost funding and synergies
available from the acquisition in respect of
underwriting, collections and distribution
channels. In accordance with IFRS3, goodwill
is not amortised but is subject to an annual
impairment review.
Costs of £3.9m associated with the acquisition,
including due diligence, legal, advisory and tax
fees have been charged as an exceptional costs
in 2014. Costs of £3.1m associated with the placing
of ordinary shares to fund the acquisition have
been deducted from the share premium account.
Moneybarn generated a profit before tax,
amortisation of acquired intangibles and
exceptional items of £5.8m in the four months
following acquisition. On a pro forma basis, after
restating Moneybarn’s pre-acquisition funding
rate of 10% to the group’s lower marginal cost of
funding of 5%, the business generated a full-year
profit before tax, amortisation of acquisition
intangibles and exceptional costs of £15.0m
in 2014.
Provident Financial plc Annual Report and Financial Statements 2014
71
Moneybarn is a high return on capital business
and, as such, there will be no change to the
group’s financial model or dividend policy.
Funding and liquidity
The group’s funding strategy is to maintain a
secure, prudent and well-diversified funding
structure at all times. Central to delivery of
this strategy is maintaining the gearing ratio
at a maximum of 3.5 times, which provides a
comfortable buffer compared with the relevant
bank covenant of 5.0 times.
The group borrows to provide loans to customers.
The seasonal pattern of lending results in peak
funding requirements in December each year.
The group is less exposed than mainstream
lenders to liquidity risk as loans to customers
are of a short-term duration whilst the group’s
borrowing facilities extend over a number of
years. The profile of borrowing longer-term
and lending shorter-term creates a positive
maturity mismatch.
The group has three main sources of funding:
> Bank funding – committed syndicated
bank facility;
> Bonds and private placements – senior public
bonds, private placements with UK and European
institutions and UK retail bonds; and
> Retail deposits taken by Vanquis Bank.
The group’s funding and liquidity policy is
designed to ensure that it is able to continue
to fund the growth of the business. The group
therefore maintains headroom on its committed
borrowing facilities to fund growth and contractual
maturities for at least the following 12 months,
after taking account of the ability that Vanquis
Bank has to fully fund itself through retail deposits.
Vanquis Bank is unable to provide finance to other
divisions or Provident Financial plc.
Group committed borrowings at the end of 2014
were £1.495.3m compared with £1,277.3m at
the end of 2013. Borrowings have increased
during the year primarily due to the refinancing of
Moneybarn’s debt of approximately £150m, using
the group’s facilities and the strong growth in
Vanquis Bank’s UK receivables of approximately
£233m during the year, partly offset by the
contraction in the CCD receivables book of £152m.
At the end of 2014, the group had committed
borrowing facilities of £1,606.8m (2013: £1,512.5m).
These facilities provided committed headroom of
£111.5m as at 31 December 2014 (2013: £235.2m)
with an average period to maturity of 3.1 years
(2013: 3.2 years).
On 31 January 2014, the group entered into a
new £382.5m syndicated bank facility maturing
in May 2017 and cancelled the existing facility
of £382.5m which was due to expire in May 2015.
The syndicate comprises the group’s core
relationship banks and the all-in cost of funds
was lower than the cancelled facility with
broadly consistent terms, conditions and
covenant package. The group exercised its
option in January 2015 to further extend the
maturity of the syndicated bank facility from
May 2017 to May 2018. In addition, the extension
was accompanied by a reduction in the interest
margin which is expected to reduce the 2015
interest charge by approximately £1m.
After reflecting the extension of the syndicated
bank facility, the weighted average period to
maturity of the group’s committed facilities
increases from 3.1 to 3.3 years.
At the end of 2014, Vanquis Bank had taken
£580.3m of retail deposits, up from £435.1m
at 31 December 2013. A reconciliation of the
movement in retail deposits during 2014 is
set out in Table 3. The overall inflow of new
funds through Vanquis Bank’s retail deposits
programme during 2014 was again relatively
modest at £190.7m (2013: £187.7m), reflecting
the high level of headroom on the group’s
committed debt facilities.
There were £69.7m of maturities during the year
(2013: £114.9m), of which £26.6m were retained
(2013: £31.8m). This represents a relatively low
retention rate of approximately 38% (2013: 28%),
in line with the positioning of the interest rates
offered during the year.
Rates of between 1.51% and 4.65% (2013: 1.66%
and 4.65%) have been paid on retail deposits
during 2014 and the overall blended interest
rate on the deposit portfolio in 2014 was 3.2%
(2013: 3.8%). The average period to maturity
of retail deposits at 31 December 2014 was
2.4 years (2013: 2.3 years).
1 After taking account of the one-year extension to the
syndicated bank facility in January 2015.
2 Based on the Vanquis Bank intercompany loan from
Provident Financial plc of £342.2m as at 31 December 2014.
Table 3: Reconciliation of retail deposits2014 £m2013 £mAt 1 January435.1327.4New funds190.7187.7Maturities(69.7)(114.9)Retentions26.631.8Cancellations(8.9)(3.2)Capitalised interest6.56.3At 31 December580.3435.1Table 4: Committed borrowing facilitiesMaturity £mBank facility20181382.5Bonds and private placements:Senior public bond2019250.0M&G term loan2016–2021100.0Other sterling/euro medium-term notes2015–201827.8Retail bond 2010202025.2Retail bond 2011201650.0Retail bond 20122017120.0Retail bond 2013202165.0Residual subordinated loan notes20156.0Total bonds and private placements644.0Vanquis Bank retail deposits2015–2019580.3Total committed facilities1,606.8Borrowings on committed facilities1,495.3Headroom on committed facilities111.5Retail deposits capacity2342.2Funding capacity453.7Provident Financial plc Annual Report and Financial Statements 2014Strategic report
72
Financial review continued
Gearing (times)
2014
2013
2012
2011
2010
Interest cover* (times)
2014
2013
2012
2011
2010
3.0
3.2
3.2
3.3
4.1
3.7
2.4
3.5
3.3
3.0
*Prior to interest, amortisation, the movement in the fair value
of derivative financial instruments, exceptional costs and tax.
The total balance held in fixed-term bonds or
cash savings accounts is £145bn. The key
determinant for depositors is the interest rate
on offer. The market represents an excellent
source of funding and Vanquis Bank plans to
continue to build its deposit portfolio to enable
it to repay its intra-group loan from Provident
Financial plc, which was £342.2m at the end
of 2014 (2013: £292.1m). The rate of growth
will be dependent on ensuring that the group
maintains an appropriate, but not excessive,
level of headroom on its committed debt facilities
in line with the group’s treasury policies.
The funding structure of the group’s committed
facilities as at 31 December 2014, after reflecting
the recent extension of the syndicated bank
facility, is shown in Table 4.
The funding structure takes into account the
available capacity for Vanquis Bank to take retail
deposits with the full repayment of the intra-group
loan from Provident Financial plc. The group’s
funding capacity on this basis amounts to
£453.7m (2013: £527.3m).
Excluding the retail deposits programme,
maturities on the group’s committed debt
facilities in 2015 and 2016 are restricted to the
repayment of £50.0m of retail bonds issued in
2011, £10.0m of private placements and £6.0m of
residual subordinated loan notes. After assuming
that Vanquis Bank funds its receivables with
deposits and taking account of the extension of
the syndicated bank facility in January 2015, the
group’s committed facilities are sufficient to fund
both contractual maturities and projected growth
until May 2018.
The group continues with its programme to
consider opportunities to further diversify its
funding base as well as extending the maturity
profile of its debt. As such, the group will continue
to review the retail bond and private placement
markets during 2015.
The group’s blended funding rate in 2014 was
6.6%, reduced from 6.8% in 2013. This primarily
reflects the lower blended cost of retail deposits
of 3.4% in 2014 compared with 3.8% in 2013 and
a marginal increase in the mix of retail deposit
funding, which represents approximately 39% of
the group’s funding at the end of 2014 compared
with approximately 34% in 2013. The group
funding rate for 2015 is expected to continue to
reduce to approximately 6% as the level of retail
deposits increases and due to the lower margin
on the syndicated bank facility.
The group is required to comply with its banking
covenants in respect of gearing, interest cover,
net worth, net worth excluding Vanquis Bank
and cash cover. Following the renewal of the
syndicated bank facility in January 2014, the
group’s bank covenants remained substantially
unchanged with the only exception being an
increase in the minimum net worth covenant from
£220m to £265m, reflecting the uplift in the net
asset value of the group since the previous limit
of £220m was set. Performance against these
bank covenants at 31 December 2014 is set out
in Table 5.
The group has comfortably complied with these
covenants during 2014.
Table 5: Performance against bank covenantsCovenantLimit20142013 Gearing1< 5.0 times2.43.0Net worth – group2> £265m571.6398.5 – excluding Vanquis Bank2> £140m287.0187.8Interest cover3> 2.0 times4.13.7Cash cover4> 1.1 times1.311.311 Borrowings less the liquid assets buffer and other liquid resources held in satisfaction of the PRA liquidity requirements divided by equity (excluding the group’s pension asset, net of deferred tax, and the fair value of derivative financial instruments).2 Equity less the group’s pension asset and fair value of derivative financial instruments, both net of deferred tax.3 Profit before interest, amortisation, the movement in the fair value of derivative financial instruments, exceptional costs and tax divided by the interest charge prior to the movement in the fair value of derivative financial instruments.4 Cash collected divided by credit issued.Provident Financial plc Annual Report and Financial Statements 2014
73
Dividend cover* (times)
2014
2013
2012
2011
2010
1.35
1.32
1.30
1.26
1.20
*Prior to amortisation of acquisition intangibles and exceptional costs.
Capital retained/(absorbed) (£m)
2014
2013
2012
2.8
2011
2010
(4.5)
34.9
22.4
17.1
Gearing has reduced from 3.0 times in 2013
to 2.4 times in 2014, against an internal
maximum target of 3.5 times and a covenant
limit of 5.0 times. The reduction over the last
12 months reflects:
(i) the Moneybarn acquisition being almost wholly
funded through equity in order to preserve
regulatory capital. Goodwill and intangible
assets are a deduction from regulatory capital
but remain part of the net asset base used
in the calculation of gearing; and
(ii) the shrinking of the home credit receivables
book resulting from the repositioning of
the business. A full calculation of gearing
is set out on page 146 in the financial and
capital risk management section of the
financial statements.
The group’s credit rating was reviewed by
Fitch Ratings in June 2014 and remains
unchanged at BBB. A negative outlook
was attached to the rating reflecting Fitch’s
requirement to fully understand the impact of
Vanquis Bank representing the largest proportion
of the group’s profits. Accordingly, Fitch will
observe the development of Vanquis Bank.
Capital generation and dividends
The group’s strategy is to invest in businesses
which generate high returns to support the
group’s high distribution policy. The group funds
its receivables book through a combination of
approximately 20% equity and 80% borrowings.
Accordingly, the capital generated by the group
is calculated as cash generated from operating
activities, after assuming that 80% of the
growth in customer receivables is funded with
borrowings, less net capital expenditure. This is
consistent with a maximum target gearing ratio
of 3.5 times and maintaining an adequate level
of regulatory capital. The group’s dividend policy
set at the time of the demerger of the international
business in 2007 was to maintain a full-year
dividend payment of 63.5p per share whilst
moving to a target dividend cover of at least
1.25 times.
In the period from 2007 to 2010, the group
absorbed capital in maintaining the group’s
dividend at 63.5p, whilst building the group’s
dividend cover to the minimum target of 1.25
times. In 2011, due to the growth in the group’s
earnings, dividend cover passed 1.25 times and
the group generated more than sufficient capital
to fund receivables growth and increase the
group’s dividend, whilst retaining surplus capital.
Table 6: Capital generation2014 £m2013 £m Operating cash flow221.5183.8Interest paid(72.3)(70.0)Tax paid(44.9)(39.6)Net capital expenditure(17.9)(8.8)Add back 80% of receivables growth funded by debt89.173.8Capital generated175.5139.2Analysed as:Vanquis Bank70.253.0CCD115.098.5Moneybarn(1.3)–Central(8.4)(12.3)Dividends declared(140.6)(116.8)Capital retained34.922.4Dividend cover*1.351.32* Prior to the amortisation of acquisition intangibles and exceptional costs.Provident Financial plc Annual Report and Financial Statements 2014Strategic report
74
Financial review continued
In the last three years, further growth in group
earnings, together with continued strong capital
generation, has enabled the group to increase
its dividend broadly in line with earnings,
deliver a dividend cover of around 1.30 times
and retain net surplus capital in each year.
Throughout this period the group’s gearing ratio
has been maintained below the maximum target
of 3.5 times. In 2014, the group generated surplus
capital of £34.9m (2013: £22.4m). Table 6 sets out
an analysis by division.
On a divisional basis, Vanquis Bank generated
£70.2m of capital during the year (2013: £53.0m),
showing another strong year-on-year increase.
The business is generating surplus capital over
and above that required to fund its receivables
growth and maintain sufficient regulatory capital.
Accordingly, Vanquis Bank paid dividends to
Provident Financial plc of £42.5m during 2014 and
paid a further £39.0m subsequent to the year end.
CCD generated £115.0m of capital in 2014,
up from £98.5m in 2013. The stronger capital
generation in 2014 primarily reflects lower
exceptional costs of £10.0m and a marginally
higher release of capital from the reduction in the
receivables book. CCD’s capital generation in 2014
benefitted by £30m from the shrinkage in the
receivables book and has cumulatively benefitted
by £56m over the last two years. The business
continues to be highly capital generative and
provides the bedrock for the group’s high dividend
payout ratio.
Prudential regulation
As a result of holding a banking licence,
Vanquis Bank is regulated by the PRA which sets
requirements for Vanquis Bank as a solo entity
relating to capital adequacy, liquidity and large
exposures. Vanquis Bank is also regulated by
the FCA for conduct purposes.
CCD operated under a number of consumer
credit licences granted by the Office of Fair
Trading (OFT). With effect from 1 April 2014,
CCD was regulated for conduct purposes by the
FCA when it assumed control of consumer credit
regulation from the OFT. In addition, the group,
incorporating Vanquis Bank, CCD and Moneybarn,
is the subject of consolidated supervision by the
PRA by virtue of Provident Financial plc being
the parent company of Vanquis Bank. The PRA
sets requirements for the consolidated group in
respect of capital adequacy and large exposures.
Regulatory capital
The PRA requires financial institutions to maintain
a sufficient level of regulatory capital to withstand
a series of downside stress events. The PRA
sets regulatory capital requirements specific to
each institution, known as its Individual Capital
Guidance (ICG). This is determined following
consideration of the Internal Capital Adequacy
Assessment Process (ICAAP) conducted by the
firm. During 2014, the PRA reviewed the ICAAP
for Vanquis Bank and the group. Revised ICGs
were set for both the group and Vanquis Bank
and the level of regulatory capital held by both
the group and Vanquis Bank as at 31 December
2014 was comfortably in excess of the ICGs set
by the PRA.
The ICG is specified as a percentage of the
minimum Pillar I requirement and comprises
credit, operational, counterparty and market risk,
calculated using predetermined formulae together
with certain additional capital add-ons to cover
any additional risks.
The Capital Requirements Directive IV (CRD IV)
came into force on 1 January 2014 and revised
existing capital and liquidity requirements and
reporting. Under these new regulations, the group
is required to deduct dividends from regulatory
capital when they are ‘foreseeable’. Under CRD
IV, the definition of ‘foreseeable’ has been more
clearly defined to ensure harmonisation across
all applicable jurisdictions. CRD IV defines
‘foreseeable’ as being in line with a company’s
normal practice for paying dividends relative
to the profits being accrued and not when they
are declared, which was the group’s practice.
Accordingly, as profits are verified on a periodic
basis the group deducts dividends in line with the
group’s current dividend cover of approximately
1.3 times.
Regulatory capital equates to equity share
capital and reserves after deducting foreseeable
dividends and after adding back subordinated
loan notes less: (i) the net book value of goodwill
and intangible assets; and (ii) the pension asset,
net of deferred tax, and the fair value of derivative
financial instruments. As at 31 December 2014,
the group’s common equity tier one ratio and
leverage ratio were 20% and 16% respectively.
The level of regulatory capital held by both the
group and Vanquis bank was comfortably in
excess of the ICG set by the PRA.
CRD IV will require the group and Vanquis Bank
to maintain a capital conservation buffer and
a countercyclical buffer. From 1 January 2016,
the capital conservation buffer will be calculated
as 0.625% of risk-weighted exposures to the
extent that it exceeds the capital planning buffer
set by the PRA. The buffer increases to 1.25%
in 2017, 1.875% in 2018 and 2.5% in 2019.
The countercyclical buffer is subject to the same
transitional rules as the capital conservation
buffer and will be set at a rate of between 0%
and 2.5% by the Bank of England dependant
on economic circumstances.
Liquidity
To ensure that sufficient liquid resources are
available to fulfil operational plans and meet
financial obligations as they fall due, the PRA
requires that all regulated entities maintain a liquid
assets buffer held in the form of high-quality,
unencumbered assets.
The liquid assets buffer is calculated using
Individual Liquidity Guidance (ILG) set by the
PRA based on the Individual Liquidity Adequacy
Assessment (ILAA) prepared by Vanquis Bank.
In addition, further liquid resources must be
maintained based upon daily stress tests linked
to the three key liquidity risks of Vanquis Bank,
namely retail deposit maturities, undrawn credit
card lines and operating cash flows. This results
in a dynamic liquid resources requirement.
Provident Financial plc Annual Report and Financial Statements 2014
75
As at 31 December 2014, the liquid assets
buffer, including the liquid resources held against
the daily stress tests, amounted to £121.4m
(2013: £86.3m). The increase during the year
reflects the growth in the receivables book of
Vanquis Bank, together with the increased level
of retail deposits maturing in the first quarter of
2015 compared with the same period in 2014.
Vanquis Bank holds its liquid assets buffer,
including other liquid resources, in a combination
of UK government gilts and a designated money
market fund.
CRD IV introduced two further liquidity measures,
the Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR). The LCR and NSFR will
be applicable to both the group and Vanquis Bank
and are expected to be introduced in October
2015 and January 2018 respectively. These are
not expected to significantly affect the group’s
liquidity position.
Pillar III disclosures
As part of the regulatory supervision by the
PRA, the group, consistent with other regulated
financial institutions, is required to make annual
Pillar III disclosures which set out information
on the group’s regulatory capital, risk exposures
and risk management processes. A considerable
amount of the information required by the Pillar
III disclosures is included within the 2014 Annual
Report and Financial Statements. The group’s full
Pillar III disclosures can be found on the group’s
website, www.providentfinancial.com.
Tax
The tax charge for 2014 represents an effective
rate of 21.5% (2013: 22.7%) on profit before tax,
the amortisation of acquired intangible assets
and exceptional items and is in line with the UK
corporation tax rate which reduced from 23%
to 21% on 1 April 2014.
The group is expected to benefit in future years
from the further rate reduction to 20% on 1 April
2015 announced by the Government and enacted
in the 2013 Finance Act.
Accounting policies
The group’s financial statements have been
prepared in accordance with IFRS as adopted by
the European Union. The group’s financial model
is underpinned by the application of prudent,
appropriate accounting policies chosen by the
directors to ensure that the financial statements
present a true and fair view of the business.
All of the group’s accounting policies are compliant
with the requirements of IFRS, interpretations
issued by the International Financial Reporting
Interpretations Committee (IFRIC) and UK
company law. The continued appropriateness
of the accounting policies, and the methods of
applying those policies in practice, is reviewed
at least annually. The principal accounting policies,
which are consistent with the prior year, are set
out on pages 135 to 140.
The group’s prudent accounting policies are
reflected in the impairment policies adopted
across the group.
In Vanquis Bank, Moneybarn and CCD’s
Satsuma business, impairment provisions
based on expected future cash flows discounted
at the effective interest rate (EIR) are made once
a contractual monthly payment is missed.
The level of provision progressively builds through
each arrears stage with a full provision, subject
to recoveries, being made against accounts
which are 90 days in arrears. For customers
entering special payment arrangements,
impairment provisions based on historic
payment performance discounted at the EIR are
immediately reflected. This accounting policy is
realistic and prudent when benchmarked against
other monthly direct repayment businesses.
In the weekly home credit business of CCD, a loan
is impaired when more than one weekly payment
has been missed in the previous 12 weeks and
the provision is progressively increased to over
95% once no payment has been received in
the last 12 weeks. This reflects timely, realistic
provisioning which reinforces the right behaviour
amongst agents and employees.
In order to assist shareholders and other users
of the group’s financial statements, supplementary
commentary has been provided within the
group’s financial statements in highlighted boxes.
The additional commentary addresses questions
regularly asked by investors, analysts and
other stakeholders, as well as providing further
information on the group’s key accounting policies,
financial model and important movements
in income statement and balance sheet items
during the year.
Going concern
In adopting the going concern assumption in
preparing the financial statements, the directors
have considered the activities of its principal
subsidiaries, as set out in the strategic report,
as well as the group’s principal risks and
uncertainties as set out in the governance report.
The board has considered the group’s latest
financial projections from the most recent
budget, including:
> Funding levels and headroom against
committed borrowing facilities;
> Cash flow and liquidity requirements;
> Funding capacity from Vanquis Bank’s retail
deposit programme;
> Regulatory capital projections against the
PRA’s regulatory capital requirements; and
> Forecast compliance against
banking covenants.
Based on these forecasts and projections, the
board is satisfied that the group has adequate
resources to continue to operate for the
foreseeable future. For this reason, the group
continues to adopt the going concern basis in
preparing the financial statements.
Provident Financial plc Annual Report and Financial Statements 2014Strategic report
76
Provident Financial plc
Annual Report and Financial Statements 2014
Governance and
Remuneration
Introduction from the Chairman
Our directors and officers
77
78
80 Leadership
84
88
Effectiveness
Shareholder engagement
Risks
Audit committee and auditor
90 Risk advisory committee
93
97
101 Nomination committee
104 Directors’ report
109 Directors’ remuneration report
110 Remuneration policy
116 Annual Report on Remuneration
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Governance
77
Introduction from the Chairman
However, only Moneybarn has met the board’s
exacting demands of a strategic acquisition and
this acquisition marks a key addition to the group’s
product offering.
UK Corporate Governance Code
Our approach to governance is based on the
concept that good corporate governance
enhances longer-term shareholder value and sets
the culture, ethics and values for the rest of the
group. Consistent with our belief in the importance
of corporate governance, I am pleased to report
that we have complied in full with the principles
and provisions of the 2012 UK Corporate
Governance Code which was published in
September 2012 (the Code). A copy of the
Code can be found at www.frc.gov.uk.
Corporate policies
We have embedded the corporate governance
principles in our corporate policies which are
updated annually to reflect changing requirements
and best practice. The corporate policies were
updated in July to reflect the change in regulator
and the new requirements on customer and
conduct risk. The corporate policies reflect the
best practice we expect from our divisions and
key corporate functions. They are designed to
strengthen the corporate governance framework
and provide an overview and guidance on
expected working behaviours which ensures
consistency throughout the group in accordance
with its vision and values. Further information
is set out at page 81 of the report.
Board evaluation
A number of action points arose from the 2013
external board evaluation which were reported
on in last year’s annual report. These included
considering opportunities for board members to
spend more time with senior management and
for non-executive directors to spend more time
in the businesses.
An internal board evaluation was undertaken
in December 2014. As part of this review, I am
pleased to report that the board felt that there had
been improved interaction with the businesses
and that contact with the senior management
teams had increased. Earlier this year I also
assigned each of the non-executive directors to
a division in order to gain further insight into and
a better understanding of the business. The board
also agreed to hold a board meeting in a different
business location every year and we continue
to invite the managing directors of the divisions
(including Moneybarn from August) to attend
the board meetings to present strategic and
operational reports on their divisions.
Further information on this is set out on pages
85 to 87, including details of the action points that
have been identified from this process. I intend
to address these action points over the course
of 2015 and I will meet with the non-executive
directors to review the issues raised during the
board evaluation process. As part of the 2014
board evaluation process, I am already assessing
the training needs for the independent non-
executive directors for 2015 so that tailored
training plans can be developed.
Focus on risk management
As reported last year, the transition to regulation
by the FCA has meant that in 2014 there has been
increased focus on customer and conduct risk.
Following a review of the group’s risk management
framework and processes, we agreed it was
appropriate to have the risk advisory committee
review conduct risk rather than establish a
sub-committee. The risk advisory committee
terms of reference have therefore been extended
to specifically include oversight of customer and
conduct risk within the divisions and the managing
director and chief risk officer of each division will
attend committee meetings for this agenda item.
We have continued to maintain our focus on
monitoring risk through the work of our audit and
risk advisory committees. Further information on
risk management can be found on pages 90 to 96.
Board composition
Following a formal performance evaluation
carried out in January 2015, the nomination
committee agreed to extend Rob Anderson’s term
of appointment by three years. The committee’s
recommendation was based on Rob’s recent and
relevant operational experience, knowledge of
the group and the fact that his length of tenure
creates a balance with the two new non-executive
directors who joined the board in January 2014.
I am pleased to report that the board accepted the
nomination committee’s recommendation at its
meeting in February 2015.
Manjit Wolstenholme
Chairman
24 February 2015
Dear shareholder
This was my first year as Chairman and I am
delighted to update you on the key corporate
governance highlights in 2014.
This year has been an exciting and challenging
year with changes to the composition of the
board and committees in January, changes to the
committee chairmanships in March, the change
in regulator to the Financial Conduct Authority
(FCA) from the Office of Fair Trading (OFT)
and Financial Services Authority (FSA) in April
and the acquisition of Duncton Group Limited
(Moneybarn) in August.
As you are aware from our previous reports,
we take corporate governance and the reporting
of it very seriously and I am extremely pleased
to report that we won ‘Best Board Disclosure’
at the Institute of Chartered Secretaries and
Administrators’ ‘Excellence in Governance
Awards 2014’ for our 2013 Annual Report. It is
our aim and intention to uphold this high standard
of reporting in this year’s board disclosure.
On appointment, I agreed to develop my
relationship with the Chief Executive, as I believe
this is central to the smooth running of the board.
I have set up monthly meetings for the two of
us and these will continue in 2015.
Moneybarn
The acquisition of Moneybarn in August was
a key highlight for the board in 2014, being the
first acquisition approved by the board since the
demerger of the international business in 2007.
The board has received and assessed several
acquisition opportunities since the demerger
of our international business, all of which
represented an opportunity to expand the group’s
product offering in the non-standard credit sector.
Provident Financial plc Annual Report and Financial Statements 2014Governance 78
Governance continued
Our directors and officers
Peter Crook (51)
Chief Executive
Appointed to the board: 2006
Chairman:
Executive committee and
group executive committee
Key achievements:
• Driving and executing the agreed strategies of the group and achieving above plan
financial performance.
• The identification and oversight of strategic acquisition opportunities, including the
completion of the purchase of Moneybarn.
• Providing strategic input into the FCA full authorisation process being undertaken by each
of the divisions.
• Providing strategic input into the future options for the Vanquis Bank Polish pilot operation
resulting in the decision in early 2015 to withdraw from the pilot.
Previous board and management experience:
UK managing director, Barclaycard.
Current external appointments:
Non-executive director of Cabot (Group Holdings) Limited.
Andrew Fisher (57)
Finance Director
Key achievements:
• Extending the group’s £382.5m syndicated bank facility by one year to May 2018.
• Providing oversight on the commercial and financial due diligence exercise undertaken
Appointed to the board: 2006
in respect of the acquisition of Moneybarn.
Committee membership:
Executive committee and group
executive committee
• Taking the lead role in the group’s discussions with the Prudential Regulation Authority
(PRA) on regulatory requirements.
• Realignment of risk across the group to reflect the transition to the FCA and the focus
on customer and conduct risk.
Previous board and management experience:
Finance Director of Premier Farnell plc and partner at Price Waterhouse LLP.
Current external appointments:
None.
Manjit
Wolstenholme (50)
Independent
non-executive Chairman
Appointed to the board: 2007
Committee membership:
Risk advisory committee
Chairman:
Nomination committee
Key strengths:
• Extensive experience of corporate finance matters, having spent 13 years
in investment banking.
Previous board and management experience:
Co-head of investment banking at Dresdner Kleinwort Wasserstein and Partner
at Gleacher Shacklock.
Current external appointments:
Non-executive director of Future plc, The Unite Group plc and Aviva Investors
Holdings Limited.
Malcolm Le May (57)
Independent
non-executive director
Senior Independent Director
Appointed to the board: 2014
Committee membership:
Audit committee,
risk advisory committee
and nomination committee
Chairman:
Remuneration committee
Key strengths:
• Over 30 years’ experience in banking, asset management and insurance.
Previous board and management experience:
Co-head of banking for Barclays in New York; head of investment banking, Europe at
UBS and global head of corporate and investment banking at ING Barings, Deputy CEO
at Morley Fund Management (now Aviva Investors), President of JER Europe, Senior
Independent Director of Pendragon plc and non-executive director of RSA Insurance
Group plc.
Current external appointments:
Senior advisor to Ernst & Young, non-executive director of REG (UK) Limited,
Chairman of Juno Capital LLP, senior advisor to Heidrick & Struggles and Partner
at Opus Corporate Finance.
Provident Financial plc Annual Report and Financial Statements 2014 Our directors and officers
79
Alison Halsey (59)
Independent
non-executive director
Appointed to the board: 2014
Committee membership:
Remuneration committee,
risk advisory committee and
nomination committee
Chairman:
Audit committee
Key strengths:
• 34 years with KPMG specialising in financial services with audit and advisory responsibilities
for UK and international banks.
Previous board and management experience:
Partner at KPMG. Advised a number of UK charities and was a board member of the National
Autistic Society for five years.
Current external appointments:
Non-executive director of Cambien Group plc and Teachers Assurance and an Ambassador
for Alzheimer’s Society.
Stuart Sinclair (61)
Independent
non-executive director
Appointed to the board: 2012
Committee membership:
Remuneration committee,
audit committee and
nomination committee
Chairman:
Risk advisory committee
Key strengths:
• Extensive experience in financial services in the UK and overseas.
• 10 years in US-based management consulting, 14 years as CEO or equivalent in retail
banking organisations and seven years on financial services boards.
Previous board and management experience:
Chairman of GE Capital China and GE Capital Bank (UK), Chief Executive Officer of Tesco
Personal Finance, director of Virgin Direct; director of Retail Banking at The Royal Bank
of Scotland and non-executive director at Liverpool Victoria.
Current external appointments:
Director of Vitality Health, Senior Independent Director of Swinton Group Limited, QBE
Insurance (Europe) Limited and QBE Underwriting Limited; non-executive director of TSB
Bank plc and Council Member of the Royal Institute for International Affairs (Chatham House).
Rob Anderson (56)
Independent
non-executive director
Appointed to the board: 2009
Committee membership:
Remuneration committee, audit
committee, risk advisory committee
and nomination committee
Chairman:
None
Key strengths:
• Extensive retail experience and knowledge of the type of consumer served by the group.
Operational business experience which is relevant to the group’s businesses.
Previous board and management experience:
Director of childrenswear business unit of Marks & Spencer and Chief Executive of Signet
Jewelers Limited’s UK Division.
Current external appointments:
None.
Ken Mullen (56)
General Counsel and
Company Secretary
Appointed to the board: 2007
Committee membership:
Group executive committee
Secretary:
Executive committee, remuneration
committee, audit committee,
risk advisory committee and
nomination committee
Key achievements:
• Project management of the legal due diligence exercise, through a combination of internal
and external legal resources, on two potential acquisition targets.
• Completion of the sale and purchase agreement in respect of Moneybarn.
• In his capacity as chairman of the Trustees, revised the group defined benefit pension
scheme’s investment strategy which has resulted in a significant de-risking of the scheme.
• Close management of the group’s regulatory relationships, both in the UK and overseas.
Previous board and management experience:
Company Secretary and General Counsel of Premier Farnell plc, Silentnight plc and
Whessoe plc.
Current external appointments:
Chairman of Rexel UK Limited Pension Scheme.
Provident Financial plc Annual Report and Financial Statements 2014Governance 80
Governance continued
Leadership
“ Collective and effective
leadership ensures the
delivery of the group’s
strategy and maintaining
strong governance
practices is a key board
responsibility in support
of this goal.
Manjit Wolstenholme
Chairman
”
This report looks at board members, their role,
their performance and their oversight. It also looks
at their induction, succession, independence,
and effectiveness.
The principal responsibility of the board is to
promote the long-term success of the group in
a manner consistent with its culture, values and
standards and so create and deliver sustainable
shareholder value. The board leads and provides
direction by setting the strategy and overseeing
its implementation by management. The board
seeks to ensure that the right balance is achieved
between the ultimate focus on long-term growth
and the delivery by management of its short-term
objectives. In setting and monitoring the execution
of the group’s strategy, consideration is given to
the impact that those decisions will have on the
group’s obligations to various stakeholders, such
as shareholders, employees, suppliers and the
community in which it operates as a whole.
Specific key decisions and matters have been
reserved for approval by the board and are set
out in its terms of reference. These include:
the establishment of, and changes to, the
group strategy; determination of interim and
recommendation of final dividends; approval
of all major transactions; approval of the group
budget and financial results; approval of the
Vanquis Bank controls required by the PRA safety
and soundness objectives; and the annual review
of the effectiveness of the group’s system of
internal control.
The board reviews the terms of reference for
itself and its committees annually. It last updated
its terms of reference and those of its committees
in January 2015. The full formal schedule of
matters reserved to the board and each of its
committees can be found on the group’s website
at www.providentfinancial.com.
To assist the board in carrying out its functions
and to ensure that there is independent oversight
of internal controls and risk management, the
board delegates certain responsibilities to its five
principal committees as shown in the diagram
below. Membership of these committees consists
primarily of the independent non-executive
directors and, in some cases, the Chairman, with
the exception of the executive committee which
consists of the executive directors only.
Governance frameworkExecutive committeeComprises the two executive directors and is chaired by the Chief Executive. The committee deals with matters relating to the general running of the group.Nomination committeeSee pages 101 to 103 for more information.Remuneration committeeSee pages 116 and 117 for more information.Risk advisory committeeSee pages 90 to 92 for more information. Audit committeeSee pages 97 to 100 for more information.Group boardProvident Financial plc Annual Report and Financial Statements 2014 Leadership
81
The chairmen of each board committee reports
to the board on the matters discussed at the
committee meetings.
Identification and management of risk is central to
the creation of long-term shareholder value and
is overseen by the risk advisory committee on
behalf of the board. The risk advisory committee
considers the nature and extent of the risks facing
the group, keeps them under review, including
the framework to mitigate such risks and notifies
the board of changes to the status and control
of risks.
In addition, the group has detailed corporate
policies which are explained on pages 77 and 92
of this report. On a day-to-day basis, the divisions
and the corporate office team have responsibility
for the implementation of the corporate policies
and the group executive committee is responsible
for the general oversight of this process.
Detailed reports on the activities of the risk
advisory committee, audit committee and
nomination committee are set out in this report
on pages 90, 97 and 101 respectively.
Details of the work of the remuneration
committee together with the Annual Statement
from the remuneration committee chairman,
the Remuneration Policy and the Annual Report
on Remuneration, are set out in the director’s
remuneration report, on pages 109 to 128.
The right team
The board held 12 meetings in 2014.
Individual director attendance is set out in the
table below.
The board is responsible for the establishment
of and changes to the group strategy. As part of
that process and, as in previous years, an annual
two-day corporate planning conference (CPC)
was held away from the office to review and
develop the group’s strategy. The CPC is attended
by all board members, the General Counsel and
Company Secretary, the Director of Corporate
Strategy and Risk and other members of senior
management where appropriate.
In 2014, the Director of Corporate Affairs, the
managing directors and commercial directors of
Vanquis Bank and the Consumer Credit Division
(CCD), the Operations Director of the home credit
business of CCD and the Finance Director of
Vanquis Bank also attended and were involved
in the discussions on market developments
and competitive threats. Further, for the first
time external speakers were also in attendance.
The agenda included:
> A discussion on the general macro-economic
environment and the non-standard credit
market in which the group operates;
> An analysis of the key characteristics of
non-standard credit consumers;
> An overview of the available methods to
capture and use customer and operational data;
> A synopsis of what regulatory changes mean
for market structure, particularly in the sub-
prime and high-cost short-term credit sectors;
> A facilitated discussion on payment
technologies and new types of competitors
from outside the lending sector; and
> A review of the human resources capabilities
within the group.
Attendance at board and committee meetingsBoardAudit committeeNomination committeeRemuneration committeeRisk advisory committeePercentage attendedTotal number of meetings in 2014126 143 100%Manjit Wolstenholme12 –1 – 3100%Peter Crook12–– ––100%Andrew Fisher12 –– – –100%Malcolm Le May 12 6 1 4 3 100%Rob Anderson 12 6143100%Alison Halsey126143100%Stuart Sinclair11614396%Provident Financial plc Annual Report and Financial Statements 2014Governance 82
Governance continued
Leadership continued
Executive director
Non-executive director
Company Secretary
At each main meeting
Discuss:
Strategic matters
Acquisition opportunities
Trading results and key performance
indicators (KPIs)
Management accounts and financial commentary
Operational reports from each division
Treasury matters
Legal, company secretarial and regulatory matters
Board committee matters
Investor relations and shareholder feedback
Corporate affairs
Review:
Minutes of previous meetings
Minutes of the meetings of the executive committee
The implementation of actions agreed at
previous meetings
43%
14%
43%
3
1
2
Sector experience
1 Financial services
2 Retail
3 Other
3
2
72%
14%
14%
1
Tenure
1 0–3 years
2 4–6 years
3 +6 years
Board compositionKey board discussions and actions in 2014JAN • Consideration of the board evaluation report and discussion of the recommendations. • Review of the talent and succession planning report.JUL • Review and approval of the decision to expand the terms of reference of the risk advisory committee to include conduct risk. • Approval of due diligence reports for the proposed acquisition of Moneybarn. • Approval of the group’s ICAAP.AUG • Approval of the acquisition of Moneybarn, including the sale and purchase agreement. NOV • Consideration and approval of actions arising from discussions with the Central Bank of Ireland in respect of CCD.DEC • Review of the internal board evaluation. • Review and approval of the 2015 budget and profit plan 2015–2019. • Review and approval of the funding plan 2015–2019. • Review and approval of the response to the PRA in order to finalise the group’s ICAAP.FEB • Consideration of potential acquisition opportunities. • Review of non-executive directors’ fees. • Review and approval of changes in committee chairmanship.MAY • Review of due diligence reports in respect of a potential acquisition.JUN • Review of potential acquisition opportunities. • Review of the group’s contingency plans to address a cyber attack. • Review and approval of the 2014 budget update. • Two-day CPC.Provident Financial plc Annual Report and Financial Statements 2014
Leadership continued
83
The board comprises the Chairman, two executive directors and four independent non-executive directors. Their responsibilities are summarised in the table
below. The names of the directors and their full biographical details, including the skills and experience they each bring to the board, can be found on pages
78 and 79. There is a clear division of responsibility at the head of the group as the Chairman has overall responsibility for the leadership of the board, while
the Chief Executive manages and leads the businesses.
Roles
The Chairman
The
Chief Executive
• Chairs the board, the nomination committee and the AGM.
• Sets the board meeting agendas with the Chief Executive to ensure
that the board devotes its time and attention to the right matters.
• Builds an effective board.
• Facilitates and encourages active engagement and appropriate
challenge by all directors.
• Ensures the board receives timely and relevant information
and is kept advised of key developments.
• Responsible for the day to day management, leadership and direction
of the group and the executive management team in accordance
with the strategy and long-term objectives approved by the board.
• Chairs the executive committee and makes decisions on matters
affecting the operation, performance and strategy of the group’s
businesses, with the exception of those matters reserved to
the board.
• Responsible for overseeing the delivery of the corporate social
responsibilities of the group.
Executive
directors
• Responsible for all matters affecting the performance of the group.
• Responsible for implementation of strategy, policies, budgets and
the financial performance of the group.
• Provide specialist knowledge and experience to the board.
• Responsible for the successful leadership and management
of risk and finance functions across the group.
Non-executive
directors
• Provide independent and constructive challenge.
• Provide governance through participation in and chairmanship
of the board committees.
• Provide an external focus to the board’s discussions, particularly
with regard to strategy and business development.
• Review management performance.
Manjit Wolstenholme is also a non-executive director of Future plc,
The Unite Group plc and Aviva Investors Holding Limited.
These appointments involve no more than one and a half days’ work
per week and there have been no material changes in her other
commitments since 1 January 2015.
Peter Crook also chairs the divisional boards of Vanquis Bank,
CCD and Moneybarn.
Peter Crook and Andrew Fisher comprise the executive committee
which deals with matters relating to the running of the group other
than those reserved to the board and the other committees.
The non-executive directors have a range of recent and relevant
financial services, corporate governance and consumer experience
as detailed on pages 78 and 79.
They are appointed for fixed periods of three years, subject to
confirmation by shareholders. This three-year period may be extended
for a further three years (and, in exceptional cases, further extended),
subject to annual reappointment by shareholders. Their letters of
appointment may be inspected at the company’s registered office
or can be obtained on request from the Company Secretary.
Rob Anderson’s term of appointment has been extended for an additional
three years, subject to shareholder approval at the 2015 AGM.
Senior
Independent
Director (SID)
• Is available for shareholders if they have any concerns which contact
through the normal channels has failed to resolve or is inappropriate.
• Acts as a sounding board for the other directors and confidante
Malcolm Le May assumed the role of SID on 1 January 2014. He was
selected for this role on account of his extensive experience in the
financial services sector and his corporate finance background.
for the Chairman.
• Is a conduit, as required, for the views of the other non-executive
directors on the performance of the Chairman.
• Conducts the Chairman’s annual perfomance evaluation.
Company
Secretary
• Responsible to the board.
• Provides comprehensive practical support and guidance
to directors, both as individuals and collectively.
• Particular emphasis on supporting the non-executive directors in
maintaining the highest standards of probity and corporate governance.
• Responsible for communicating with shareholders, as appropriate,
and ensuring that due regard is paid to their interests.
All directors are able to consult with Ken Mullen, who is also secretary
to all of the board committees.
There is also a formal procedure by which any director may take
independent professional advice relating to the performance of any
aspect of their duties at the company’s expense, which can be facilitated
by the Company Secretary.
The appointment and removal of the Company Secretary is a matter
for the board.
Provident Financial plc Annual Report and Financial Statements 2014Governance 84
Governance continued
Effectiveness
Each of the five non-executive directors
has been formally determined by the board
to be independent for the purposes of the
effective governance of the group, in line with
the independence expectations of the Code.
The board’s assessment is based on the fact that
they have all served less then nine years in their
current roles, they receive no additional benefits
from the group and they have not previously held
an executive role within the group.
The board believes that there are no current
or past matters which are likely to affect their
independent judgement.
Conflicts of interest
The Companies Act 2006 (‘the Act’) and the
company’s articles of association (‘the Articles’)
require the board to consider any potential
conflicts of interest. The board considers and, if
appropriate, authorises each director’s reported
actual and potential conflict of interest, taking into
consideration what is in the best interests of the
company and whether the director’s ability to
act in accordance with his or her wider duties
is affected.
The board has put procedures in place to deal
with situations where a director has a conflict of
interest. Each director abstains from approving
their own reported conflicts, and as part of these
procedures the board:
> Considers each conflict situation separately
based on its particular facts;
> Considers any conflict situation in conjunction
with the other duties of directors under
the Act;
> Keeps records and board minutes on
authorisations granted by directors and the
scope of any approvals given; and
> Regularly reviews conflict authorisations.
The board has complied with these procedures
during the year.
Induction of a new director
On appointment, each director undertakes a
comprehensive induction programme which
introduces the director to the group’s businesses
and its senior management. On 1 January 2014,
Malcolm Le May and Alison Halsey joined the
group as new non-executive directors and
undertook the following as part of their induction:
> Had individual meetings with the executive
directors and the Company Secretary;
> Met with the divisional boards and senior
management teams in each division;
> Spent a day at one of the CCD branches; and
> Met with the audit partner from Deloitte LLP.
Training
Appropriate training and briefing is provided to
all directors on appointment to the board, taking
into account their individual qualifications and
experience. Ongoing training is arranged to suit
their specific needs and the Chairman regularly
reviews and agrees with each director their
training and development needs. The Chairman
is in the process of addressing individual directors’
requirements in order to create individual
development plans for each of the non-executive
directors which will focus on areas where they
can add value to key strategic matters facing the
group and which may feature as a board agenda
item throughout 2015.
Independence of
non-executive directors
Non-executive directors are expected to be
independent in character and judgement and
free from any business or other relationship
which could materially interfere with the
exercise of that judgement. The board and the
nomination committee consider and review the
independence of each non-executive director
on an annual basis. In carrying out the review,
consideration is given to factors such as length
of tenure and the ability of the director to provide
objective challenge to management.
What does effectiveness mean to the company?The composition, experience and balance of skills on the board are regularly reviewed to ensure that there is the right mix on the board and its committees to enable them to work effectively. The balance of the board is illustrated on page 82.The Chairman manages the board and oversees the operation of its committees with the aim of ensuring that they operate effectively by fully utilising the diverse range of skills and experience of the various board members. The board and its committees are annually assessed to ensure their effectiveness is maintained, that they remain fit for purpose, and that they continue to evolve and develop, to address the ever-changing regulatory environment in which the group operates. Evaluating the board’s performance can lead to fresh insights into the functioning of the board, whilst potentially identifying areas that might need to be strengthened and developed.Provident Financial plc Annual Report and Financial Statements 2014 Effectiveness
85
Board evaluation 2013
Following the external board evaluation in 2013, a summary of the board’s progress against the actions that arose is set out below.
Actions
Progress/outcomes
1. Consider restructuring the CPC to cut down on
presentation time and allow more time for debate,
big picture issues and less formal time with the
executive team.
The 2014 CPC was more interactive and included a more thorough analysis of issues on the agenda rather
than formal presentations. Formal presentations were avoided by providing materials to read in advance of the
conference and by break-out sessions where individuals were able to analyse and discuss issues in smaller
groups using external presenters to facilitate discussions.
2. Consider opportunities throughout the year for
the senior management team to spend more time
with board members and increase the visibility of
the non-executive directors within the operations.
3. Consider increasing the number of non-executive
director meetings outside board meetings to
provide an opportunity to talk informally and to
get to know new board members in due course.
4. Consider creating development plans for board
members which focus on individual roles and
encourage board members to concentrate on one
aspect of the business in more detail.
In February, the Chairman assigned the non-executive directors to divisions to enable them to gain a better
understanding of the issues facing the business and to enhance and inform board discussions.
Alison Halsey and Stuart Sinclair were assigned to spend time with the senior management team in CCD,
and Malcolm Le May and Rob Anderson were assigned to the Vanquis Bank senior management team.
In 2015, the Chairman will reassign the non-executive directors and the process will include Moneybarn.
There has been greater interaction between the senior management team and the non-executive directors
through the invitation of a number of senior managers to attend and present at board meetings. The divisional
managing directors have continued to be invited to present their operational and strategic reports at each of the
board meetings. This has been a huge success, adding value to the board meetings and giving the non-executive
directors increased visibility of divisional performance and management.
The board has agreed to have an offsite visit each year at a business location. In 2014 the offsite visit was held
in Edinburgh. This visit was followed by an informal session where issues were discussed in greater depth.
During the offsite visit, the board also met with the CCD Divisional Operations Manager in Scotland and his team.
The non-executive directors have also made a number of site visits throughout 2014 in order to gain first-hand
experience of the group’s businesses.
The non-executive directors have held a number of meetings in 2014 in order to discuss a range of issues
without the executive directors being present. This is intended to continue in 2015.
Individual training plans for the non-executive directors are in the process of being developed. Non-executive
directors have been assigned to a specific division (referred to above).
5. Bring committee membership in line with
The Chairman is no longer a member of the audit committee or the remuneration committee.
best practice.
The Chief Executive is no longer a member of the nomination committee.
The Finance Director is no longer a member of the risk advisory committee.
6. Consider ways of ensuring that board papers
are sent out in a more timely manner to allow
non-executive directors more time to prepare
for meetings.
Papers are now circulated by means of BoardPad when available and at the earliest possible opportunity,
rather than waiting for a full set of papers to be available before circulation.
Provident Financial plc Annual Report and Financial Statements 2014Governance 86
Governance continued
Effectiveness continued
Board evaluation 2014
Following the external board evaluation in 2013, this year’s evaluation of the board, its committees, individual directors and the Chairman was carried out
internally in December 2014, by way of a detailed questionnaire.
The results of the evaluation were discussed by the board as a whole at its meeting in December 2014, and at the committee meetings in December 2014
and January 2015. The evaluation confirmed that the board and its committees were working effectively and efficiently as a team and a high overall score.
was achieved. The evaluation confirmed that improvements had been made since the external board evaluation in 2013 and also identified a number of
areas for further improvement.
Areas
1. Overview
Progress
The board overall scored well, either meeting or exceeding
requirements. The executive directors felt that the board enhanced
their ability to run the business effectively in the interests of the
stakeholders and the non-executives felt that they were listened
to and that their input was appreciated.
2. Role of
directors
and the board
The board scored highly and exceeded requirements on acting
effectively. It did, however, consider that this would need to be
reviewed following transition of the group to FCA regulation.
The board gave good feedback on the role of the Company Secretary.
3. Board
composition
The board felt that its composition gave the right balance at this time.
It did note that additional skills would be beneficial as the group
evolves in the technology and digital sphere.
Further development of succession planning was identified,
particularly for the executive directors.
Action points
No significant actions were identified.
No significant actions were identified.
The board and the nomination committee intends to continue to develop and
extend its work on succession planning, which will include consideration of
high potential individuals and their development in the business. The nomination
committee has requested a report from the Chief Executive which considers
the future shape of the business, and prioritises management development
and succession planning which will be reviewed by the nomination committee
and the board.
Whilst satisfied with the current composition and collective performance of the
board, it was agreed that consideration should be given to complementing and
strengthening its existing skill set and experience.
4. Non-executive
directors
The board was extremely satisfied with the addition of the new non-
executive directors and their contribution to the board’s effectiveness.
The board believes that the non-executive directors’ discussions
without the executive directors had improved but must be maintained
in 2015 in order to continue being beneficial. The non-executives’
integration with senior management and the businesses had
also improved.
The board will continue to encourage interaction between the non-executive
directors and the businesses and senior management.
Responses also indicated that additional site visits and exposure to site
management below the group executive committee level would be beneficial.
As a result, a further site visit is planned for 2015, where the board will take
the opportunity to meet local management, employees and stakeholders.
5. Executive
directors
6. Board
meetings
The board agreed that the executive directors had a strong and
balanced relationship which was good for the business.
No significant actions required.
The board agreed that its meetings had improved with the presence
of the divisional managing directors who present formal reports.
It was, however, felt that future agendas should include a broader
variety of topics for discussion.
Whilst work could be done on achieving a greater integration of the
output from the CPC into the objectives set for the divisions, it was felt
that the CPC had greatly improved this year under the new Chairman.
The board agreed that the current annual pattern of board meetings
together with the two-day off site strategy review and one meeting
at a UK branch location works well.
Agreed to assess the schedule of meetings in 2015 and corresponding
agendas to ensure that at each meeting there is a substantial element
of strategy discussed.
Further integration of the CPC output required.
Agreed to consider more regular reviews and discussions on broader
topics and more variety on presentation and themes in order to enhance
the board agenda.
Provident Financial plc Annual Report and Financial Statements 2014 Effectiveness continued
87
Areas
Progress
Action points
7. Monitoring
performance
The board agreed that performance reporting had improved and
that the presentation of strategic objectives and financial information
was highly visible.
The board identified the need to address the specific requirements of regulation
by the FCA, including in particular the need to enhance the reporting on, and
monitoring of conduct issues.
Overall the board was satisfied with performance monitoring.
8. Information
9. Leadership
and culture
The board agreed that the addition of the divisional managing director
reports added visibility and context to the board meetings. The use
of iPads for board papers worked well and made information easily
accessible. The board did have concerns over ‘run of the mill’ reporting.
It was agreed there was a need for a more detailed analysis into the strategic
issues facing the group on a rolling basis. In 2015 the board will consider
improvements to the agenda to avoid ‘run of the mill’ reporting and will look
to ensure it focuses on potential pitfalls and future opportunities.
The board, excluding the Chairman, agreed that the Chairman
demonstrates effective leadership and has a good relationship with
the Chief Executive, the Finance Director and the board as a whole.
The board considered that discussion was more free flowing and
that all directors were able to fully contribute.
No significant actions were identified.
10. Corporate
governance
The board agreed that it continues to maintain a high standard
of corporate governance although it noted the need to enhance
processes as part of the transition to regulation by the FCA.
11. Committees
Overall the committees scored well, and met the requirements of
the board. The board agreed that the remuneration committee and
risk advisory committee liaison had improved with regard to risks
and controls which related to remuneration strategy.
The board agreed to consider its visibility and control over the divisions, whilst
allowing FCA approved persons within the divisions to fulfil their responsibilities.
A project has been established, with external assistance, to identify the
appropriate corporate governance structure for the group which balances the
board’s oversight responsibilities with the regulatory status of its divisions and
the responsibilities of its approved persons.
No significant actions were identified.
Provident Financial plc Annual Report and Financial Statements 2014Governance 88
Governance continued
Shareholder engagement
“ The board believes that
open and regular
dialogue with investors
provides the foundation
for a long and trusted
relationship.
Manjit Wolstenholme
Chairman
”
The Chairman is responsible for ensuring that
appropriate channels of communication are
established between directors and shareholders
and that all directors are aware of any issues and
concerns that major shareholders may have.
Regular engagement provides investors with an
opportunity to discuss particular areas of interest
and raise any concerns. The group is eager to
ensure that it understands shareholders’ views
and that it is able to effectively communicate
its strategy. The group works to engage
effectively with shareholders through its regular
communications, the AGM and other investor
relations (IR) activity.
IR programme
The group has a comprehensive IR programme
through which the Chief Executive, Finance
Director and Head of IR engage regularly with the
company’s largest shareholders on a one-to-one
basis to discuss strategic and other issues as well
as to give presentations on the group’s results.
The effectiveness of the group’s IR programme
has been recognised in the UK PLC Awards for
three consecutive years. The group won the
award for ‘Best Investor Communications’ in
2012, was included in a shortlist of four in 2013
and has once again been shortlisted for the same
award in 2014.
Specific information on the 2014 IR programme
can be found in the calendar on page 89.
Further communication is achieved through:
> The annual report – this is the most significant
communication tool, ensuring that investors
are kept fully informed regarding developments
in the group.
> The corporate website – provides investors
with timely information on the company’s
performance as well as details of the group’s
corporate social responsibility (CSR) activities.
> A web app – enables shareholders to view key
website data on their tablet devices and mobile
phones including videos, presentations and
results announcements.
> Regular investor days – inviting institutional
shareholders and sell-side analysts to an
on-site facility or an external location to
provide them with a more detailed insight into
the group. The next investor day will take place
at Vanquis Bank’s London headquarters on
16 April 2015.
> Investor/analyst meetings– the group takes
a proactive approach by inviting investors and
sell-side analysts to meet with divisional senior
management and to visit operational facilities.
Key themes discussed with shareholders in 2014Home credit >Rationale for the repositioning of the home credit business. >Drivers of the improvement in performance in home credit.Satsuma >Impact of payday regulation on the online instalment market. >Progress in building capability of Satsuma and competition.Moneybarn >Background on the Moneybarn business and growth potential. >Reasons for the Moneybarn acquisition being funded by an equity placing. >Progress with the transition to the new FCA regulatory regime.Vanquis Bank >Potential for Vanquis Bank UK to exceed its medium-term growth targets. >Potential impact of forthcoming FCA credit card review on Vanquis Bank. >Update on the potential Polish pilot operation and timescales for any growth targets.Provident Financial plc Annual Report and Financial Statements 2014 Shareholder engagement
> US and European roadshow programmes
– allows overseas investors better access
to management, enabling them to receive
the same access as investors in the UK.
Usually attended by the Chief Executive,
the Finance Director and the Head of IR.
> An annual CSR report – a stand alone report
demonstrating the importance placed on CSR.
> Responding promptly– the group is committed
to respond to shareholders, regardless of the
size of their holding, within two working days.
> An annual perception audit – designed to
obtain formal independent feedback from
investors and sell-side analysts. This enables
management to consider and respond to any
concerns in the investment community.
Board oversight
Communications with shareholders are given a
high priority by the board. In order to ensure that
the board members develop an understanding of
the views of major shareholders, there is regular
dialogue with institutional shareholders, including
meetings after the announcement of the year-end
and half-yearly results. Shareholders occasionally
meet with the Chairman or SID, and meet with the
remuneration committee chairman when required
to discuss remuneration matters.
The board also considers an IR report at each
board meeting which outlines the general
nature of matters communicated and discussed
with institutional investors, including feedback.
Independent reviews of shareholder views are
also commissioned annually and reviewed by
the board. The group carries out an annual
perception audit and collates broker feedback
from roadshows to present in the IR board report.
All analyst and broker reports on the company are
also distributed to all board members.
This year there have been no significant issues
raised by shareholders in relation to the company.
Had there been, these would have been reported
to the board, discussed in detail, and an appropriate
corrective action plan developed to address any
concerns raised.
AGM
Shareholders are invited each year to attend the
AGM, where the board members are available
to answer any questions shareholders may have.
Facilities are also available to shareholders to
submit questions in advance of the meeting
and to cast their votes electronically or by post.
Details of proxy votes cast are made available by
means of an announcement to the London Stock
Exchange and on the group’s website. It is the
company’s policy to give shareholders in excess
of 20 working days’ notice of the AGM and the
Notice of the 2015 AGM setting out the resolutions
for the meeting, together with an explanation of
them, accompanies this report and is available
on the group’s website. Details of the 2015 AGM
are set out on page 108 of the Directors’ report.
89
Find out more online – we publish our results
and presentations on our investor website at
www.providentfinancial.com
Investor relations programme in 2014 JAN • Trading statement.JUL • Interim results. • London and Edinburgh investor/sales teams roadshow.SEP • Scandinavia investor roadshow. • Frankfurt and Zurich investor roadshow.OCT • Q3 IMS and analysts call. NOV • US investor roadshow (New York, Boston, Chicago, Los Angeles). • JP Morgan ‘Best of British’ Conference.DEC • Berenberg European Investor Conference. • Citi ‘Diversified Financials’ Conference.FEB • Preliminary results announcement. • London and Edinburgh investor/sales team roadshows.MAR • US investor lunch hosted by Macquarie.APR • Paris and Brussels investor roadshow.MAY • AGM and Q1 IMS. • US investor roadshow (New York, Connecticut and Boston).JUN • Societe Generale UK Economy Investor Conference.Provident Financial plc Annual Report and Financial Statements 2014Governance 90
Governance continued
Risk advisory committee
Risk advisory committeeMembers Secretary Stuart Sinclair1 (Chairman) Ken MullenAlison Halsey Malcolm Le MayManjit WolstenholmeRob AndersonAttendees by invitationPeter CrookAndrew FisherDavid Mortlock (Head of Audit)David Merrett (Director of Corporate Strategy and Risk) 1 Appointed as Chairman on 1 March 2014AccountabilityThe board has ultimate responsibility for determining the nature and extent of the principal risks it is willing to accept to achieve its strategic objectives and for maintaining a sound system of risk management and internal controls, in accordance with the Code. The risk advisory committee assists the board by monitoring and managing the risk management and internal control systems across the group and reports to the board.Governance in action Risk managementFollowing the change in regulator from the FSA and OFT to the FCA and PRA, the group has invested considerable time reviewing its risk management framework and processes. At the outset the overall group statement on risk appetite was redefined. This sets out the maximum level of risk the group is prepared to accept. This statement focuses on the need to ensure that customers are at the heart of what the business does, whilst maintaining the dividend and sufficient capital to protect against losses. Divisional statements have also been redefined to support the group statement.It was also agreed that the risk advisory committee was best suited to review the group’s management of customer and conduct risk, as part of its wider review of risk management and monitoring of risk management across the group. As the overall group statement now includes customer and conduct risk, a principal purpose of the risk advisory committee is to monitor the effectiveness of the divisions in establishing and maintaining frameworks, policies and procedures to identify and manage customer and conduct risk. This ensures that customers’ needs are at the heart of what the divisions and the group does and that there is a fair deal between the divisions and their customers. The risk advisory committee will also recommend to the board an overall group customer and conduct risk appetite, culture and tone for approval. The time allocated for risk advisory committee meetings has been significantly extended to allow a full review to be undertaken of each division’s conduct risk framework and conduct risk governance policies. During 2015, the risk advisory committee meetings and other board committee meetings will be held on a separate day to the board meeting in order to allow the committees sufficient time to consider and debate those matters falling within their terms of reference. Risk governance and oversight is particularly important for the group as the structure is different to most financial services groups and banks. Under the FCA regime, the divisions are FCA authorised and regulated, and include approved persons for controlled functions and independent non-executive director oversight where appropriate. However, Provident Financial plc, as the holding company, is not authorised or regulated by the FCA and there are no approved persons at group board level. A project has been established to identify the appropriate corporate governance structure for the group. In the meantime, both the group board (under the Code) and the divisions (under the FCA) have responsibilities to maintain sound risk management and internal control systems. The group therefore operates a ‘three lines of defence’ model: the first line involves the operational identification, assessment and management of risk; the second line involves independent review and challenge of first line actions against established risk appetites; and the third line is independent assurance. Going into 2015, the risk advisory committee is confident that the group has an effectively designed risk management framework in place. 2015 will continue to be a transition to FCA regulation as the group embeds the new approach to decisions and processes which have been enhanced to address customer and conduct issues. The risk advisory committee will monitor this transition closely and will report on progress in the 2015 Annual Report and Financial Statements.Provident Financial plc Annual Report and Financial Statements 2014
Risk advisory committee
91
are in accordance with the FRC’s revised
Guidance for Directors on the Combined Code
(‘the FRC’s Guidance’) and the FCA’s Disclosure
and Transparency Rules.
Further insight into the group’s principal risks, and
the management of these is on pages 93 to 96.
Effectiveness
The committee formally considered its
effectiveness in 2014. On the basis of the internal
board and committee evaluation undertaken, the
overall view was that it was working effectively
and no significant actions were required.
Role and responsibilities of
the risk advisory committee
The risk advisory committee’s principal purposes
are to recommend to the board an overall
customer and conduct risk appetite, culture and
tone for approval and to monitor the effectiveness
of the divisions in establishing and maintaining
risk management frameworks, policies
and procedures.
In addition to the responsibilities mentioned
above, the committee is also responsible for:
> Considering the nature and extent of the
risks facing the group, the likelihood of risks
materialising and the group’s ability to reduce
the incidence and the impact of the risks
which do materialise;
> Reviewing the group’s capability to identify
and manage new risk types, and keeping under
review the effectiveness of the group’s internal
control systems and risk management systems
in conjunction with the audit committee;
> Reviewing the group’s business continuity
plans; and
> Notifying the board of any changes in the
status and control of risks.
Update on 2014 activities
During 2014, the risk advisory committee has:
> Updated its terms of reference and the group
risk management framework to explicitly
include customer and conduct risk, to reflect
the separation of risk and audit and to reflect
the new risk assessment descriptions;
> Appointed a new chairman; and
> Undertaken the activities set out in the
calendar on the right.
Statement on internal controls
Our risk management framework is firmly
embedded within our management and
governance processes, and incorporates the
process detailed in the diagram on page 92.
This risk management framework has been
in operation throughout 2014 and continues
to operate up to the date of approval of this
annual report. This framework is the process
by which compliance with laws and regulations,
the reliability of financial reporting and the
effectiveness and efficiency of operations
are reviewed. The framework assists in the
identification, evaluation, and management of
principal risks as required by the Code, and is
designed to manage rather than eliminate the
risk of failure to achieve business objectives.
The board believes the framework provides
reasonable, but not absolute assurance against
material misstatement or loss.
The board provides oversight to help ensure
that the group and its divisions maintain
sound risk management and internal control
systems. Through the risk advisory committee,
it reviews the assessment of risks and the risk
management framework.
A consistently applied method is used at divisional
and group level to identify the key risks that
could have a significant impact on the ability of
the group to achieve its objectives. Risk owners
within the divisions and the corporate office are
identified and given responsibility for ensuring
actions are implemented with appropriate review
dates. The risk registers are reviewed by the risk
advisory group and updated at least quarterly.
The risk advisory committee is responsible
for monitoring the key metrics identified by
all divisions and the corporate office in the
management of risk and ensures in particular
that customer outcomes remain central to the
group’s risk management programme.
The board are satisfied that the company’s risk
management and internal control systems are
effective and were effective throughout 2014
and up to 24 February 2015. The board does this
through the audit committee, which carries out
an annual review and issues an opinion on risk
and control effectiveness. This review confirms
that the risk management and internal control
systems effectively support and manage the
achievement of the overall group objectives and
provide suitable protection of the group’s assets,
reputation and sustainability. A strong risk and
control culture was identified in all divisions and
areas where improvements could be made were
identified. An action plan has been established to
ensure that the systems and processes continue
to evolve as the regulatory environment in which
the group operates continues to change.
The group finance function establishes the
process and timetable for financial reporting
and consolidation activities and identifies and
approves changes to accounting and financial
reporting standards.
The board believes the process and the key
elements of the internal control system, including
in particular the financial reporting processes,
Risk advisory committee key items in 2014 JAN • Updated terms of reference. • Reviewed cyber risk. • Reviewed and approved the revised group risk appetite framework, risk management framework and risk profile. • Actioned the recommendations of the independent board evaluation in 2013. • Reviewed and updated the risk processes for new territories. • Reviewed and identified major issues in the changing regulatory and political environment. • Andrew Fisher stepped down as member of the committee, in line with best practice.OCT • Reviewed key group risks. • Vanquis Bank and CCD conduct risk, framework and appetite was tabled, discussed and noted. • Post-acquisition action plan for Moneybarn discussed. • Vanquis Bank’s and CCD’s CROs attended the committee for the first time. JUL • ICAAP reviewed and agreed to recommend approval to the board. • Conduct risk management approach tabled, discussed and noted. Conduct risk was agreed to be added to the terms of reference of the risk advisory committee meetings were increased to at least four a year and the time allocated to each meeting was significantly increased.Provident Financial plc Annual Report and Financial Statements 2014Governance 92
Governance continued
Risk advisory committee continued
Internal controlThe boardReviews the framework annually to ensure that it remains fit for purpose and complies with relevant requirements.WhistleblowingWhistleblowing policies are in place in each of the group’s divisions. The group is committed to the highest standards of quality, honesty, openness and accountability and employees are encouraged to raise genuine concerns under these policies either by contacting a manager or telephoning a dedicated external helpline, in confidence. During 2014, this external helpline was operational throughout the group and procedures are in place to ensure issues raised are addressed in a confidential manner. The Company Secretary is required to report to the audit committee in December each year on the integrity of these procedures, the state of ongoing investigations and conclusions reached. During 2014, only one issue (which was human resources related) was raised via this system and this was appropriately responded to through the group’s human resources function.New whistleblowing legislation in the Republic of Ireland (ROI) has required CCD to review and update its whistleblowing procedures for ROI and ensure that employees in ROI are aware of the availability of the external helpline.Divisional boardsThe divisional boards and their committees are responsible for managing the divisional risks and preparing divisional risk registers for review by the risk advisory group who report to the risk advisory committee.Internal auditRegularly reviews the adequacy of internal controls (including financial, operational and compliance controls) in conjunction with the external auditor and reports to the risk advisory group, risk advisory committee and audit committee. An annual programme of work which targets and reports on higher-risk areas is carried out by the group internal audit function. The operation of internal financial controls is monitored by regular management reviews, including a requirement for each division to certify compliance quarterly.Monthly management accountsMonthly management accounts are prepared comparing actual trading results by division to budget and the prior year. Regulatory capital levels, funding liquidity and economic trends are also reported monthly. A rolling forecast of the full year outturn is produced as part of the management accounts pack. Management accounts are distributed to the executive directors and senior management team on a monthly basis and are distributed to the board for each board meeting.Corporate policiesThe board requires the divisions and the corporate office to operate in accordance with the corporate policies and to certify compliance on a biannual basis. This includes confirmation of compliance and any suggestions for improvements. This ensures that the process remains dynamic and that the divisions and corporate office are operating at the highest level. The corporate policies were last updated in July 2014.Biannual budget processIn December each year, the board approves detailed budgets and cash flow forecasts for the year ahead. It also approves outline projections for the subsequent four years. An update to the budget is approved in June each year.Finance forumA six-weekly finance forum, chaired by the Finance Director and attended by divisional finance directors and senior finance management including the heads of tax, audit, treasury and risk, reviews and provides oversight of the key financial matters of the group.Risk advisory committeeIndependent of the business units and chaired by a non-executive director of the board. Responsible for ensuring that there is an appropriate risk management framework embedded across the group. Risk advisory groupFormally reviews the divisional risk registers four times a year, and reports to the risk advisory committee.Provident Financial plc Annual Report and Financial Statements 2014 93
Risks
Details of the group’s key risks, together with the controls and procedures in place to mitigate the risks and progress made against each risk in 2014,
are as follows:
Customer and conduct risk
The risk of poor outcomes for customers.
• The FCA replaced the OFT as the regulatory body for consumer credit on 1 April 2014. Under the FCA regime there is increased focus on customer and
conduct risk, in particular, ensuring that customer’s interests are at the heart of what our businesses do.
• Ensuring poor customer outcomes are avoided requires focus on treating customers fairly through, in particular, designing appropriate incentive schemes,
ensuring affordability and sustainability of all lending and handling vulnerable customers sensitively.
Mitigation
Progress in 2014
• Risk and compliance committees
within Vanquis Bank, and a customer
and conduct risk committee within
CCD oversee compliance with the
FCA rules and guidelines, including
treating customers fairly.
• Vanquis Bank has in place a customer
experience forum which considers
issues from a customer’s perspective
and ensures that adequate
consideration has been given
to conduct risk.
• CCD have in place a compliance
assurance team which provides
conduct and regulatory assurance
across its business in order to ensure
that CCD is delivering fair customer
outcomes and meeting its
regulatory obligations.
• Moneybarn is developing its formal
approach to customer and conduct
risk as part of its transition to
FCA regulation.
• The risk advisory committee has oversight
of the divisional risk frameworks including
in particular the customer and conduct
risk frameworks.
• Regular customer satisfaction surveys
are undertaken in all businesses.
• Vanquis Bank has had the FSA principle of
treating customers fairly firmly embedded
into its business since it was introduced in
2007 and continues to develop policies and
processes since the move to FCA regulation.
• Responsible lending policies, practices and
procedures in place in all businesses in order
to minimise the risk of customers potentially
receiving loans or lines of credit that are
unaffordable or unsustainable.
• All divisions have policies and procedures
in place to ensure that financial promotions
are clear, fair and not misleading.
• All divisions have policies and procedures
to ensure effective complaints handling is in
place, should customers voice any concerns.
Regulatory risk
• Customer satisfaction remains high in both CCD (93%) and Vanquis Bank (84%).
• Customer complaints remain low in all businesses.
• Vanquis Bank has an extremely high success rate through the Financial
Ombudsman Scheme (FOS).
• CCD has implemented a conduct risk framework and dashboards in each
of its businesses to capture, assess and monitor conduct risk. 12 key risks
were identified.
• Vanquis Bank has implemented changes arising from the transfer of
consumer credit regulation from the OFT to the FCA, including enhanced
controls to limit detriment to customers, further support for vulnerable
customers and focus on sustainability and affordability of customer debt.
• Vanquis Bank has carried out risk assessments on internal and third party
incentive schemes to identify and assess any customer risks from incentive
programmes and implemented a strategy to reduce the risks.
• Vanquis Bank’s senior management attended customer listening sessions
with a view to identifying conduct issues throughout the product lifecycle.
• Moneybarn has redesigned its broker commission schemes in light of FCA
work and guidance on incentive structures and their potential to encourage
inappropriate behaviours.
The risk of adverse regulatory change for the group and/or the failure to comply with relevant regulatory requirements.
• The risk that the group suffers a loss due to non-compliance with regulatory requirements.
• There is increased focus on regulation, particularly for non-standard credit lenders.
• The FCA replaced the OFT as the regulatory body for consumer credit businesses on 1 April 2014. FCA authorisation, supervision and enforcement
regimes as well as conduct rules and guidance are now fully in force.
• At the end of November 2013, the government announced that it intended to legislate to introduce a cap on the total cost of credit for payday loans.
The duty imposed on the FCA was to introduce the cap by January 2015 and was formally established through the Financial Services (Banking Reform)
Act in December 2013. The FCA introduced a cap on the total cost of credit for high-cost short-term credit on 2 January 2015. The only group business
to which this applies is Satsuma, which continues to operate below the cap.
• The FCA has published the terms of reference for its credit card market study which will enable the FCA to build a detailed understanding of the UK retail
credit card market.
Mitigation
• A central in-house legal team is in
place which monitors legislative
changes and supports divisional
compliance functions.
• Expert third-party legal advice is
taken where necessary.
• Divisional compliance functions are
in place which monitor compliance
and report to divisional boards.
Progress in 2014
• There is ongoing constructive dialogue
• On 1 January 2014, the Chief Executive, Peter Crook was appointed to the
with regulators.
• Full and active participation in all relevant
regulatory reviews and consultation
processes in the UK and EU.
• The group does not provide payday lending.
• Long relationships and established credibility
with key regulators who recognise the
different dynamics of the home credit and
credit card sectors compared with the
payday lending model.
FCA Practitioner Panel allowing the group to fully participate in discussions
on the transition to FCA regulation.
• Transitionary programmes in order to achieve full FCA authorisation have
been established in CCD, Vanquis Bank and Moneybarn.
• Peter Minter, managing director of Moneybarn (acquired in August 2014)
is a member of the FCA Smaller Business Practitioner Panel.
• Ongoing proactive engagement with regulators both in the UK and the EU.
• No changes were required to the pricing of Satsuma products in order
to comply with the FCA cap.
• Vanquis Bank is currently responding to initial information requests from
the FCA in its planning stage, and will continue to assist the FCA in its work.
The FCA expects to reach its conclusions towards the end of the year.
Provident Financial plc Annual Report and Financial Statements 2014Governance 94
Governance continued
Credit risk
The risk that the group will suffer unexpected losses in the event of customer defaults.
• Defaults in the non-standard market are typically higher than in more mainstream markets.
• There is continued pressure on home credit customers’ incomes.
• Any deterioration in the employment market could increase the level of defaults.
Mitigation
Progress in 2014
• The Vanquis Bank and CCD
• Home credit loans are underwritten face-to-face
• Vanquis Bank has continued to apply consistently tight underwriting
credit committees set policy and
regularly review credit performance.
• Credit risk is subject to ongoing
review in the current economic
climate and management
continues to maintain its tight
underwriting stance.
• Comprehensive daily, weekly and
monthly reporting on KPIs.
• Vanquis Bank uses highly bespoke
underwriting including full
external bureau data; a welcome
call is conducted prior to issuing
credit; initial credit lines are low
(typically £250); customers are
re-scored monthly; an intensive
call centre-based operation
focuses on collections.
by agents in the customer’s home; agents generally
maintain weekly contact with the customer and
stay up to date with their circumstances; agents’
commission is predominantly based on collections
not credit issued; application and behavioural
scoring is used to assist agents’ underwriting;
loans are small-sum and short-term in nature.
• Satsuma used the knowledge from the home credit
business and built a bespoke scorecard using
proprietary knowledge data as well as additional
bureau data. This has been augmented in 2014 by
the implementation of a state of the art decisioning
system which allows greater flexibility to improve
scorecards including the use of behavioural and
social data. This is combined with Vanquis Bank’s
underwriting and collections techniques such as
the initial welcome call. Close customer contact is
maintained through a dedicated ‘representative on
the phone’ and ongoing communication through
email, SMS and telephone.
Business risk
standards on both new accounts and credit line increases.
• Stable delinquency levels in Vanquis Bank has enabled the business to
generate a risk-adjusted margin of 33.2%, well ahead of the minimum
target of 30%.
• The focus on collections performance in home credit has resulted in a
significant improvement in credit quality and a strengthening in CCD’s
risk-adjusted margin from 58.9% to 69.1%.
• The Satsuma business model has been developed by combining the
experience and knowledge of home credit and Vanquis Bank with an
inherent customer focus.
• Moneybarn (acquired in August 2014) has recently upgraded its already
market-leading credit scoring approach and will work with other group
companies to continue to develop its capabilities.
The risk of loss arising from the failure of the group’s strategy or management actions over the planning horizon.
• Increased marketing activity from existing competitors may impact Vanquis Bank’s growth rates.
• CCD may not be able to build the necessary capability to capture the growth opportunity in the online loans market with Satsuma. Pressure on customers’
incomes from rises in fuel, food and utility costs could impact the demand for credit, increase impairment and reduce profitability in home credit.
• Potential increased competition from competing formats such as online mail order credit and rent-to-own may further reduce the flow of new customers
into home credit.
• Increased competition or the cyclical nature of the used car finance market may limit Moneybarn’s ability to pursue its strategy to grow significantly with
access to new funding,
Mitigation
Progress in 2014
• A clear board strategy is in place.
• The group has comprehensive monthly
• Despite a modest increase in marketing activity by competitors,
• A corporate planning conference
(CPC) is held annually.
• Central resource is in place to
develop the corporate strategy.
• New products and processes are
thoroughly tested prior to roll-out.
• There is comprehensive
monitoring of competitor products,
pricing and strategy.
• Robust business change functions
oversee change programmes.
management accounts, a monthly rolling forecast
and a biannual budgeting process.
• Loans are short-term in nature and, in home
credit, agents visit customers in their homes
and are therefore able to stay up to date with
their circumstances.
• The group has demonstrated the ability to manage
the business through the deterioration seen in
the UK economy and employment market during
recent years.
Vanquis Bank remains the most active participant in the non-standard
credit card market and booked a record 430,000 accounts in 2014
through the continued development of distribution channels.
• A decision was made in January 2015 to cease the Polish pilot operation
as the board do not consider that a business can be built which is capable
of delivering the group’s target returns in a suitable timeframe.
• The repositioning of CCD’s home credit business as a smaller but
leaner, better-quality, more modern business focused on returns,
is substantially complete.
• Satsuma has begun to show early signs of its capacity to grow strongly
as marketing spend has been increased in Q4 2014, having built
capabilities throughout 2014.
• Since acquisition in August 2014, Moneybarn has been able to grow
strongly as funding constraints have been lifted.
Reputational risk
The risk that an event or circumstance could adversely impact on the group’s reputation, including adverse publicity from the activities of legislators,
pressure groups and the media.
• Media and pressure group activity increases during an economic downturn or when the company is performing well.
• There is a reputational impact from increased focus on regulation, particularly of non-standard credit lenders.
Mitigation
Progress in 2014
• Credit and collection policies
• The over 130-year-old home credit business is
• Continued investment and focus on corporate responsibility and in the
are designed to ensure that all
businesses adhere to responsible
lending principles.
• The group invests in a centrally
coordinated community
programme. For more information
see pages 30 to 37.
well understood and has been subject to regular
regulatory review and scrutiny.
• Specialist in-house teams, external advisors and
established procedures are in place for dealing
with media issues.
• A proactive communication programme is targeted
at key opinion formers and is coordinated centrally.
community programme.
• Achieved an overall rating score of 99 out of a maximum possible of
100 in the FTSE4Good Index Series which measures the environmental,
social and governance ratings of listed companies worldwide.
Provident Financial plc Annual Report and Financial Statements 2014 95
Operational risk
The risk of loss resulting from IT systems failure.
• Vanquis Bank is reliant on third-party IT applications and systems providers: FDI for its core customer credit card platform and Newcastle Building Society
for its retail deposit platform.
• The repositioning of the home credit business relies heavily on the development and effective roll-out of technology, in particular mobile technology and apps.
• Moneybarn operates industry leading IT systems which are developed and maintained in-house.
Mitigation
Progress in 2014
• IT is managed in the businesses by experienced teams.
• There is significant experience of managing third-party IT arrangements within
the businesses.
• There are established disaster recovery procedures which are tested on a regular basis.
• Specialist project teams are used to manage change programmes.
• Well established change control and testing processes are established for new
business developments.
• Insurance policies are in place to cover eventualities such as business interruption,
loss of IT systems and crime.
• Rigorous selection processes are in place for third-party suppliers to ensure that they
are ‘best in class’.
Threats to agent safety make it unsafe to operate home collection.
• CCD’s development and roll-out of the smartphone collections app is
now at an advanced stage with over 95% of agents using the app to
conduct their rounds. CCD’s ‘Chip and Pin’ technology development
which will allow agents to accept electronic payments is at an advanced
stage. Tablet computers have also been introduced, providing its field
management with a mobile office which has freed up significant time
previously spent on office-based administration.
• The group’s IT systems are hosted by proven external specialist suppliers
and recovery arrangements have been extensively tested during 2014.
• Home credit agents are required to carry cash to issue credit and they receive cash as a result of their collections activities.
Mitigation
Progress in 2014
• Significant time and expenditure is invested in ensuring staff are safety conscious.
• The group continues to spend a significant amount of time and goes to
• Assistance is given to agents to ensure that they are safety aware.
• Induction sessions and regular updates are provided on safety awareness.
• Safety awareness weeks form part of the annual calendar.
• Safety incidents are monitored closely by management with follow-up actions taken.
• Periodic independent audits of health and safety policies and procedures are carried
out by the group’s insurers.
great lengths to promote and train staff on safety and provides assistance
to agents to ensure they remain safety aware.
• CCD’s development of ‘Chip and Pin’ technology will reduce the level
of cash carried by agents.
The risk of loss resulting from loss or abuse of confidential data or systems, including cyber risk and the risk that IT systems are compromised
leading to financial and/or reputational losses.
• There continues to be a heightened focus and emphasis on cyber risk management, coordinated by the UK government including the new
Cyber Hygiene standards.
• Vanquis Bank, CCD and Moneybarn utilise and store sensitive personal data as part of their day-to-day operations.
• There continues to be heightened focus and emphasis on data loss by the Information Commissioner’s Office (ICO).
Mitigation
• IT and physical security policies are in place.
• Dedicated resources are in place to support the management of information security.
• Reporting of security-related incidents to divisional risk committees.
• Specialist departments are in place in each business to prevent, detect and monitor fraud.
• There is regular fraud reporting to divisional boards and to the group audit committee.
• Hierarchical field management structure and weekly agent meetings ensure a strong
controls environment within home credit including periodic LMS training for agents and
employees on data privacy, as well as a number of other regulatory training modules.
Progress in 2014
• A programme of IT security upgrades within Vanquis Bank including
new firewalls, new network management tools and the migration to
a new payment processing firm.
• Vanquis Bank achieved compliance with PCI DSS version 2 in 2014.
• Processes surrounding physical security of data in home credit have
been further enhanced. Additional controls have been implemented
to manage physical data distribution supported by a training and
awareness programme.
• Responding to the increasing relevance of cyber and IT risk in CCD,
six IT managers have been added, along with 25 people in the IT change
team and 40 people in the development and testing team.
Loss of key management or reduction in staff morale impacts business performance.
• The risk of loss of key staff has increased following the group’s successful performance over recent years.
Mitigation
Progress in 2014
• Effective recruitment, retention and succession planning strategies are in place.
• Detailed benchmarking of Vanquis Bank management’s remuneration
• The group has competitive remuneration and incentive structures.
• Effective training and personal development plans are in place throughout the group.
against industry peers.
• Senior management turnover remained low through 2014.
• CCD held an off site event to explain the new direction of CCD, build
employee morale and encourage employee involvement in CCD’s future.
• CCD developed a new effective induction and continuous training regime
for its employees in 2014.
Provident Financial plc Annual Report and Financial Statements 2014Governance 96
Governance continued
Risks continued
Liquidity risk
The risk that the group will have insufficient liquid resources available to fulfil its operational plans and/or meet its financial obligations as they fall due.
Mitigation
Progress in 2014
• The model of ‘borrowing long and lending short’ results in a positive maturity mismatch,
which means the duration of the receivables book is significantly less than the average
duration of the group’s funding. This profile significantly reduces the liquidity risk for
the group.
• A board-approved policy is in place to maintain committed borrowing facilities which
provide funding headroom for at least the following 12 months, after assuming that
Vanquis Bank will fully fund its receivables book through retail deposits.
• The group’s strategy of maintaining committed facility headroom and diversifying funding
sources has resulted in a strong balance sheet position.
• Liquidity is managed by an experienced central treasury department.
• Vanquis Bank maintains a liquid assets buffer in line with the PRA’s liquidity guidelines.
• There is daily monitoring of liquid resources.
• The group has continued to make excellent progress in strengthening
its funding base in 2014.
• The group exercised its option in January 2015 to extend its £382.5m
syndicated bank facility by 12 months to May 2018.
• Retail deposits have increased from £435m to £580m during 2014,
representing 53% of Vanquis Bank’s receivables against a PRA
permitted level of 100%.
• Headroom on committed facilities of £112m as at 31 December 2014
which, together with the recent extension of the syndicated bank facility
and the retail deposits programme at Vanquis Bank, is sufficient to meet
projected growth and contractual maturities until May 2018.
• The group remains an investment grade credit, with a credit rating
of BBB with a negative outlook.
Financial risk
The risk that the group suffers a loss as a result of unexpected tax liabilities.
• Tax authorities are placing greater emphasis on taxation controls in assessing tax risk and the associated level of scrutiny placed on companies.
Mitigation
Progress in 2014
• The group has a board-approved tax strategy which is aligned with its mission and core
values and which has been shared with HMRC. The strategy sets out the group’s overall
approach to tax, including its tax governance framework, how tax risk management is
embedded within the group’s overall corporate governance structure and how the group
ensures it complies with the tax obligations in the territories in which it operates.
• The group continues to have advance discussions with HMRC in relation
to the various business developments impacting on the self employed
status of agents, including the contractual changes required as a result
of the transition to FCA regulation and the various strategic changes that
have taken place in the home credit business since 2013.
• Policies and procedures are in place which support the management of key tax risks, along
with documented systems, processes and controls to support the UK taxes which the group
pays and the preparation and submission of related tax returns. This includes policies and
procedures which seek to ensure that the agents engaged by the home credit business
maintain their self-employed status. Processes and controls supporting the calculation
of UK taxes and preparation of related returns are subject to annual internal audit review.
• The group is committed to building open and straightforward relationships with tax
authorities, including having a regular and constructive dialogue with HMRC. This regularly
includes advance discussion of transactions and keeping HMRC informed of key business
developments, particularly those that could potentially impact on self-employed status
of agents.
• An experienced in-house team, supported by tax-aware personnel in the businesses,
deals with all of the group’s tax matters. Advice is sought from external advisors on
material transactions and whenever the necessary expertise is not available in-house.
• With input and expertise from external advisors, and working alongside
the in-house team, due diligence was undertaken on Moneybarn, as well
as work on the tax aspects of the sale and purchase and on Moneybarn’s
conversion to IFRS post acquisition.
• Work has commenced on improving and enhancing the various systems
and processes in place to support Moneybarn’s tax returns and tax
compliance obligations.
• Due diligence processes were completed to ensure that the group can
comply with its obligations under the US Foreign Account Tax Compliance
Act and similar provisions, and that Vanquis Bank can identify and report
information about retail deposit account holders who are residents or
citizens of particular territories.
Pension risk
The risk that there may be insufficient assets to meet the liabilities of the group’s defined benefit pension scheme.
• The current economic environment results in increased volatility in equity markets and corporate bond yields.
• Improving mortality rates in the UK.
Mitigation
Progress in 2014
• The defined benefit pension scheme was substantially closed to new members from
• The group’s pension asset for accounting purposes stands at £56.0m
1 January 2003.
as at 31 December 2014 (2013: £29.2m).
• Cash balance arrangements are now in place within the defined benefit pension scheme
• The company and trustees agreed to revise the investment strategy of
to reduce the exposure to improving mortality rates and market volatility.
• The pension investment strategy aims to maintain an appropriate balance of assets
between equities and bonds.
• New employees since 2003 have been invited to join the group’s defined contribution
pension schemes which carry no investment or mortality risk for the group.
• The defined benefit pension scheme was amended in 2012 so that accrued pension
benefits are now linked to increases in the Consumer Price Index rather than future
salary increases. This reduces the future liabilities of the scheme.
the group’s defined benefit scheme by significantly reducing the holding
in equities to 20%, reducing the holding in corporate bonds to 20%
and increasing the holding in matching assets to 60% using leveraged
gilts to increase the extent of the liability matching to close to 100%.
This repositioning of investments has resulted in a de-risking of the
scheme by substantially reducing the inflation and interest rate risk.
Provident Financial plc Annual Report and Financial Statements 2014 97
Audit committee and auditor
“Integrity, quality and challenge
remain the key areas of focus for
the committee in our overriding
aim to protect shareholders’ interests.
Alison Halsey Audit committee chairman
”
Update on 2014 activities
During the year the committee continued to
monitor the integrity of the financial statements
of the group including, in particular, the
annual and half yearly reports and the interim
management statements.
Significant issues and areas
of judgement considered by
the audit committee
The following significant issues and areas of
judgement were considered by the committee
in relation to the 2014 Annual Report and
Financial Statements:
Impairment of receivables within
the Consumer Credit Division (CCD)
Receivables are impaired in CCD when the
cumulative amount of two or more contractual
weekly payments have been missed in the
previous 12 weeks. Impairment is calculated
using models which use historical payment
performance to generate the estimated amount
and timing of future cash flows from each
arrears stage.
Judgement is applied as to the appropriate point
at which receivables are impaired and whether
past payment performance provides a reasonable
guide as to the collectability of the current
receivables book. Accordingly, this is a primary
source of audit effort for the group’s external
auditor, Deloitte LLP (Deloitte).
In order to assess the appropriateness of the
judgements applied, management produce a
detailed report for both the audit committee
and the external auditor setting out: (i) the
assumptions underpinning the receivables
valuation; and (ii) a scenario analysis comparing
the receivables valuation with alternative
valuations based upon various forecasts of
future cash collections, including prior year
performance, current performance and
budget performance.
In assessing the adequacy of CCD’s impairment
provisions, the committee:
> Reviewed management’s report and challenged
management on the results and judgements
used in the test;
> Considered the work performed by Deloitte
on validating the data used in the testing
performed by management and their challenge
of the assumptions used;
> Considered the findings within the report in
light of current trading performance, expected
future performance and the potential benefit
of operational initiatives in the business; and
> Considered the work performed by the
internal audit function on information
technology controls and operational controls
such as cash collections, credit management
and arrears management.
Impairment of receivables at
Vanquis Bank and Moneybarn
Receivables are impaired in Vanquis
Bank and Moneybarn when one or more
contractual monthly payment has been
missed. The impairment provision is calculated
using models which use historical payment
performance to generate the estimated
amount and timing of future cash flows from
each arrears stage. Management update the
methodology monthly to ensure the assumptions
accurately take account of the current economic
environment, product mix and recent customer
payment performance.
Annual statement by the chairman of the audit committeeFollowing my appointment as chairman of the audit committee on 1 March 2014, I am delighted to be presenting the audit committee report to you as a separate report in accordance with the FRC’s Guidance and the Financial Reporting Laboratory’s ‘Reporting of Audit Committees’ guidance. Audit committeeMembers SecretaryAlison Halsey1 (Chairman) Ken Mullen Malcolm Le MayStuart SinclairRob AndersonAttendees by invitationManjit WolstenholmePeter CrookAndrew FisherGary Thompson (Group Financial Controller)David Mortlock (Head of Audit)Deloitte LLP (External auditor) 1 Appointed as Chairman on 1 March 2014.Provident Financial plc Annual Report and Financial Statements 2014Governance
98
Governance continued
Audit committee and auditor continued
Judgement is applied on whether past payment
performance is a good indication of how a
customer may pay in the future. Accordingly, this
is a primary source of focus for Deloitte during
the audit process.
In assessing the adequacy of Vanquis Bank’s
and Moneybarn’s impairment provisions,
the committee:
> Considered the work performed by Deloitte
on validating the data used and their challenge
of the assumptions used by management;
> Considered the findings in light of current
trading performance and expected
future performance;
> Considered the work performed by the internal
audit function on information technology
controls and operational controls such as cash
collections, credit management and arrears
management; and
> Considered the review performed by the
Vanquis Bank audit committee on the Vanquis
Bank impairment provisions.
Retirement benefit asset
The valuation of the retirement benefit asset is
dependent upon a series of assumptions. The key
assumptions are the discount rate, inflation rates
and mortality rates used to calculate the present
value of future liabilities.
Judgement is applied in formulating each of the
assumptions used in calculating the retirement
benefit asset. The committee reviewed the
advice of the company’s external actuary,
Towers Watson, who propose the appropriate
assumptions and calculate the valuation of
the retirement benefit asset. In addition, the
committee considered the work performed by
Deloitte and their views on the suitable ranges
of assumptions based on their experience.
Valuation of acquisition
intangible asset
The valuation of the broker relationship intangible
asset on the acquisition of Moneybarn has been
calculated based on the estimated cash flows
associated with the business generated from
Moneybarn’s broker relationships discounted
over their expected useful life.
Management apply judgement in: (i) deriving the
forecast cash flows from broker relationships
by extracting them from Moneybarn’s budget;
(ii) establishing the appropriate discount rate to
apply to forecast cash flows; and (iii) calculating
the estimated useful life of broker relationships
of 10 years.
In assessing the reasonableness of the valuation
of the acquisition intangible asset, the committee
considered a detailed paper produced by
management on the valuation methodology.
In addition, the committee also considered the
work performed by Deloitte and their views on
the appropriateness of the assumptions used
by management.
Taxation
The group provides for tax liabilities based on an
assessment of the probability of such liabilities
falling due. Judgement is applied to determine
the quantum of such liabilities and the probability
of them occurring. The committee considers
management’s assessment of the likelihood and
quantum of any potential liability and the views
and work performed by Deloitte in considering the
reasonableness of the assessment carried out.
Fair, balanced and understandable
A specific area of focus, discussion and oversight
for the committee throughout 2014 has been
the requirement to provide the board with an
assurance that the content of the Annual Report
and Financial Statements 2014, taken as a whole,
is fair, balanced and understandable and provides
the necessary information for shareholders to
assess the group’s position and performance,
business model and strategy.
In justifying this statement the committee
considered the robust process which operated
in creating the Annual Report and Financial
Statements in 2014 including:
> The full and effective disclosure by the divisions
of their customer and conduct risk and the
review undertaken by the risk advisory
committee and the committee;
> Input which is provided by senior management
from each division and the corporate function
and the process of review, evaluation and
verification to ensure balance, accuracy
and consistency;
> The review conducted by external advisors
appointed to advise on best practice;
> The regular review of the internal audit activity
reports which are presented at committee
meetings and the opportunity to meet the
external auditor without the executive directors
or members of the senior management team
being present;
> The meetings of the committee held to review
and consider the draft Annual Report and
Financial Statements in advance of the final
sign-off; and
> The final sign-off process by the board
of directors.
This assessment was underpinned by
the following:
> Key judgement papers prepared by
management covering impairment of
receivables across the group, but specifically
at CCD, the valuation of acquisition intangibles
and growing concern which were carefully
reviewed and challenged by the committee
with the assistance of the external auditor who
also fully analysed the papers as part of the
year-end process;
> Comprehensive guidance issued to all
contributors involved in the preparation of the
Annual Report and Financial Statements at
all levels;
> The fact that the risks reflected the issues
which were of concern to the committee;
> A verification process dealing with the factual
content of various aspects of the Annual Report
and Financial Statements;
> Comprehensive reviews undertaken at
different levels in the group that aim to ensure
consistency and overall balance; and
> The early discussion by the board which
> Comprehensive review by the senior
enabled it, and the committee, to provide input
into the overall messages and tone of the
Annual Report and Financial Statements;
management team.
Provident Financial plc Annual Report and Financial Statements 2014 Audit committee and auditor continued
Composition of the committee
The other members of the committee during
2014, Rob Anderson, Malcolm Le May and Stuart
Sinclair, all have a wide range of business and
financial experience which is evidenced by their
biographical summaries on pages 78 and 79.
Malcolm Le May and I joined the committee on
1 January 2014 and I took over chairmanship
of the committee on 1 March 2014. Both Malcolm
and I have considerable recent and relevant
business and financial experience as evidenced
by our biographical details set out on pages
78 and 79.
Internal audit
The group operates an in-house internal audit
function which is managed by the group
Head of Audit with specialist services provided
by third-party consultants where necessary.
The internal audit function also reports to the
committee which helps to ensure the function’s
independence from group management.
The committee reviews regular reports on the
activity of this function and I also meet separately
with the Head of Audit on a quarterly basis.
External auditor
The committee considers the reappointment
of the external auditor, including the rotation of
the audit partner, annually. This also includes
an assessment of the external auditor’s
independence and an assessment of the
performance in the previous year, taking into
account detailed feedback from directors and
senior management across the group.
The external auditor is required to rotate the
audit partner responsible for the group audit
every five years. The current lead audit partner
has been in place for three years. The group
carried out a rigorous audit tender in June 2012
and as a result of the tender, Deloitte replaced
PricewaterhouseCoopers LLP as the group’s
external auditor.
The committee will continue to assess the
performance of the external auditor on an ongoing
basis to ensure that they are satisfied with the
quality of the services provided. In accordance
with the Code, the external audit contract will
be put out to tender at least every 10 years.
99
In accordance with best practice and guidance
issued by the FRC, the committee will continue
to review the qualification, expertise, resources
and independence of the external auditor and the
effectiveness of the audit process during the next
financial year.
The committee has adopted a policy on the
appointment of staff from the external auditor
to positions within the various group finance
departments. It grades appointments into four
categories and sets out the approvals required.
Neither a partner of the audit firm who has acted
as engagement partner, the quality review partner,
other key audit partners or partners in the chain
of command, nor a senior member of the audit
engagement team, may be employed as Group
Finance Director, Group Financial Controller or
a divisional Finance Director.
At its February and July meetings, the committee
had a separate session with the external auditor
without any executive director or employee of
the company or group being present. This gives
members of the committee the opportunity to
raise any issues, including any issues on the
interim and final results of the group, directly
with the external auditor.
Non-audit work
The company has a formal policy on the use
of the auditor for non-audit work. This policy is
reviewed annually.
The award of non-audit work to the auditor
is managed in order to ensure that the auditor
is able to conduct an independent audit and
is perceived to be independent by the group’s
shareholders and other stakeholders.
The performance of non-audit work by the
external auditor is monitored and work is
awarded only when, by virtue of their knowledge,
skills or experience, the auditor is clearly to be
preferred over alternative suppliers.
The group maintains an active relationship with at
least two other professional advisors. The nature
and cost of all non-audit work awarded to the
group’s external auditor for the period since the
last meeting and for the year to date is reported
at each meeting of the committee, together with
an explanation as to why the auditor was the
preferred supplier.
The role of the committeeGeneralThe primary function of the committee is to assist the board in fulfilling its oversight responsibilities by reviewing the financial statements of the group and other financial information before publication. In addition, the committee also reviews: >The systems of internal financial, operational and compliance controls on a continuing basis, and the arrangements and procedures in place to deal with whistleblowing, fraud and bribery; and >The accounting and financial reporting processes, along with the roles and effectiveness of both the internal audit function and the external auditor. The ultimate responsibility for reviewing and approving the Annual Report and Financial Statements remains with the board.Specific The committee is also specifically responsible for: >All matters relating to the appointment and reappointment of the external auditor, the auditor’s remuneration and the policy on the supply of non-audit services to the company by the external auditor; >Approving the internal audit plan annually; >Keeping under review the effectiveness of the group’s system of internal controls by considering internal audit activity reports at each meeting and reporting to the board on a regular basis. The committee also reviewed and approved the statement set out on page 91 concerning internal controls and risk management; and >Reviewing and approving the register of benefits offered to directors in accordance with the company’s code of practice on benefits.Provident Financial plc Annual Report and Financial Statements 2014Governance 100
Governance continued
Audit committee and auditor continued
Fees paid to Deloitte for non-audit work during
the year amounted to £823,000 (2013: £93,000)
comprising £60,000 for the group interim review,
£49,000 for the review of profits for regulatory
reporting purposes, £568,000 for transactional
due diligence advice and £146,000 for agreed
upon procedures work throughout the year.
Effectiveness
The committee formally considered its
effectiveness in 2014. This was undertaken as
part of the board evaluation. Each director was
able to comment and rate various aspects of
the committee’s role by responding to a series
of questions relating to the performance of the
committee contained in the internal board and
committee evaluation questionnaire. On the basis
of the evaluation undertaken, the overall view
was that the committee was operating efficiently
and effectively.
Alison Halsey
Chairman of the audit committee
24 February 2015
No information technology, remuneration,
recruitment, valuation or general consultancy
work may be awarded to the auditor without my
prior written approval and such approval is only
given in exceptional circumstances. I am required
to approve in advance any single award of non-
audit work with an aggregate cost of £250,000 or
more. The auditor may not perform internal audit
work. External specialist resource for the internal
audit function is provided by KPMG LLP.
Where Deloitte has been used in 2014 for
non-audit work under the terms of this
policy, prior approval was obtained from the
committee. On each occasion the committee
sought confirmation that Deloitte’s objectivity
and independence would be safeguarded.
A paper requesting approval was presented to
the committee which set out details of Deloitte’s
internal controls which have been designed
to ensure independence and objectivity and a
confirmation that Deloitte had the knowledge,
skills and experience to carry out the work in
preference to any other supplier.
During the year, the committee regularly
considered a schedule of audit and non-audit
work carried out by Deloitte. This fell broadly
into four categories; fees payable for the audit of
the parent company and consolidated financial
statements; audit of the company’s subsidiaries
pursuant to legislation; other services pursuant
to legislation; and tax services.
Audit committee key items in 2014 FEB • Review of CCD receivables valuation. • Review and approval of the going concern paper which confirmed it was appropriate to prepare the Annual Report and Financial Statements for year ended 31 December 2013 on a going concern basis. • Review of full year results. • Discussion with the external auditor without any executive director or employee present. • Review of statement on Internal Controls. • Independence of external auditor discussed. • Recommendation to the board regarding reappointment of external auditor. • Consideration of a new reporting structure for Vanquis Bank and group internal audit function.JUL • Review of CCD receivables valuation. • Review and approval of the going concern paper which confirmed it was appropriate to prepare the interim results for the six months ended 30 June 2014 on a going concern basis. • Review of interim results. • Discussion with the external auditor without any executive director or employee present. • Review of effectiveness of external auditor.OCT • Review of the external auditor’s planning report for forthcoming year end. • Consideration of a report on the effectiveness of the controls in CCD’s central collections department. • Review and approval of the 2015 internal audit plan. • Review and approval of the organisation and reporting structure for the group and Vanquis Bank internal audit functions.DEC • Proposed internal audit plan for 2015 approved. • Review of the annual report on external whistleblowing activity. • Review of register of benefits received by directors. • Review of performance and effectiveness of the committee. • Draft Internal Audit Charter agreed in principle. • External review of the internal audit function approved and agreed. • Review of CCD central collections department strategy.Provident Financial plc Annual Report and Financial Statements 2014 101
Nomination committee
Update on 2014 activities
Details of the committees’ activities during the
year are set out in the calendar on page 102.
Diversity
The group recognises the importance of diversity,
including gender diversity, at all levels of the
group, as well as at board level. The nomination
committee and the group as a whole is committed
to increasing diversity across our operations
and supporting the development and promotion
of talented individuals, regardless of gender,
nationality and ethnic background. The board is
supportive of the recommendations contained
in Lord Davies’ report ‘Women on Boards’ for
female board representation to increase to
25% by the end of 2015 and is compliant with
this recommendation.
“Succession planning has
been recognised as a key
priority for 2015 as the
group continues to grow
and expand, particularly
following its recent
acquisition.
Manjit Wolstenholme Chairman
Role and responsibilities
> Regularly reviews the structure, size and
composition (including skills, knowledge,
experience and diversity) of the board,
and makes recommendations for
change to the board to ensure it remains
appropriately refreshed;
> Gives full consideration to the succession
planning for directors and the senior
management team which ensures
that succession is managed smoothly
and effectively;
”
> Keeps under review the leadership needs of the
organisation, both executive and non-executive,
with a view to ensuring the continued ability
of the organisation to compete effectively in
the marketplace;
> Identification and nomination of candidates for
approval by the board to fill board vacancies;
> Evaluation of the balance of skills, knowledge,
experience and diversity on the board before
any appointments and the preparation of a
description of the role and the capabilities required
for a particular appointment. The committee
considers candidates on merit and against
objective criteria with due regard to the benefits
of diversity, including gender; and
> Reviews the results of the board performance
evaluation process.
The nomination committee comprises all of the non-executive directors and is chaired by Manjit Wolstenholme, the Chairman. The Chief Executive attends all meetings by invitation. The committee meets at least once a year.The committee intends to develop its succession planning process which will be extended to include an insight into the opportunities for certain high potential individuals. The committee has commissioned a report with a view to creating a more extensive succession plan which is fit for purpose.Nomination committee Members SecretaryManjit Wolstenholme (Chairman) Ken MullenAlison HalseyMalcolm Le MayRob AndersonStuart SinclairAttendees by invitationPeter Crook1 1 Ceased to be a member from 1 January 2014.Provident Financial plc Annual Report and Financial Statements 2014Governance
102
Governance continued
2
2
1
1
Nomination committee continued
The board has had 29% female representation
since last year’s annual report. The board uses
the nomination committee to ensure that its
composition is diverse, particularly in terms
of different backgrounds and experience as
this brings a variety of perspectives, skills, and
knowledge to the board. For more information
about the board’s composition, see page 82.
We remain committed to at least maintaining
this level of female representation in the
medium term, whilst ensuring that diversity in
its broadest sense remains a key feature of the
board. The nomination committee will continue
to recommend appointments to the board
based on merit. The board remains committed
to strengthening the pipeline of senior female
executives within the business and has taken
steps to ensure that there are no barriers to
women succeeding at the highest levels within
the group.
The group believes that diversity amongst
directors contributes towards a high performing
and effective board. The board works hard to
ensure that it is able to recruit directors from
different backgrounds, with diverse experience,
perspectives, personalities, skills and knowledge.
Last year, we reported that the company was
committed to achieving a target of 25% women
within the wider senior management group by
2015. We have made good progress in terms
of gender diversity within the wider senior
management group and we are happy to report
that as at 31 December 2014, 30% of the group’s
senior management are female.
The board, through the nomination committee,
is committed to increasing diversity across
the group. Despite the progress that has been
made, the committee is conscious that, whilst
the group board has 29% female representation,
the divisional boards are considerably lacking in
female representation. 20% of the CCD board are
female, whilst no females sit on the Vanquis Bank
or Moneybarn boards. The committee intends to
look at this over the course of 2015 with a view
to increasing female representation, where it
can, whilst continuing to consider appointments
on merit.
In support of our policy on diversity, we intend
to report annually on the following objectives
and initiatives that promote gender and other
forms of diversity amongst our board and
senior management:
> We will consider candidates for appointment
as non-executive directors from a wider pool,
including those with little or no listed company
board experience;
> We will only engage executive search firms
who have signed up to the voluntary Code
of Conduct on gender diversity and best
practice; and
> We will ensure the topic of diversity is raised
during every board evaluation.
Succession planning
As discussed above, the group remains
committed to maintaining and improving, where
necessary, its level of female representation,
whilst ensuring that the right skills and experience
are being sought. The committee intends to
support the group’s diversity policy within its
succession planning by strengthening its senior
female management within the business over
the course of 2015.
The nomination committee will continue its work
of ensuring there are appropriate succession
plans in place and a mix of skills amongst both
the executive and non-executive directors.
The committee keeps under review a detailed
succession plan for the executive directors,
the Chairman and the persons discharging
managerial responsibility. Below board level,
succession planning safeguards the pipeline
of talented individuals within the group who
are capable and have potential to succeed the
executive directors and other members of the
senior management team in the short, medium
and long term.
The Chief Executive has been tasked with
preparing a report on the future of the group,
reflecting its new composition, for review by the
board in February 2015 and by the committee in
May 2015. This report will identify the potential
successors for senior management positions,
taking into account gender, the talent pool across
the group and possible recruitment.
Group nationalityGeographical mix of directors and senior management across the group and divisions.The board1 Male 71%2 Female 29%Overall senior management1 Male 70%2 Female 30%Nomination committee key items in 20142014 • Reviewed the medium term succession plan provided by an external evaluator as part of the 2013 external board evaluation; • Identified and discussed potential successors for executive directors and divisional managing directors; • Tasked the Chief Executive with preparing a report on the future of the group; and • Recognised that succession planning in 2015 is a key priority for the development of the group.Provident Financial plc Annual Report and Financial Statements 2014 Nomination committee continued
103
In line with the Code, an executive director will be
permitted to hold one non-executive directorship
in a FTSE 100 company (and to retain the
fees from that appointment) provided that the
board considers that this will not adversely
affect their executive responsibilities. The board
would not permit an executive director to take
on the chairmanship of a FTSE 100 company.
Any request for an exception to this policy is
considered on its merits.
Effectiveness
At its meeting in February 2015 the committee
formally considered its effectiveness in 2014, and
on the basis of the internal board and committee
evaluation undertaken, the overall view was that
the committee was working effectively.
Manjit Wolstenholme
Chairman of the nomination committee
24 February 2015
A programme of work has also been developed
for 2015 which will establish talent management
and succession planning on a group-wide basis.
The key objectives of the programme are:
> The creation of a talent map of all divisions
and the corporate office;
> A talent review of potential candidates
for succession purposes; and
> A talent assessment of those
potential candidates.
Board composition
As the board continues to work towards
securing FCA authorisation for each division, the
committee will ensure that the board composition
retains an appropriately balanced range of skills,
experience and technical ability so that the group
is well placed to achieve its objectives and longer
term strategy in the new regulatory environment.
During the year, the composition of the
committees was refreshed and details are
contained on page 85.
Policy on board appointments
The board’s policy on other directorships is
designed to ensure that all directors remain able
to discharge their responsibilities to the company.
The letters of appointment of the non-executive
directors state that any proposed appointment
to the board of another company will require
the prior approval of the board. The company’s
policy is that a non-executive director should
have sufficient time to fulfil their duties to the
company, including, where appropriate, chairing
a committee.
The board will consider all requests for
permission for other directorships carefully,
subject to the following principles:
> A non-executive director would not be
expected to hold more than four other material
non-executive directorships; and
> If a non-executive director holds an executive
role in a FTSE 350 company, they would not be
expected to hold more than two other material
non-executive directorships.
Provident Financial plc Annual Report and Financial Statements 2014Governance 104
Governance continued
Directors’ report
was provided and no payments pursuant to these
provisions were made in 2014 or at any time
up to 24 February 2015.
There were no other qualifying indemnities in
place during this period.
The company maintains Directors’ and Officers’
Liability insurance which gives appropriate cover
for any legal action brought against its directors.
Information required by Listing
Rule 9.8.4R
Share capital
During the year, the ordinary share capital in issue
increased by 6,797,827 shares to 146,413,447
shares at 31 December 2014. Details are set out
in note 24 to the financial statements.
The company’s issued ordinary share capital
comprises a single class of ordinary share.
Details of movements in issued share capital can
be found in note 24 to the financial statements.
The rights attached to the ordinary shares are set
out in the Articles. Each share carries the right
to one vote at general meetings of the company.
During the period, 6,797,827 ordinary shares in
the company were issued as follows:
> 202,689 shares in relation to the Provident
Financial Performance Share Plan 2013 at
a price of 1899p;
> 413,853 shares in relation to the Provident
Financial Long Term Incentive Scheme 2006
at prices of 1899p and 2139p;
> 269,955 shares in relation to the employee
share option schemes at prices ranging
between 491p and 1305p; and
> 5,911,330 shares were placed at a price
of £20.30 per placing share in relation to
the acquisition of the Moneybarn group
of companies.
Rights of ordinary shares
All of the company’s issued ordinary shares are
fully paid up and rank equally in all respects and
there are no special rights with regard to control
of the company. The rights attached to them, in
addition to those conferred on their holders by law,
are set out in the Articles. There are no restrictions
on the transfer of ordinary shares or on the
exercise of voting rights attached to them, except:
Directors
The membership of the board and biographical
details of the directors are given on pages 78
and 79 and are incorporated into this report
by reference.
All directors served throughout 2014 and up
to the date of signing of the financial statements.
There were no changes in directors.
During the year, no director had a material interest
in any contract of significance to which the
company or a subsidiary undertaking was a party.
Appointment and replacement of
directors
Rules about the appointment and replacement of
directors are set out in the Articles. In accordance
with the recommendations of the Code, all
directors will offer themselves for reappointment
at the 2015 AGM. The directors’ powers are
conferred on them by UK legislation and by
the Articles. Changes to the Articles must be
approved by shareholders passing a special
resolution and must comply with the provisions
of the Companies Act 2006 and the FCA’s
Disclosure and Transparency Rules.
Directors’ indemnities
The Articles permit it to indemnify directors of
the company (or of any associated company) in
accordance with section 234 of the Companies
Act 2006. The company may fund expenditure
incurred by directors in defending proceedings
against them.
If such funding is by means of a loan, the director
must repay the loan to the company if they are
convicted in any criminal proceedings or judgment
is given against them in any civil proceedings.
The company may indemnify any director of the
company or of any associated company against
any liability.
However, the company may not provide an
indemnity against: (i) any liability incurred by
the director to the company or to any associated
company; (ii) any liability incurred by the director
to pay a criminal or regulatory penalty; (iii) any
liability incurred by the director in defending
criminal proceedings in which they are convicted;
(iv) in defending any civil proceedings brought
by the company (or an associated company)
in which judgment is given against them; or
(v) in connection with certain court applications
under the Companies Act 2006. No indemnity
IntroductionIn accordance with section 415 of the Companies Act 2006, the directors present their report for the year ended 31 December 2014. The following provisions, which the directors are required to report on in the Directors’ Report, have been included in the Strategic Report: >Future business developments (throughout the Strategic Report, in particular on pages 40 to 67); >Greenhouse gas emissions (pages 36 and 37); >Risk management (pages 93 to 96).Both the Strategic Report and the Directors’ Report have been prepared and presented in accordance with and in reliance upon applicable English company law. The liabilities of the directors in connection with both the Directors’ Report and the Strategic Report shall be subject to the limitations and restrictions provided by such law. Other information to be disclosed in the Directors’ Report is given in this section. Provident Financial plc Annual Report and Financial Statements 2014 Directors’ report
105
Share schemes are a long-established and
successful part of our total reward package,
encouraging and supporting employee share
ownership. The company operates two
savings-related share option schemes aimed at
encouraging employees’ involvement and interest
in the financial performance and success of the
group through share ownership.
In particular, around 1,246 employees were
participating in the company’s save as you earn
schemes as at 31 December 2014 (2013: 1,304).
The company’s SIP offers employees the
opportunity to further invest in the company and
to benefit from the company’s offer to match that
investment on the basis of one share for every
four shares purchased. 285 employees were
investing in company shares under the SIP
as at 31 December 2014.
Executive share incentive schemes
Options are outstanding under the Provident
Financial Executive Share Option Scheme 2006
(the ESOS). Awards are also outstanding under
the Provident Financial Long Term Incentive
Scheme 2006 (the LTIS) and both the Provident
Financial Performance Share Plan (the PSP) and
the Provident Financial Performance Share Plan
(2013) (the 2013 PSP).
As set out on page 118 of the directors’
remuneration report, the remuneration committee
did not grant any options during the year under
either the ESOS or the LTIS.
Provident Financial plc 2007
Employee Benefit Trust (the EBT)
The EBT, a discretionary trust for the benefit
of executive directors and employees, was
established on 11 September 2007. The trustee,
Kleinwort Benson (Jersey) Trustees Limited, is not
a subsidiary of the company. The EBT operates
in conjunction with the LTIS, and the 2013 PSP
and has previously purchased shares in the
market for the purpose of the LTIS. Following the
passing of a resolution at the 2008 AGM, the EBT
is able to subscribe for the issue of new shares.
The number of shares held by the EBT at any
time, when added to the number of shares held
by any other trust established by the company for
the benefit of employees, will not exceed 5% of
the issued share capital of the company. The EBT
is funded by loans from the company which are
then used to acquire, either via market purchase
(1) where the company has exercised its right to
suspend their voting rights or to prohibit their
transfer following the omission by their holder
or any person interested in them to provide the
company with information requested by it in
accordance with Part 22 of the Companies
Act 2006; or
(2) where their holder is precluded from exercising
voting rights by the FCA’s Listing Rules or the
City Code on Takeovers and Mergers.
Substantial shareholdings
In accordance with the Disclosure and
Transparency Rules DTR 5, the company as at
20 February 2015 (being the latest practicable
date before publication of this report), has been
notified of the following disclosable interests in
its issued ordinary shares:
Invesco Limited
M&G Investment
Management Limited
Woodford Investment
Management Limited (UK)
BlackRock Investment
Management Limited
Marathon Asset
Management (UK)
Tweedy Browne Company
LLC (US)
Cantillon Capital
Management LLC
Interests as at 31 December 2014 were
as follows:
Invesco Limited
M&G Investment
Management Limited (UK)
Woodford Investment
Management Limited (UK)
BlackRock Investment
Management Limited
Marathon Asset
Management (UK)
Tweedy Browne Company
LLC (US)
Cantillon Capital
Management LLC
17.90%
6.23%
5.80%
5.21%
4.93%
3.87%
3.69%
18.07%
6.24%
5.75%
5.19%
4.87%
4.14%
3.80%
Note: all interests disclosed to the company in
accordance with DTR 5 that have occurred since
20 February 2015 can be found on the group’s
website: www.providentfinancial.com.
Dividend waiver
Information on dividend waivers currently in place
can be found on page 125.
Powers of the directors
Subject to the Articles, UK legislation and any
directions given by special resolution, the business
of the company is managed by the board. The
directors currently have powers both in relation
to the issuing and buying back of the company’s
shares, which were granted by shareholders at
the AGM on 8 May 2014. The board is seeking
renewal of these powers at the 2015 AGM.
All employee share schemes
The current schemes for employees resident in
the UK are the Provident Financial plc Employee
Savings-Related Share Option Scheme 2003, the
Provident Financial Savings Related Share Option
Scheme 2013 and the Provident Financial Share
Incentive Plan (SIP).
Directors’ interests in shares The beneficial interests of the directors in the issued share capital of the company were as follows:Number of shares31 December 201431 December 2013Peter Crook1629,669708,897 Andrew Fisher1411,870462,710 Rob Anderson4,0473,897Manjit Wolstenholme5,6635,663Malcolm Le May––Stuart Sinclair––Alison Halsey––1 These interests include conditional share awards granted under the LTIS, awards under the PSP and 2013 PSP and shares purchased under the SIP as detailed on pages 118 to 125 of the Annual Report on Remuneration. No director had any non-beneficial interests at 31 December 2014 or at any time up to 24 February 2015.There were no changes in the beneficial or non-beneficial interests of the directors between 1 January 2015 and 24 February 2015.Provident Financial plc Annual Report and Financial Statements 2014Governance 106
Governance continued
Directors’ report continued
or subscription, ordinary shares to satisfy
conditional share awards granted under the LTIS,
and awards granted under the 2013 PSP. For the
purpose of the financial statements, the EBT is
consolidated into the company and group. As a
consequence, the loans are eliminated and the
cost of the shares acquired is deducted from
equity as set out in note 26 on page 183 of the
financial statements.
Trustees (Performance Share Plan) Limited, is a
subsidiary of the company. The number of shares
held by the PF Trust at any time, when added
to the number of shares held by any other trust
established by the company for the benefit of
employees, will not exceed 5% of the issued share
capital of the company. As at 31 December 2014,
the PF Trust had no interest in any shares in the
company (2013: nil).
The PF Trust has previously subscribed for
shares for the purpose of satisfying awards
granted under the PSP. When the PF Trust
subscribed for shares, it was funded by loans
from the company which were then used to
acquire ordinary shares for the purposes of
satisfying awards granted under the PSP. For the
purposes of the financial statements, the PF
Trust is consolidated into the company and group.
As a consequence, the loans are eliminated
and the cost of the shares acquired is deducted
from equity. As the PSP expired in July 2012,
no further awards were made under the PSP
and no further loans to the PF Trust were made
during 2014.
The PF Trust operated in conjunction with
the PSP and the legal and beneficial interest
in the Basic Award and the Matching Award
was transferred from the PF Trust to executive
directors and employees when awards were
made but was subject to certain forfeiture
provisions. In addition, full vesting of the Matching
Award was subject to the achievement of the
performance targets set out on pages 123 and
124 of the Annual Report on Remuneration.
In relation to its operation in conjunction with
the LTIS, the EBT transfers the beneficial interest
in the shares to the executive directors and
employees when conditional share awards
are made. In relation to the 2013 PSP, the legal
and beneficial interest in the Basic Award is
transferred to the executive directors and other
participants when the awards are made but is
subject to certain forfeiture conditions. However,
only the beneficial interest in the Matching Award
is transferred when the award is made and the
legal interest is transferred to the participant on
the vesting of the Matching Award. Full vesting of
awards granted under the LTIS and the Matching
Award granted under the 2013 PSP is subject
to the achievement of the performance targets
set out on pages 122 to 124 of the directors’
remuneration report.
In April 2014, the EBT subscribed for the issue
of 395,037 new shares in order to satisfy
the awards made under the LTIS on 8 April
2014. In September 2014, the EBT subscribed
for the issue of 18,816 new shares in order
to satisfy further awards under the LTIS on
1 September 2014.
In addition to this, the EBT in April 2014
subscribed for the issue of 202,689 shares in
order to satisfy awards made under the 2013
PSP on 8 April 2014.
As at 31 December 2014, the EBT held the
non-beneficial interest in 2,535,307 shares in
the company (2013: 2,809,850). The EBT may
exercise or refrain from exercising any voting
rights in its absolute discretion and is not obliged
to exercise such voting rights in a manner
requested by the employee beneficiaries.
Provident Financial Employee
Benefit Trust (the PF Trust)
The PF Trust, a discretionary trust for the benefit
of executive directors and employees, was
established in 2003 and operated in conjunction
with the PSP. The trustee, Provident Financial
Pensions
The group operates three pension schemes.
Employee involvement in the group defined
benefit pension scheme is achieved by the
appointment of member-nominated trustees
and by regular newsletters and communications
from the trustees to members. In addition,
there is a website dedicated to pension matters.
The trustees manage the assets of the defined
benefit pension scheme, which are held under
trust separately from the assets of the group.
Each trustee is encouraged to undertake training
and regular training sessions on topical issues
are carried out at meetings of the trustees by
the trustees’ advisors. The training schedule
is based on The Pension Regulator’s Trustee
Knowledge and Understanding requirements
and the sessions are tailored to current topical
issues or to address any skill gaps. The trustees
have a business plan and, at the start of each
year, review performance against the plan and
objectives from the previous year. In addition, they
agree objectives and a budget for the current year.
The trustees have a risk register and associated
action plan and a conflicts of interest policy, both
of which are reviewed at least annually.
In January 2014, three new member-nominated
trustees were appointed, bringing the total to four.
In addition, there are three trustees appointed by
the company.
The group also operates a group personal
pension plan for employees who joined the group
from 1 January 2003. Employees in this plan
have access to dedicated websites which provide
information on their funds and general information
about the plan.
In October 2013, the group auto-enrolled all
eligible staff into a new scheme designed for
auto-enrolment.
In January 2015, the trustees implemented a
new investment strategy with the agreement of
the company, the object of which was to reduce
the risk that the assets would be insufficient in
the future to meet the liabilities of the scheme.
The de-risking was completed on
9 February 2015.
In 2011, the company established an Unfunded
Unapproved Retirement Benefits Scheme
(UURBS), for the benefit of those employees
who were affected by the HMRC reduced annual
allowance which applies to registered pension
schemes and was introduced in October 2010.
Profit and dividendsThe profit for the financial year, before taxation and exceptional items, amounts to £234.4m (2013: £196.1m). The directors have declared dividends as follows:Ordinary shares(p) per sharePaid interim dividend34.1p per share (2013: 31.0p per share)Proposed final dividend63.9p per share (2013: 54.0p per share)Total ordinary dividend98.0p per share (2013: 85.0p per share)The final dividend will be paid on 19 June 2015 to shareholders whose names are on the register of members at the close of business on 22 May 2015.Provident Financial plc Annual Report and Financial Statements 2014 Directors’ report continued
107
The UURBS offers an alternative to a cash
payment in lieu of a pension benefit over the
annual allowance.
Health and safety
Health and safety standards and benchmarks
have been established in the divisions and the
performance of the divisions in meeting these
standards is closely monitored by the board.
Anti-bribery and corruption
The corporate policies were updated in 2011
to reflect the introduction of the Bribery Act in
July 2011 and a corporate hospitality register
was established using a risk-based approach.
Although the risks for the group arising from
the Bribery Act continue to be assessed as
low, the divisions are, nevertheless, required
to undergo appropriate training and instruction
to ensure that they have effective anti-bribery
and corruption policies and procedures in place.
Compliance is regularly monitored by the risk
advisory committee and is subject to periodic
review by the group internal audit function.
Overseas branches
The group has overseas branches in the
Republic of Ireland and Poland.
Important events since the
end of the financial year
(31 December 2014)
The group’s syndicated bank facility of £382.5m
was extended to May 2018 in accordance
with a provision in the facility in January 2015.
Further information can be found on page 71
of the Strategic Report.
On 24 February 2015, the group announced its
decision to withdraw from the pilot credit card
operation in Poland as the timeframe required to
develop a business of sufficient scale to achieve
the group’s target returns is too long and therefore
is not the best use of the group’s capital.
Corporate governance statement
The group’s corporate governance report is
set out on pages 76 to 108. The group has
complied with the provisions of the UK Corporate
Governance Code published in September 2012
(the Code) throughout 2014.
Financial instruments
Details of the financial risk management objectives
and policies of the group and the exposure of the
group to credit risk, liquidity risk, interest rate risk
and foreign exchange rate risk are included on
pages 142 to 146 of the financial statements.
Significant agreements
There are no agreements between any group
company and any of its employees or any
director of any group company which provide
for compensation to be paid to an employee or
a director for termination of employment or for
loss of office as a consequence of a takeover
of the company.
Employee involvementThe group is committed to employee involvement in each of its divisions. Employees are kept well informed of the performance and strategy of the group through weekly huddles or monthly ‘town hall’ style meetings, personal briefings and through an increasing use of modern technology. The divisions now use social network sites such as ‘Yammer’ for employee communication and discussions, intranet discussion boards, blogs by employees and managing directors and there is now a monthly podcast called the BIG Conversation within CCD.The group consults with employees regularly, including through employee forums, trade unions and employee surveys, so that their views can be taken into account when making decisions that are likely to affect their interests. The group also provides a wellbeing programme within each division. CCD recently opened a fitness and wellbeing centre at the group’s head office. These are designed to promote physical and mental health across the business. The group also has a number of community programmes in place. Further detail of this is set out on pages 30 to 37 of the Strategic Report. Employees are also able to share in the group’s results through various share schemes as set out on page 105 of this report.TrainingThe company is fully committed to encouraging employees at all levels to study for relevant educational qualifications and to training employees at all levels in the group. In particular, the company has initiated a series of talent and development initiatives as part of its investment in the career progression of its employees. The company is authorised by the Solicitors Regulation Authority and the Institute of Chartered Accountants of England and Wales to issue training contracts to employees wishing to qualify as solicitors or chartered accountants, respectively. Equal opportunitiesThe group is committed to employment policies, which follow best practice, based on equal opportunities for all employees, irrespective of gender, pregnancy, race, colour, nationality, ethnic or national origin, disability, sexual orientation, age, marital or civil partner status, gender reassignment or religion or belief. The group gives full and fair consideration to applications for employment from disabled persons, having regard to their particular aptitudes and abilities. Appropriate arrangements are made for the continued employment and training, career development and promotion of disabled persons employed by the group. If members of staff become disabled, every effort is made by the group to ensure their continued employment, either in the same or an alternative position, with appropriate retraining being given if necessary. Provident Financial plc Annual Report and Financial Statements 2014Governance 108
Governance continued
Directors’ report continued
There are no significant agreements to which
the company is a party that take effect, alter or
terminate upon a change of control following a
takeover bid for the company.
Directors’ responsibilities in
relation to the financial statements
The following statement, which should be read in
conjunction with the independent auditor’s report
on pages 187 to 192 is made to distinguish for
shareholders the respective responsibilities of
the directors and of the auditor in relation to the
financial statements.
The directors are responsible for preparing the
annual report, the directors’ remuneration report
and the financial statements in accordance with
applicable law and regulations.
The Companies Act 2006 requires the directors
to prepare financial statements for each financial
year. Under this Act, the directors have prepared
the group and company financial statements in
accordance with International Financial Reporting
Standards (IFRS) as adopted by the European
Union. Under this Act, the directors must not
approve the financial statements unless they are
satisfied that they give a true and fair view of the
state of affairs of the group and company and of
the profit or loss of the group for that period.
In preparing these financial statements, the
directors have:
> Selected suitable accounting policies and
applied them consistently;
> Made judgements and accounting estimates
that are reasonable and prudent;
> Complied with IFRS as adopted by the
European Union, subject to any material
departures disclosed and explained in the
financial statements; and
> Prepared the financial statements on a going
concern basis.
The directors have also considered the review
undertaken and the report provided by the audit
committee and are satisfied that the Annual
Report and Financial Statements 2014, taken as
a whole, are fair, balanced and understandable
and provides the necessary information for
shareholders to assess the company’s position
and performance, business model and strategy.
The directors have accepted the audit committee
report on the basis of the review undertaken by
it as set out in page 98 of the report.
The directors are also required by the FCA’s
Disclosure and Transparency Rules (DTR) to
include a management report containing a fair
review of the business of the group and the
company and a description of the principal risks
and uncertainties facing the group and company.
The Directors’ Report and the Strategic Report
constitute the management report for the
purposes of DTR 4.1.5R and DTR 4.1.8R.
The directors are responsible for keeping proper
accounting records that are sufficient to:
> Show and explain the company’s transactions;
> Disclose with reasonable accuracy at any
time the financial position of the company
and group; and
> Enable them to ensure that the financial
statements and the directors’ remuneration
report comply with the Companies Act 2006
and as regards the group financial statements,
Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of
the company and the group and hence taking
reasonable steps for the prevention and
detection of fraud and other irregularities.
The Annual Report and Financial Statements
2014 will be published on the group’s website in
addition to the normal paper version. The directors
are responsible for the maintenance and integrity
of the company’s website. Legislation in the
United Kingdom governing the preparation and
dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement
Each of the directors, listed below, confirms that,
to the best of their knowledge, the group financial
statements, prepared in accordance with IFRS
as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit
of the group, the company and the undertakings
included in the consolidation taken as a whole and
that the Strategic Report contained in this Annual
Report and Financial Statements 2014 includes a
fair review of the development and performance
of the business and the position of the company
and group, and a description of the principal risks
and uncertainties it faces.
Manjit Wolstenholme
Chairman
Malcolm Le May
Senior Independent Director
Alison Halsey
Non-executive director
Stuart Sinclair
Non-executive director
Rob Anderson
Non-executive director
Peter Crook
Chief Executive
Andrew Fisher
Finance Director
Disclosure of information to auditor
In accordance with section 418 of the Companies
Act 2006, each person who is a director at the
date of this report confirms that:
> So far as they are aware, there is no relevant
audit information of which the company’s
auditor is unaware; and
> They have taken all steps that ought to have
been taken as a director in order to make
themselves aware of any relevant audit
information and to establish that the company’s
auditor is aware of that information.
Auditor
Deloitte LLP, the auditor for the company, was
appointed in 2012 and a resolution proposing
their reappointment will be proposed at the
forthcoming AGM.
Annual general meeting (AGM)
The AGM will be held at 10 am on 7 May 2015
at the offices of Provident Financial plc, No.
1 Godwin Street, Bradford, West Yorkshire,
BD1 2SU. The Notice of Meeting, together with
an explanation of the items of business, will be
contained in a circular to shareholders to be
dated 31 March 2015.
Approved by the board on 24 February 2015
and signed by order of the board.
Kenneth J Mullen
General Counsel and Company Secretary
Provident Financial plc Annual Report and Financial Statements 2014 Remuneration
109
Directors’ remuneration report
Malcolm Le May
Chairman of the remuneration committee
Awards made under the Provident Financial
Performance Share Plan (PSP) in 2012 are
also due to vest in March 2015. In order for the
basic award to be matched in full, an average
annual EPS growth of 11% was required over
the three financial years ended 31 December
2014. Based upon an actual average annual EPS
growth of 19.1%, the basic awards were matched
in full.
* For the purposes of incentive pay, EPS is calculated
on an adjusted basis.
Remuneration policy
The directors’ remuneration policy, which was
approved by shareholders at the 2014 AGM, is
summarised on pages 110 to 115 for information
and is consistent with the policy approved by
shareholders at last year’s AGM.
In accordance with the terms of the approved
remuneration policy, the committee is seeking
shareholder approval to renew the LTIS, which is
due to expire in 2016, at the 2015 AGM. The terms
of the new LTIS are substantially similar to
the expiring LTIS, and were communicated to
shareholders and the shareholder advisory bodies
during the consultation carried out in December
2014 and January 2015. In general, the proposals
were well received.
Following the consultation, the committee
agreed to increase the executive directors’ share
ownership requirements from 125% to 175% of
salary in 2015 and 200% of salary in 2016.
I will be available to answer questions on the
remuneration policy, the renewal of the LTIS, and
the Annual Report on Remuneration at the AGM
in May 2015.
Malcolm Le May
Chairman of the remuneration committee
Annual Statement by the chairman
of the remuneration committee
On behalf of the board, I am pleased to present
the directors’ remuneration report for the year
ended 31 December 2014 following my first year
as chairman of the remuneration committee.
Performance in 2014
The company has continued to deliver sustainable
returns and growth for its shareholders during
2014, with the key highlights being as follows:
> Profit before tax, amortisation of acquisition
intangibles and exceptional costs up by 19.5%
to £234.4m;
> TSR growth of 57.0%;
> Adjusted EPS growth of 18.4%;
> A 15.3% increase in dividend for the year from
85.0p to 98.0p; and
> The acquisition of Moneybarn in August which
was immediately earnings accretive.
Key outcomes in respect of 2014
The annual bonus scheme is based on an
adjusted EPS target* and personal objectives.
For 2014, the adjusted EPS target, prior to the
investment in Poland, any amortisation of the
broker relationships intangible asset created on the
acquisition of Moneybarn and exceptional costs,
was set at 125.2p, with threshold and maximum
EPS at 95% and 105% of the target respectively.
Based upon an adjusted EPS of 138.6p, bonuses
of 100% of the maximum of the EPS element
were awarded to Peter Crook and Andrew Fisher
in respect of 2014, reflecting the strong financial
performance of the company. Having considered
the achievement against personal objectives,
overall bonuses of 100% of the maximum were
awarded to Peter Crook and Andrew Fisher.
Both executive directors have chosen to waive
the maximum two-thirds of their annual bonus
in order to participate in the Provident Financial
Performance Share Plan (2013) (2013 PSP).
Awards made under the Provident Financial Long
Term Incentive Scheme (LTIS) in 2012 are due to
vest in March 2015. These awards are subject to
a performance target based on annualised EPS
growth and absolute annualised TSR over the
three financial years ended 31 December 2014.
In order for the award to vest in full, annualised
TSR of 15% and annualised EPS growth of 11%
was required. Based upon an actual annualised
TSR of 43% and an annualised EPS growth of
16.3%, 100% of the award will vest in March 2015.
This report sets out details of the remuneration policy for our executive and non-executive directors, describes the implementation of the policy and sets out the remuneration received by the directors for the year ended 31 December 2014. The report complies with the provisions of the Companies Act 2006, Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and the Listing Rules of the Financial Conduct Authority (FCA). The company also followed the requirements of the UK Corporate Governance Code published in September 2012.For completeness and transparency, this part of the directors’ remuneration report includes a summary of the remuneration policy approved by shareholders at last year’s AGM (set out on pages 110 to 115) and intended to operate until the AGM in 2017 unless any significant changes to the policy are proposed that require shareholder approval prior to this date. The Annual Statement by the chairman of the remuneration committee (set out on this page) and the Annual Report on Remuneration (set out on pages 116 to 128) will be subject to an advisory vote at the 2015 AGM.Provident Financial plc Annual Report and Financial Statements 2014Remuneration 110
Remuneration continued
Remuneration policy
Considerations when setting policy
In setting the remuneration policy for the
executive directors and senior management,
the committee takes into account the following:
1. The responsibilities of each individual’s role,
experience and performance;
2. The need to attract, retain and motivate
executive directors and senior management
when determining benefit packages, including
an appropriate proportion of fixed and
variable pay;
3. Pay and benefits practice and employment
conditions both within the group as a whole
and within the sector in which it operates;
4. Periodic external comparisons to examine
current market trends and practices and
equivalent roles in companies of similar size,
business complexity and geographical scope;
5. The need to maintain a clear link between
the overall reward policy and specific
company performance;
6. The need to achieve alignment to the business
strategy both in the short and long term; and
7. The requirement for remuneration
to be competitive, with a significant
proportion dependent on risk-assessed
performance targets.
How employees’ pay is taken
into account
Pay and conditions elsewhere in the group were
considered when finalising the policy for executive
directors and the senior management team.
The same principles apply throughout the group
but are proportionate relative to an individual’s
influence at group level. The base salary
increases awarded to the executive directors
are consistent with the average percentage
increases awarded elsewhere in the company
and reflect the strong financial performance
of the company and each individual director’s
personal performance. The committee does
not formally consult directly with employees on
executive pay but does receive periodic updates
from the divisional human resources directors on
remuneration issues in general and specifically
in relation to remuneration structures throughout
the group.
How the executive directors’
remuneration policy relates to
the senior management team
Remuneration for the level below executive
director (including share incentives, bonus and
pension entitlement) is set primarily by reference
to market comparatives.
Long-term incentives are typically only provided
to the most senior executives and are reserved
for those identified as having the greatest potential
to influence group level performance.
How shareholders’ views
are taken into account
We remain committed to taking into account
shareholder views on any proposed changes to
our remuneration policy. Following consultation
with shareholders on the proposed renewal of
the LTIS, it has been agreed that the current share
ownership guidelines for executive directors be
increased to 175% of salary in 2015 and 200%
of salary in 2016. This change improves the
current policy’s alignment with the company’s
shareholders vis-à-vis the share ownership
guidelines included in the remuneration policy
approved by shareholders at the 2014 AGM.
Committee role The committee is responsible for the remuneration of the Chairman, the executive directors and the Company Secretary. The remuneration and terms of appointment of the non-executive directors are determined by the board as a whole. The committee also reviews the remuneration of the senior management teams within the three divisions and the corporate office team.The Chief Executive is consulted on proposals relating to the remuneration of the other executive directors and the senior management teams and the Chairman is consulted on proposals relating to the Chief Executive’s remuneration. When appropriate, both are invited by the committee to attend meetings but are not present when their own remuneration is considered.Provident Financial plc Annual Report and Financial Statements 2014 Remuneration policy
Executive director remuneration policy
111
Purpose and link
to strategy
Operation including
maximum levels
Performance targets and provisions
for recovery of sums paid
Element
Salary
Annual bonus
To reflect the
responsibilities of
the individual role.
To reflect the
individual’s skills
and experience and
their performance
over time.
To provide an
appropriate level of
basic fixed income
and avoid excessive
risk arising from
over reliance on
variable income.
Incentivises annual
delivery of agreed
financial and
operational goals.
Rewards the
achievement of
an agreed set of
annual financial and
operational goals.
Reviewed annually and effective from 1 January.
Typically set following review of the budget for the
forthcoming year, taking into account salary levels
in companies of a similar size and complexity.
Targeted at or around median.
Annual increases typically linked to those of the wider
workforce. Increases beyond those granted to the wider
workforce may be awarded in certain circumstances such
as where there is a change in responsibility, progression
in the role, or a significant increase in the scale of the role
and/or size, value and/or complexity of the group.
Financial and operational goals set annually.
Maximum opportunity of 120% of salary for the Chief
Executive and 100% of salary for the Finance Director.
One-third of bonus earned is subject to compulsory deferral
into the 2013 PSP, typically for a period of three years.
May defer up to an additional third of bonus.
Any deferred bonus will be eligible for Matching Awards
under the 2013 PSP.
Remainder of bonus paid in cash.
Performance
Share Plan
Alignment of
management’s long-
term strategic interests
with long-term interests
of shareholders.
Encourages an
increased shareholding
in the group.
Invitations to participate and awards made annually.
Opportunity to defer up to two-thirds of annual bonus and
receive a basic award together with a matching share award.
Executive directors eligible for a Matching Award of up to two
times based on a deferral of up to two-thirds of annual bonus
with a minimum compulsory deferral of one-third.
Maximum bonus being earned and a maximum bonus
deferral, results in a maximum benefit of 160% of salary in the
case of the Chief Executive and 133% of salary in the case of
the Finance Director. Dividends may also be payable on basic
awards and in addition, dividend equivalent provisions allow
the committee to pay dividends on vested Matching Awards
or cash at the time of vesting.
Broad assessment of company and individual performance
as part of the review process.
Clawback provisions do not apply.
A minimum of 50% of any bonus opportunity will be subject
to financial targets (eg EPS) with up to 20% linked to
personal objectives.
A graduated scale operates from threshold performance through
to the maximum performance level. In relation to financial targets,
0% of this part of the bonus becomes payable for achieving the
threshold performance target with a graduated scale operating
thereafter for higher levels of financial performance. In relation
to personal objectives, it is not always practicable to set a sliding
scale for each objective. Where it is, a similar proportion of the
bonus becomes payable for achieving the threshold performance
level as for financial targets.
Clawback provisions apply where there is a material prior period
error requiring restatement of the group financial statements.
Details of the bonus measures operated each year will be
included in the relevant Annual Report on Remuneration.
The committee reserves the power to make changes over
the life of the policy to achieve alignment with the group’s
annual strategy.
Awards vest based on three-year performance against a
challenging range of EPS growth targets set and assessed by
the committee. 25% of the Matching Award (half of one matching
share) vests at the threshold performance level with full vesting
taking place on a graduated scale for achieving the maximum
performance level. The performance condition is reviewed annually
by the committee prior to grant (in terms of the range of targets
and the choice of metric) and may be refined to ensure that the
condition remains aligned with the company's strategy and KPIs.
Any substantive reworking of the current performance condition
would be accompanied by appropriate dialogue with the company's
shareholders and/or approval sought for a revised remuneration
policy depending on the nature of the change.
Clawback provisions apply where there is a material prior period
error requiring restatement of the group financial statements.
Clawback provisions apply to the Matching Award only.
Provident Financial plc Annual Report and Financial Statements 2014Remuneration 112
Remuneration continued
Remuneration policy continued
Element
Long Term
Incentive
Scheme
Retirement
benefits
Other
benefits
Purpose and link
to strategy
Operation including
maximum levels
Performance targets and provisions
for recovery of sums paid
Alignment of
management’s
long-term strategic
interests with
long-term interests
of shareholders.
Rewards strong
financial performance
and sustained increase
in shareholder value.
Encourages an
increased shareholding
in the group.
Provision of a range
of schemes and
arrangements to
enable executive
directors to fund
their retirement.
Provision of a range
of insured and
non-insured benefits
commensurate with
the role.
Annual grant of share awards (structured as conditional
awards or nil-cost options).
Executive directors are eligible for awards of up to 200% of
salary which is the maximum opportunity contained within
the plan rules.
Dividend equivalent provisions allow the committee to pay
dividends on vested shares or cash at the time of vesting.
The Long Term Incentive Scheme expires in May 2016 and
a resolution to renew the scheme on substantially similar
terms is being presented to shareholders for approval at
the 2015 AGM.
Available pension arrangements include the cash balance
section of the Provident Financial Staff Pension Scheme,
an Unfunded Unapproved Retirement Benefits Scheme,
a cash supplement in lieu of pension and/or a contribution
to individual Self Invested Personal Pensions (SIPPs).
Pension credit of up to 30% of salary per annum is given
to all executive directors.
Awards vest based on a three-year performance period
against a challenging range of EPS and TSR targets set and
assessed by the committee. 20% of the award vests at the
threshold performance level with full vesting taking place on
a graduated scale for achieving the maximum performance
level. The performance conditions are reviewed annually by
the committee prior to grant (in terms of the range of targets
and the choice of metrics) and may be refined to ensure that
the conditions remain aligned with the company's strategy and
KPIs. Any substantive reworking of the current performance
conditions would be accompanied by appropriate dialogue with
the company's shareholders and/or approval sought for a revised
remuneration policy depending on the nature of the change.
Clawback provisions apply where there is a material prior period
error requiring restatement of the group financial statements.
Not applicable.
Benefits will be appropriate to an executive director’s
circumstances and include:
Not applicable.
• Life cover of six times salary (subject to the provision
of satisfactory medical evidence), a permanent health
insurance benefit of 75% of basic salary after six months'
illness and membership of the group's private medical
insurance scheme;
• Fully expensed company car or a cash equivalent; and
• Participation in any all-employee share plans
operated by the company on the same basis as other
eligible employees.
Share
ownership
To ensure alignment of
the long-term interests
of executive directors
and shareholders.
Executive directors are required to hold a minimum of
125% of salary in the form of shares in the company.
Not applicable.
Executive directors are required to retain half of any shares
vesting (net of tax) under the LTIS until the guideline is
met. Unvested shares held under the PSP are not taken
into account.
The committee will operate the incentive schemes within the policy detailed above and in line with their respective rules. In relation to the discretions
included within the scheme rules, these include, but are not limited to: (i) who participates in the schemes; (ii) testing of the relevant performance targets;
(iii) undertaking an annual review of performance targets and weightings; (iv) the determination of the treatment of leavers in line with the scheme rules;
(v) adjustments to existing performance targets and/or share awards under the incentive scheme if certain relevant events take place (eg a capital
restructuring, a material acquisition/divestment etc.) with any such adjustments to result in the revised targets being no more or less challenging to achieve;
and (vi) dealing with a change of control. For the purposes of incentive pay, EPS is calculated on an adjusted basis to show the EPS generated by the group’s
underlying operations.
Provident Financial plc Annual Report and Financial Statements 2014 Remuneration policy continued
113
“ The committee’s
objective is to ensure
that our remuneration
policy is aligned to our
business objectives and
is motivational for our
executives so that we
can grow the business
and deliver long-term
returns to shareholders.
Malcolm Le May
Remuneration committee chairman
”
Regulatory changes
The committee is mindful that proposed
regulatory changes in the financial services sector
may result in a need to rebalance the executive
directors’ pay and, as a result, the committee
retains discretion to adjust the current proportions
of fixed and variable pay within the current total
remuneration package if new legislation were
to impact the executive directors in due course.
Should this be the case, the company would
enter into appropriate dialogue with its major
shareholders and, depending on the nature of any
changes, may be required to seek shareholder
approval for a revised remuneration policy.
Policy for new directors
Base salary levels will be set in accordance
with the approved remuneration policy, taking
into account the experience and calibre of the
individual. Benefits will also be provided in line
with the approved remuneration policy and
relocation expenses/arrangements may be
provided if necessary.
The maximum level of variable pay that may be
offered on an ongoing basis and the structure
of remuneration will be in accordance with the
approved remuneration policy. This limit does
not include the value of any buyout arrangements.
Different performance measures may be set
initially for the annual bonus, taking into account
the responsibilities of the individual and the point
in the financial year that they join the company.
Any incentive offered above these limits would be
contingent on the company receiving shareholder
approval for an amendment to the approved
remuneration policy at its next AGM.
The above policy applies to both an internal
promotion to the board or an external hire.
In the case of an external hire, if it is necessary
to buy out incentive pay or benefit arrangements
(which would be forfeited on leaving a previous
employer), then the form (cash or shares), timing
and expected value (ie likelihood of meeting any
existing performance criteria) of the remuneration
or benefit being forfeited will be taken into
account. The company will not pay any more
than necessary and will not pay more than the
expected value of the remuneration or benefit
being forfeited. The approved remuneration policy
will apply to the balance of the remuneration
package. The company will also not make a
golden hello payment.
In the case of an internal promotion, any
outstanding variable pay awarded in relation to the
previous role will be allowed to pay out according
to its terms of grant (adjusted as relevant to take
into account the board appointment, even if
inconsistent with the policy prevailing when the
commitment is fulfilled).
On the appointment of a new Chairman or
non-executive director, the fees will be set
taking into account the experience and calibre
of the individual. Where specific cash or share
arrangements are delivered to non-executive
directors, these will not include share options
or other performance-related elements.
Choice of performance metrics
The performance metrics used for the annual
bonus scheme, the LTIS and the 2013 PSP have
been selected to reflect the key indicators of the
company’s financial performance.
EPS continues to be considered by the committee
as one of the broadest and most well understood
measures of the company’s long-term financial
performance and therefore it remains appropriate
to maintain the option to use it as a key metric in
our long-term incentive plans.
Furthermore, EPS is fully aligned with our
objective of continuing to deliver a high dividend
yield and thus is aligned with our shareholder
base which is weighted towards longer-term
income investors.
Provident Financial plc Annual Report and Financial Statements 2014Remuneration 114
Remuneration continued
Remuneration policy continued
In 2012, the link to RPI was removed from the
performance targets for the LTIS and PSP
following consideration by the committee
of various factors prevailing at the time.
This approach has been retained in relation
to awards under the 2013 PSP and the LTIS
since 2012, and it is intended that this will be the
approach for all awards made under the 2013
PSP and the LTIS. Performance targets will,
however, be assessed annually when setting
targets for future awards to take account of
prevailing rates of inflation.
In addition, TSR is used under the LTIS to
provide an appropriate external balance to the
internal EPS measure and is consistent with
delivering superior returns to shareholders which
remains the company’s key, over-arching, long-
term objective.
The committee has determined that absolute
TSR continues to be an appropriate performance
measure as the FTSE 250 is considered too
diverse a group against which to compare relative
TSR performance. Also, the general financial
sector is a diverse group of companies, none of
which is considered to be directly comparable
to the company. However, the committee will
continue to keep the appropriateness of this
measure under review.
No performance targets are set for options
granted under the company’s Save As You
Earn Scheme (SAYE) or for awards under the
company’s share incentive plan (SIP) as they
form part of the all-employee arrangements
which are designed to encourage employee share
ownership across the group.
In the event of the termination of a service
contract, it is the current policy to seek mitigation
of loss by the director concerned and to aim to
ensure that any payment made is the minimum
which is commensurate with the company’s
legal obligations. Payments in lieu of notice are
not pensionable.
Service contracts and exit policy
The committee ensures that the contractual terms
for the executive directors take due account of
best practice.
Service contracts normally continue until the
director’s agreed retirement date or such other
date as the parties agree. All service contracts
contain provisions for early termination.
The contracts of the executive directors are
dated 27 April 2006 for the Chief Executive
and 1 January 2008 for the Finance Director.
All contracts operate on a rolling basis with a
12-month notice period.
A director’s contract may be terminated without
notice and without any further payment or
compensation, except for sums accrued up to the
date of termination, on the occurrence of certain
events such as gross misconduct. No director has
a service contract providing liquidated damages
on termination.
In the event of a change of control of the company,
there is no enhancement to contractual terms.
Notice periods are limited to 12 months. If the
company terminates the employment of an
executive director without giving the period of
notice required under the contract, then the
executive director may be entitled to receive up to
one year’s compensation. Compensation is limited
to: base salary due for any unexpired notice
period; any amount assessed by the committee
as representing the value of contractual benefits
and pension which would have been received
during the period; and any annual bonus which
the executive director might otherwise have been
eligible to receive on a pro rata basis, subject
to the committee’s assessment of group and
personal performance.
To the extent that a director seeks to bring a claim
against the company in relation to the termination
of their employment (eg for breach of contract or
unfair dismissal), the committee retains the right
to make an appropriate payment in settlement
of such claims.
Non-executive director remuneration policyElementPurpose and link to strategyOperation including maximum levelsFeesTo attract and retain a high-calibre Chairman and non-executive directors by offering market competitive fees which reflect the individual’s skills, experience and responsibilities.The Chairman and non-executive directors receive annual fees (paid in monthly instalments). The fee for the Chairman is set by the remuneration committee and the fees for the non-executive directors are approved by the board.The Chairman is paid an all-inclusive fee for all board responsibilities. The other non-executive directors receive a basic non-executive director fee, with supplementary fees payable for additional responsibilities, including chairing a committee.The non-executive directors do not participate in any of the company’s incentive arrangements.Relevant expenses and/or benefits may be provided to the non-executive directors.The fee levels are reviewed on a regular basis, and may be increased taking into account factors such as the time commitment of the role and market levels in companies of comparable size and complexity.Flexibility is retained to go above the current fee levels and/or to provide the fees in a form other than cash (but not as share options or other performance-related incentives) if necessary to appoint a new Chairman or non-executive director of an appropriate calibre.Provident Financial plc Annual Report and Financial Statements 2014 Remuneration policy continued
115
Non-executive directors
Non-executive directors are not employed
under service contracts and do not
receive compensation for loss of office.
They are appointed for fixed terms of three years,
renewable for a further three-year term and, in
exceptional circumstances, further extended if
both parties agree. Any such extension will be
subject to annual reappointment by shareholders.
The table above shows details of the terms of
appointment for the non-executive directors.
Following the extension of Rob Anderson’s
term to 30 March 2018, all directors will seek
reappointment at the forthcoming AGM.
Remuneration payments and payments for
loss of office will only be made if consistent
with this approved remuneration policy or
otherwise approved by an ordinary resolution
of shareholders.
Malcolm Le May
Chairman of the remuneration committee
24 February 2015
In the case of a termination by the company of
the contract of any new executive director who
has been appointed where a payment in lieu of
notice is made, the committee would normally
seek to limit this to base salary, pension and
benefits for up to 12 months. An amount in
respect of loss of annual bonus for the period of
notice served (pro rata) would only be included
in exceptional circumstances and would not
apply in circumstances of poor performance.
For the avoidance of doubt, the director would be
eligible to be considered in the normal way for an
annual bonus for any period they have served as
a director, subject to the normal assessment of
group and personal performance.
Any share-based entitlements granted to an
executive director under the company’s share
incentive schemes will be determined based
on the relevant scheme rules. In the case of a
bad leaver the awards normally lapse and in
certain good leaver circumstances (eg ill health)
awards would remain eligible to vest subject
to an assessment of the performance target
and a pro rata reduction (unless the committee
determines otherwise).
Policy on other appointments
Executive directors are permitted to hold one
non-executive directorship in a FTSE 100 company
(and to retain the fees from that appointment)
provided that the board considers that this will not
adversely affect their executive responsibilities.
Copies of directors’ service contracts and/or
letters of appointment are available from the
Company Secretary on request.
Terms of appointment for the non-executive directorsNameAppointmentDate of most recent termExpected date of expiryManjit Wolstenholme16 July 200731 July 201331 July 2016Rob Anderson 2 March 2009 30 March 201530 March 2018 Stuart Sinclair 1 October 20121 October 201231 October 2015Malcolm Le May1 January 20141 January 201431 January 2017Alison Halsey1 January 20141 January 201431 January 2017Provident Financial plc Annual Report and Financial Statements 2014Remuneration 116
Remuneration continued
Annual Report on Remuneration
Committee role and membership
The role of the committee is set out in its terms
of reference which are reviewed annually
and were last updated in January 2015.
These can be found on the group’s website at
www.providentfinancial.com. The committee
meets at least three times a year and thereafter
as circumstances dictate.
Details of the work undertaken by the committee
during the year are set out on page 117.
The members of the committee, all of whom
are considered to be independent, and their
attendance at meetings during the year is as
shown in the table below.
The committee has reviewed and considered
the impact of the FCA Remuneration Code
(FCA Code). Whilst the FCA Code applies to
Vanquis Bank, it does not apply to the group
executive directors, based on the company’s
interpretation of the FCA Code, in relation to
their executive roles. As a consequence, a
Vanquis Bank remuneration committee has
been established to identify those Vanquis Bank
employees who are Remuneration Code Staff and
to ensure that Vanquis Bank complies with the
FCA Code on an ongoing basis. The committee
reviews the work undertaken by the Vanquis
Bank remuneration committee through regular
reports submitted to it.
The committee regularly reviews the approved
remuneration policy in the context of the group’s
risk management framework to ensure it does
not inadvertently promote irresponsible behaviour.
It has coordinated its work with both the audit
committee and the risk advisory committee,
who assist with the monitoring and assessment
of risk management specifically in relation to
the incentives provided under the approved
remuneration policy.
The committee considers corporate performance
on environmental, social and governance (ESG)
issues when setting the performance conditions
for the annual bonus scheme and share incentive
plans and will use its discretion to ensure that,
where appropriate, the management of ESG risks
is reflected in the rewards granted to executive
directors and the senior management team.
IntroductionThis Annual Report on Remuneration (in conjunction with the approved remuneration policy described earlier) complies with the Companies Act 2006 (the Companies Act), Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and the Listing Rules of the Financial Conduct Authority (FCA). The company also followed the requirements of the UK Corporate Governance Code published in September 2012 (the Code).This report will be subject to an advisory vote at the AGM of the company to be held on 7 May 2015 and sets out details of how the approved remuneration policy will be implemented in 2015 as well as details of the implementation of the policy in 2014.Committee members and meeting attendanceNameNotesDate appointedToAttendancePercentage attendedMalcolm Le MayChairman (from 1 January 2014) 1 January 2014 To date 4 out of 4 100%Rob Anderson 2 March 2009To date4 out of 4 100%Alison Halsey1 January 2014To date4 out of 4 100%Stuart Sinclair1 October 2012To date4 out of 4100%Provident Financial plc Annual Report and Financial Statements 2014 Annual Report on Remuneration
Effectiveness
On the basis of the internal board and committee
evaluation, the committee considered its
effectiveness in 2014 at its meeting in January
2015. Overall the committee determined that it
was operating effectively and that it continued to
have the appropriate regard for the key issues
within its remit.
External advisors
During the year, New Bridge Street (NBS), a
trading name of Aon plc (NBS’s parent company),
was engaged by the committee to provide
remuneration consultancy services. The Company
Secretary, on behalf of the committee, agrees the
scope of the services to be provided and a fixed
fee in respect of each deliverable. The total fees
paid to NBS in respect of such services to the
committee during the year were £29,028. NBS
is a signatory to the Remuneration Consultants’
Code of Conduct. Aon plc also provides pension
consultancy and investment advice to the
company. The committee is satisfied that these
additional services in no way compromised the
independence of advice from NBS.
The terms of engagement for NBS are available
from the Company Secretary on request.
The committee also engaged Addleshaw Goddard
LLP to provide advice and support in relation to
the establishment of the replacement LTIS which
is being submitted for shareholder approval at
the 2015 AGM. The total fees paid to Addleshaw
Goddard LLP in 2014 in respect of this work
were £4,000. Addleshaw Goddard LLP has also
provided other services to the company during
the year in relation to the establishment of a
new savings related share option scheme for
employees in the Republic of Ireland.
The Company Secretary is secretary to the
committee and instructed the external advisors on
behalf of the committee. The Company Secretary
attended all the meetings of the committee in
2014 and provides legal and technical support.
117
Components of the approved
remuneration policy
The approved remuneration policy will be
implemented in 2015 as follows:
Executive directors
1. Salary
Salaries for executive directors and the senior
management team are reviewed annually by the
committee, although not necessarily increased.
At its meeting in December 2014, the committee
considered the company’s strong financial
performance and each individual’s responsibilities,
abilities, experience and personal performance.
The committee also considered both the group’s
own salary structures, pay and conditions and,
although used with caution, market data on
salary rates for similar positions in comparative
companies where appropriate. Accordingly,
it agreed to increase the executive directors’
salaries in 2015 as follows:
Director’s
name
Peter Crook
Andrew Fisher
% increase
2015
3.0
3.0
Salary
£
706,000
504,000
These increases are consistent with the average
percentage increases awarded elsewhere in
the group.
2. Annual bonus
The group operates an annual bonus scheme
which provides the framework for an annual
incentive for executive directors. The aim of the
scheme is to improve the company’s performance
through the achievement of certain financial and
operational goals. The maximum bonus opportunity
will continue to be restricted to 120% of salary for
the Chief Executive and 100% of salary for the
Finance Director. The performance conditions
for the 2015 annual bonus will be based on the
group’s EPS and personal objectives as follows:
In selecting advisors, the committee considers
a range of factors (eg independence and
objectivity, experience, technical ability and market
knowledge). These factors are reviewed on a
regular basis, and were last considered by the
committee at its meeting in December 2014.
Measure
Targeted
group EPS
Personal
objectives
Peter Crook
Andrew Fisher
Maximum bonus
opportunity
Maximum bonus
opportunity
80% £677,760
80% £403,200
20% £169,440
20% £100,800
Remuneration committee key items in 2014JAN • Review of 2013 remuneration report. • Review of directors’ expenses. • Review of committee performance (2013).OCT • Review of executive remuneration landscape. • Review of feedback from committee chairman’s shareholder visits.DEC • Review of executive directors’ shareholdings. • Review and approval of shareholder consultation process for LTIS renewal. • Review of the application of the approved remuneration policy in 2015.FEB • Determination of vesting of LTIS and PSP awards granted in 2011. • Finalisation of the 2014 remuneration policy. • Agreement on the format of the 2013 remuneration report. • Review of a schedule of proposed LTIS and PSP awards and applicable performance targets. • Review of Chairman’s fees. • Review of prior year performance against financial and non-financial objectives in relation to the annual bonus scheme.Provident Financial plc Annual Report and Financial Statements 2014Remuneration 118
Remuneration continued
Annual Report on Remuneration continued
EPS (excluding exceptional items) is the key
internal measure of financial performance as it
is the broadest measure of the group’s financial
performance and is aligned to the shareholder
base which is weighted towards longer-term
income investors.
Straight-line vesting will operate between 95% of
targeted group EPS and the maximum of 105%
of targeted group EPS. The personal objectives
element of the scheme will continue to be
underpinned by the threshold level of targeted
group EPS. On the basis that the vast majority
of the group’s competitors are unlisted, and on
the basis that the EPS target is consistent with
the group’s objective of continuing to deliver a
high dividend yield, the committee considers that
disclosure of the actual EPS target for the annual
bonus scheme in 2015 would put the company
at a significant commercial disadvantage.
Details of the extent to which the bonus targets
are achieved will, however, be set out in the next
Annual Report on Remuneration.
Clawback provisions also apply to annual
bonus awards which will enable the committee
to clawback value overpaid in the event of a
restatement of the company’s Annual Report
and Financial Statements or an error in the
calculation of the extent to which the performance
target has been met. Any bonuses paid are
non-pensionable and are not taken into account
when determining base salary for performance-
related remuneration.
3. Long-term incentive schemes
The company’s long-term incentive arrangements
for executive directors are the LTIS, the 2013
PSP and the Provident Financial Executive Share
Option Scheme 2006 (the ESOS).
The LTIS expires in May 2016 and a resolution to
renew the scheme on substantially similar terms
is being presented to shareholders for approval
at the 2015 AGM.
LTIS
The committee is responsible for selecting eligible
employees, including executive directors, to
participate in the LTIS and for granting conditional
share awards under the LTIS. Participants are
eligible to be considered for awards annually.
No payment is required on grant or vesting of an
award. Until an award vests, a participant has no
voting, dividend or other rights in respect of the
shares. The aggregate market value of awards
made under the LTIS in any one financial year
may not exceed 200% of basic salary which is
the normal grant policy under the LTIS and the
committee intends to grant awards at this level in
respect of the current financial year. This 200%
limit does not include the value of any dividend
equivalent payable on shares vesting under an
LTIS award which is also paid on the vesting date.
For awards in 2015, it is proposed that the
performance targets continue to be based on
absolute EPS growth and absolute TSR, with the
range of targets remaining unchanged from 2014.
The actual range of the EPS targets for awards
in 2015 will be as follows (with a sliding scale of
vesting on a straight-line basis between these
lower and upper targets):
Annualised
growth in EPS
Below 5%
5%
11%
Percentage vesting
(of EPS part of award)
0%
20%
100%
The actual range of the TSR targets for awards
in 2015 will be as follows (with a sliding scale of
vesting on a straight-line basis between these
lower and upper targets):
Annualised
TSR
Below 8%
8%
15%
Percentage vesting
(of TSR part of award)
0%
20%
100%
Notwithstanding achievement against the
challenging EPS targets, vesting will only take
place to the extent that the committee considers
the vesting to be consistent with the broader
financial performance of the company and
the committee may scale back vesting if this is
not considered to be the case. The committee
introduced this underpin to the already demanding
EPS targets to ensure that the executive directors
do not place too great an emphasis on EPS alone.
There is also a general underpin which applies
to the TSR target whereby the committee needs
to be satisfied that the TSR performance is a
genuine reflection of the underlying performance
of the company.
Similarly challenging targets, having had regard
to prevailing circumstances, will apply to the first
awards under the 2015 LTIS in 2016.
PSP
The 2013 PSP was approved by shareholders
at the AGM in May 2013 following expiry of the
previous PSP in 2012.
Executive directors are required to defer a
minimum of one-third of annual bonus payable
into the 2013 PSP. They may also elect to defer
up to a further third of bonus. They then receive
a Matching Award under the 2013 PSP which
is subject to a performance target based on
absolute EPS growth.
At the lower end of the performance target range,
one-half of a matching share will vest up to a
maximum of two matching shares at the upper
end of the performance target range for each
basic share awarded following bonus waiver
into the 2013 PSP. The value of the award can
therefore increase or decrease depending on the
prevailing share price at the date of vesting.
The actual range of the EPS targets for awards in
2015 will be as follows:
Average annual
growth in EPS
Below 5%
5%
11%
Matching shares
vesting
No vesting
Half of one share
Two matching shares
The same general underpin to the EPS targets in
the LTIS (as set out above) applies to all awards
granted under the 2013 PSP.
Awards made under the previous PSP are
subject to different performance measures, have
different award levels and will vest in accordance
with the terms of their grant in due course.
Further details are set out on pages 123 to 125.
ESOS
The committee does not intend to make further
grants to executive directors under the ESOS
in 2015.
4. All-employee share schemes
Savings-related share option scheme
The executive directors (together with other
eligible employees) may participate in the
Provident Financial Savings Related Share Option
Scheme 2013. Participants save a fixed sum each
month for three or five years and may use these
funds to purchase shares after three or five years.
The exercise price is fixed at up to 20% below the
market value of the shares at the date directors
Provident Financial plc Annual Report and Financial Statements 2014 Annual Report on Remuneration continued
and employees are invited to participate in the
scheme and monthly savings amounts are subject
to HMRC limits.
Share incentive plan
In addition to the Provident Financial Savings
Related Share Option Scheme 2013, the executive
directors may participate in the Provident Financial
Share Incentive Plan (SIP). This is an all-employee
plan which offers a further mechanism through
which employees can acquire shares in a tax-
approved manner. Executive directors and the
senior management team are invited to participate
in the SIP on the same terms as other eligible
employees. The SIP provides an opportunity to
invest in the company’s shares and benefit from the
company’s offer to match that investment on the
basis of one share for every four shares purchased.
The amount an executive director
could earn under the approved
remuneration policy
A significant proportion of remuneration is
linked to performance, particularly at maximum
performance levels. The charts below show
how much the Chief Executive and the Finance
Director could earn under the policy under
different performance scenarios. The following
assumptions have been made:
> Minimum (performance below threshold) –
fixed pay only with no vesting under the LTIS
or 2013 PSP and no annual bonus;
> On target – fixed pay plus a bonus at target
(60% of the maximum opportunity) and vesting
of 55% of the Matching Award under the 2013
PSP and 55% of the award under the LTIS;
> Maximum (performance meets or exceeds
maximum) – fixed pay plus maximum bonus
(120/100% of salary) and maximum vesting
under the PSP 2013 and LTIS;
> Fixed pay comprises:
(i) salaries – salary effective as at
1 January 2015;
(ii) benefits – amount received by each executive
director in the 2014 financial year; and
(iii) pension – pension credit of 30% of salary.
119
Awards under the 2013 PSP and LTIS have
been assumed as follows:
(i) 2013 PSP – Matching Award of two-thirds
of bonus earned at target and maximum
performance levels; and
(ii) LTIS – award equal to 200% of salary.
Partnership and matching shares under the
all-employee SIP and options under the SAYE
have not been included.
The scenarios do not include any growth or
a fall in the share price or dividend assumptions.
It should be noted that since this analysis shows
what could be earned by the executive directors
based on the approved remuneration policy
(ignoring the potential impact of share price
movements) the numbers will be different to
the values included in the table on page 120
detailing what was actually earned by the
executive directors in relation to the financial year
ended 31 December 2014, since these values
are based on the actual levels of performance
achieved to 31 December 2014 and include the
impact of share price movements in relation to
share awards.
Non-executive directors
1. Non-executive directors’ fees
Fee levels for current incumbents for 2015
are as follows:
> Non-executive director base fee: £64,000;
> Supplementary fee for chairing the audit,
remuneration or risk advisory committee:
£15,000; and
At its meeting in February 2015, the board
reviewed the non-executive directors’ fees
in the context of a benchmarking exercise
undertaken by NBS. After taking due account
of the anticipated ongoing time commitment
for the role, it was agreed that the fees would
remain unchanged.
2. Chairman’s fees
On the basis of a benchmarking exercise carried
out by NBS in January 2015 and the anticipated
ongoing time commitment for the role, the
committee agreed that the Chairman’s fees would
remain unchanged at £255,000.
£2,902,000
> Supplementary fee for the role of Senior
Independent Director (SID): £10,000.
Peter Crook
Andrew Fisher
£4,352,000
£
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
59%
19%
2,620,000
44%
19%
£963,000
500,000
100%
37%
22%
£1,796,000
43%
17%
40%
58%
17%
25%
£718,000
100%
0
Minimum
On target
Maximum
Minimum
On target
Maximum
Fixed pay
Annual bonus
Long-term incentives
Total remuneration opportunityProvident Financial plc Annual Report and Financial Statements 2014Remuneration 120
Remuneration continued
Annual Report on Remuneration continued
Details of the implementation of the company’s approved remuneration policy in 2014 are set out below.
Directors’ remuneration
The total aggregate directors’ emoluments during the year amounted to £11,566,000 (2013: £8,592,000), analysed as follows:
Fixed pay
Variable pay
Total
Total
fixed pay
Share incentive schemes
Total
variable pay
Salary
Benefits in kind
Pension
Annual cash
bonus1
LTIS2
PSP3
PSP dividends
Director’s
name
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
Executive directors
Peter
Crook
Andrew
Fisher
685
665
489
475
45
63
42
239
262
969
969
822
707
2,492
2,127
2,174
1,004
137
178
5,625
4,016
6,594
4,985
59
181
183
733
717
489
440
1,783
1,519
1,294
582
83
105
3,649
2,646
4,382
3,363
Sub-total
1,174
1,140
108
101
420
445
1,702
1,686
1,311
1,147
4,275
3,646
3,468
1,586
220
283
9,274
6,662 10,976
8,348
Note: Peter Crook and Andrew Fisher have agreed to waive any emoluments in respect of their directorships of Vanquis Bank Limited, Provident Financial Management Services Limited and
Moneybarn No. 1 Limited.
1 The annual bonus represents the gross bonus payable to the directors in respect of 2014. Each director has agreed to waive two-thirds of gross bonus in order to participate in the 2013 PSP.
2 Amount calculated based on 100% vesting of 2012 awards multiplied by an average share price for the three months ended 31 December 2014. No account has been taken of the dividend equivalent
payable on these shares, which will be calculated on the vesting date of 26 March 2015. The actual value may vary depending on the actual share price on 26 March 2015.
3 Amount calculated based on 100% vesting of 2012 awards multiplied by an average share price for the three months ended 31 December 2014. The actual value may vary depending on the actual
share price on the vesting date of 26 March 2015.
Director’s name
Chairman
Manjit Wolstenholme
Non-executive directors
Rob Anderson
Stuart Sinclair
Alison Halsey1
Malcolm Le May1
Sub-total
Fees
2014
£’000
Annual cash bonus
Benefits in kind
2013
£’000
2014
£’000
2013
£’000
2014
£’000
2013
£’000
Total
2014
£’000
2013
£’000
255
66
79
76
89
565
85
75
75
–
–
235
–
–
–
–
–
–
–
–
–
–
–
–
3
11
11
–
–
25
2
7
–
–
–
9
258
77
90
76
89
590
87
82
75
–
–
244
Note: The non-executive directors did not receive a pension benefit nor did they receive any bonus or share incentive entitlements.
1 Appointed on 1 January 2014.
Directors’ fees
Non-executive directors
Non-executive directors’ fees are designed both
to recognise the responsibilities of non-executive
directors and to attract individuals with the
necessary skills and experience to contribute
to the future growth of the company. Full details
of the non-executive directors’ fees are set out
in the table above. Non-executive directors’
remuneration is fixed by the board and does
not include share options or other
performance-related elements.
Chairman
The fees for the Chairman are fixed by the
committee. Full details of the Chairman’s fees
are set out in the table above.
Fees from other directorships
Peter Crook is a non-executive director of Cabot
(Group Holdings) Limited and he retains the fee
from that appointment. During 2014 these fees
amounted to £50,000.
Provident Financial plc Annual Report and Financial Statements 2014
Annual Report on Remuneration continued
121
Annual bonus scheme
The 2014 annual bonus scheme was based on
adjusted targeted group EPS (as defined in the
rules of the scheme) and personal objectives.
The maximum bonus opportunity in respect
of 2014 was restricted to 120% of salary for
the Chief Executive and 100% of salary for the
Finance Director and was split as follows:
Peter Crook Andrew Fisher
Maximum bonus opportunity
80%
20%
80%
20%
Measure
Targeted
group EPS
Personal
objectives
The actual proportions of the 2014 adjusted
targeted group EPS that needed to be achieved,
which the committee considered to be
challenging, were as follows:
Threshold
Target Maximum
95%
100%
105%
0%
60%
100%
% of the
adjusted
targeted group
EPS achieved
% of EPS
element
of annual
bonus paid
Straight-line vesting operated between 95% of the
adjusted targeted group EPS and the maximum
of 105% of adjusted targeted group EPS.
The committee carries out a detailed review of
the computations undertaken in determining the
group’s EPS and ensures that the rules of the
scheme are applied consistently. The company’s
auditor is also asked to perform agreed-upon
procedures on behalf of the committee on the
EPS calculations.
At its meeting in February 2015, the committee
assessed the group’s performance against the
adjusted targeted group EPS. The adjusted EPS
achieved of 138.6p exceeded the adjusted targeted
group EPS of 125.2p by more than 5% and the
committee therefore determined that 100% of the
EPS element of the 2014 annual bonus would
be paid.
The balance of the annual bonus, as detailed in the
table of directors’ remuneration on page 120, was
paid on the basis of the committee’s assessment
of the extent to which the personal objectives for
the executive directors were achieved.
The Chief Executive’s personal objectives
included, but were not limited to: (1) refreshing
the vision and strategy for the group to reflect
the changed economic and competitive landscape;
(2) reviewing further options to broaden
participation in the non-standard market;
(3) effectively managing the funding position
of the group; (4) effectively leading the activity
to maintain the group’s reputation with external
stakeholders; (5) close involvement in the
turnaround and repositioning of the home credit
business; (6) ensuring that the group has
adequate facilities to comply with its treasury
policy; and (7) building the capability and
experience of the senior management team.
The committee’s assessment, having considered
performance against each objective, was that
the level of achievement against these objectives
was 100%.
The Finance Director’s personal objectives
included, but were not limited to: (1) undertaking
a review of strategic options to develop the group;
(2) effective management of the treasury and
taxation functions; (3) effective management
of the group’s external regulators; (4) effective
management of the group’s risk function; and
(5) effective management of the group’s IR
programme. The committee’s assessment, having
considered performance against these objectives,
was that the level of achievement against these
objectives was 100%.
The bonus payable as a percentage of salary
in relation to 2014 was therefore 100%
for the Finance Director and 120% for the
Chief Executive.
Share incentive schemes
In 2014, the committee continued with the policy
of making conditional share awards to executive
directors and the senior management team
under the LTIS and awards under the 2013
PSP. This policy is in line with prevailing market
practice and recognises that conditional share
awards, and the deferral of annual bonus in the
case of the 2013 PSP, provide greater alignment
with shareholders’ interests.
Provident Financial plc Annual Report and Financial Statements 2014Remuneration 122
Remuneration continued
Annual Report on Remuneration continued
LTIS
Historically, and dependent upon satisfactory
personal and corporate performance the
committee’s policy has been to grant conditional
share awards at the maximum level. Grants under
the scheme are restricted to no more than 200%
of a participant’s basic salary and executive
directors received maximum grants in 2014.
2014 awards
The performance targets for awards made
under the LTIS in 2014 were reviewed by the
committee at its meeting in February 2014 and it
was considered that they remained appropriately
challenging given market forecasts and the
economic environment prevailing at the time.
The actual range of the targets for awards in
2014 are the same in terms of metrics and annual
growth requirements as the proposed 2015 LTIS
awards, further details of which are set out on
page 118.
2011 awards
Vesting of the 2011 awards was split equally
between the company’s annualised growth in
EPS and its annualised TSR as follows:
Annualised
growth in EPS
Below RPI +3%
RPI +3%
RPI +8%
Annualised
TSR
Below 10%
10%
15%
Percentage vesting
(of EPS part of award)
0%
25%
100%
Percentage vesting
(of TSR part of award)
0%
25%
100%
A sliding scale of vesting (on a straight-line basis)
applied between these lower and upper EPS and
TSR targets.
The target is measured over a period of three
consecutive financial years, the first of which is
the financial year starting immediately before the
grant date of the award.
The assessment of the extent to which these
performance conditions were met was discussed
by the committee at its meeting in January
2014, with assistance from NBS. The company’s
annualised growth in EPS over the performance
period was 14.8%, and the annualised growth
in RPI over the same period was 3.5%. As the
level of growth exceeded the maximum target
of annualised EPS growth of RPI plus 8%, this
resulted in 100% of the EPS element of the
award vesting.
Long Term Incentive SchemeDetails of the conditional share awards granted to the executive directors during 2014 are summarised below: Director’s nameDate of awardNumberof sharesFace value1 Percentage of salaryPerformance condition2Performance period% vesting at thresholdPeter Crook08.04.201472,143£1,369,996200%50% based on absolute TSR and 50% based on absolute EPS Three consecutive financial years ending 31 December 201620%Andrew Fisher08.04.201451,500£977,985200%1 Face value calculation is based on the share price of £18.99 on 7 April 2014. Actual value at vesting may be greater or lesser depending on actual share price at vesting and as a result of any dividend equivalent payable on vested shares.2 Performance conditions are set out on page 118.Executive directors’ total conditional share awards at 31 December 2014 were as follows:Director’s nameDate of awardAwards held at 01.01.2014Awards granted during the yearAwards vested during the year1Awards lapsed during the yearAwards held at 31.12.2014Market price at date of grant (p)Market price at date of vesting (p)Vesting datePeter Crook04.03.2011132,283 – 132,283 – –952.51,864.004.03.201426.03.20122111,876 – – –111,8761,162.0 –26.03.201501.03.20132 90,784 – – –90,7841,465.0 –01.03.201608.04.20142 –72,143 – –72,1431,899.0 –08.04.2017Andrew Fisher04.03.201194,488 –94,488 ––952.51,864.004.03.201426.03.2012280,034 – – –80,0341,162.0 –26.03.201501.03.2013264,846 – – –64,8461,465.0 –01.03.201608.04.20142 –51,500 – –51,5001,899.0 –08.04.20171 Dividend shares on awards vesting in 2014 were received as follows: Peter Crook 17,494 shares and Andrew Fisher 12,475 shares.2 Half the award vests subject to EPS growth with 20% of this part of the award vesting for EPS growth of 5% per annum through to full vesting for EPS growth of 11% per annum. The remaining half of the award is subject to absolute TSR with 20% of this part of the award vesting for 8% absolute TSR per annum and full vesting for absolute TSR of 15% per annum. No vesting takes place below the threshold performance levels with straight-line vesting taking place between threshold and maximum performance levels. In addition; (1) where absolute TSR performance targets operate, that part of the award will not vest unless the committee is satisfied that the TSR performance is a genuine reflection of the underlying performance of the company; and (2) where absolute EPS performance targets operate, that part of the award will not vest unless the committee is satisfied that the vesting is consistent with the broader financial performance of the company. Full details of historic performance targets have been fully set out in previous directors’ remuneration reports.Provident Financial plc Annual Report and Financial Statements 2014 Annual Report on Remuneration continued
123
NBS also confirmed that the company’s
annualised TSR over the three-year performance
period was 31.4%, which exceeded the maximum
target of annualised TSR of 15%, resulting in
100% of the TSR element of the award vesting.
The committee therefore approved a 100%
vesting of the 2011 awards, having satisfied
itself that the TSR performance was a genuine
reflection of the underlying business performance
This assessment included consideration of
various factors, including the increase in profit
before tax and exceptional items over the period
of 17.8% and the increase in dividend over the
period of 15.7%.
2012 awards
Vesting of the 2012 conditional share awards is
split equally between the company’s annualised
growth in EPS and its annualised TSR as follows:
Annualised
growth in EPS
Below 5%
5%
11%
Annualised
TSR
Below 8%
8%
15%
Percentage vesting
(of EPS part of award)
0%
20%
100%
Percentage vesting
(of TSR part of award)
0%
20%
100%
A sliding scale of vesting (on a straight-line basis)
applies between the lower and upper EPS and
TSR targets.
The assessment of the extent to which these
performance conditions were met was discussed
by the committee at its meeting in February
2015, with assistance from NBS. The company’s
annualised growth in EPS over the performance
period was 16.3% which exceeded the maximum
target annualised growth in EPS of 11%.
The committee therefore approved a 100%
vesting of the EPS element of the award, having
satisfied itself that the vesting was consistent
with the broader financial performance of
the company.
NBS also confirmed that the company’s
annualised TSR over the three-year performance
period was 43%, which exceeded the maximum
target of annualised TSR of 15%, resulting in 100%
of the TSR element of the award vesting.
The committee therefore approved a 100%
vesting of the 2012 awards, having also satisfied
itself that the TSR performance was a genuine
reflection of the underlying performance of the
company. This assessment included consideration
of various factors, including the annualised
increase in profit before tax, amortisation of
acquisition intangibles and exceptional items over
the period of 19.5% and the increase in dividend
over the period of 14.1%.
There were no changes in directors’ conditional
share awards between 1 January 2015 and
24 February 2015.
The executive directors have waived an
entitlement to any dividend in respect of the
conditional share awards during the performance
period. To the extent an award vests at the end
of the performance period, either additional
ordinary shares in the company or a cash amount
equivalent to the dividends that would have been
paid on the vested awards from the date of grant,
will be provided to the executive directors if and
when the award vests.
As in previous years, awards made in 2014 to
employees within the Consumer Credit Division
(CCD), Vanquis Bank and Moneybarn are subject
to a challenging divisional target rather than group
EPS and TSR targets.
The mid-market closing price of the company’s
shares on 31 December 2014 was 2,462p.
The range during 2014 was 1,625p to 2,481p.
No consideration is payable on the award of
conditional shares.
PSP
2014 awards
In 2014, participation in the 2013 PSP included
the executive directors, who were able to elect
to waive up to two-thirds (with a minimum of
one-third) of their annual bonus, and other eligible
employees who were able to waive up to 50%
or 30%, (depending on their level of seniority),
of their annual bonus. Participants then received
a basic award of shares equal to the value of
their waived bonus, together with an equivalent
Matching Award (on the basis of one share for
each share acquired pursuant to the participant’s
basic award) which is subject to a performance
condition over a period of three years.
Awards to executive directors and certain
members of the senior management team in 2014
were however made on the basis of up to two
shares for each share acquired pursuant to their
basic award, the second matching share being
subject to a more stretching performance target.
The actual range of the EPS targets for awards
granted in 2014 is as follows:
Average annual
growth in EPS
Matching shares
vesting
Below 5%
No vesting
5%
11%
Half of one share
Two matching shares
A sliding scale of vesting (on a straight-line basis)
applies between these lower and upper targets
which are measured over a period of three
consecutive financial years, the first of which is
the financial year starting immediately before the
grant date of the Matching Award.
2011 awards
For awards granted in 2011, the actual range
of the EPS targets was as follows:
Average annual
percentage growth
in EPS
Matching shares
vesting
Below RPI +3%
No vesting
RPI +3%
RPI +8%
One matching share
Two matching shares
A sliding scale of vesting (on a straight-line basis)
applied between these lower and upper targets.
The target is measured over a period of three
consecutive financial years, the first of which is
the financial year starting immediately before the
grant date of the Matching Award.
At its meeting in January 2014, the committee
considered the extent to which the performance
target for the awards granted in 2011 had been
met. The average annual percentage growth in
EPS over the performance period was 16.0%
and the average annual percentage growth in
RPI over the same period was 3.6%. This level
of EPS growth exceeded the maximum target
of RPI plus 8% resulting in 100% of the Matching
Awards vesting.
2012 awards
For awards granted since 2012, the committee
changed the EPS target to an absolute EPS target,
which is consistent with the absolute EPS target
which was introduced for awards under the LTIS
from 2012, as set out on page 114.
Provident Financial plc Annual Report and Financial Statements 2014Remuneration 124
Remuneration continued
Annual Report on Remuneration continued
For awards granted in 2012, the actual range
of the EPS targets was as follows:
Average annual
percentage growth
in EPS
Matching shares
vesting
Below 5%
No vesting
5%
11%
One matching share
Two matching shares
A sliding scale of vesting (on a straight-line basis)
applied between these lower and upper targets
which are measured over a period of three
consecutive financial years, the first of which is
the financial year starting immediately before the
grant date of the Matching Award.
For awards granted in 2011 and 2012, the
dividends payable on the basic and matching
shares were paid to the directors on the normal
dividend payment date.
For awards granted in 2013 and 2014, the
dividend payable on the basic award only is paid
to the directors on the normal payment date.
Any dividend payable on the matching shares
granted will be paid to the directors as a dividend
equivalent on the normal vesting date.
The dividends received in 2014 under the PSP
and 2013 PSP were: Peter Crook £137,132
(2013: £178,237) and Andrew Fisher £82,596
(2013: £105,278). These figures have been included
in the table of directors’ remuneration on page 120.
At its meeting in February 2015, the committee
considered the extent to which the performance
target for the awards granted in 2012 had been met.
The average annual percentage growth in EPS over
the performance period was 19.1% and this level of
EPS growth exceeded the maximum target of 11%
resulting in 100% of the Matching Award vesting.
Offshore Employee Benefit Trust
The rules of the LTIS allow it to be operated in
conjunction with any employee trust established
by the company. Accordingly, the company
established the Provident Financial plc 2007
Employee Benefit Trust (EBT) in Jersey on
11 September 2007 with Kleinwort Benson
(Jersey) Trustees Limited (KB Trustees) acting
as the trustee of the trust.
The EBT, together with any other trust established
by the company for the benefit of employees
cannot, at any time, hold more than 5% of the
issued share capital of the company.
KB Trustees, as trustee of the EBT, subscribed
for 395,037 ordinary shares in April 2014 and
18,816 in September 2014 for the purpose of
satisfying the 2014 awards made pursuant to
the LTIS. The trustee transferred the beneficial
ownership (subject to the performance conditions
set out on page 118) in 123,643 of the shares for
no consideration to the executive directors on
6 June 2014.
KB Trustees also subscribed for 202,689 ordinary
shares in April 2014 for the purpose of satisfying
the 2014 awards made pursuant to the 2013 PSP.
The trustee transferred the beneficial ownership
(subject to the performance conditions set out
Performance Share PlanDetails of the awards granted to the executive directors during 2014 are summarised below:Director’s nameDate of awardType of awardNumber of sharesFace value1 Percentage of salaryPerformance condition2Performance period% vesting at thresholdPeter Crook08.04.14Basic24,822£471,37069%100% based on absolute EPS growth of between 5% and 11%Three consecutive financial years ending 31 December 2016Half a matching shareMatching49,644£942,740138%Andrew Fisher08.04.14Basic15,442£293,24460%Matching30,884£586,487120%1 Face value is calculated based on the share price of £18.99 on 7 April 2014. The actual value at vesting may be greater or lesser depending on actual share at vesting and as a result of any dividend payable on vesting shares.2 Performance conditions are set out on pages 123 and 124.Awards held under the PSP and 2013 PSP at 31 December 2014 were as follows:Director’s nameDate of grantBasic awards (number of shares) held at 01.01.2014Matching awards (number of shares) held at 01.01.2014Total basic awards (number of shares) vested during the yearTotal matching awards (number of shares) vested during the yearTotal basic awards (number of shares) held at 31.12.2014Total matching awards (number of shares) held at 31.12.2014Market price at date of grant (p)Market price at date of vesting (p)Vesting datePeter Crook04.03.201131,21662,43231,21662,432 – –952.51,864.004.03.201426.03.201232,53065,060 – –32,53065,0601,162.026.03.201509.05.201333,24366,486 – –33,24366,4861,533.009.05.201608.04.2014––––24,82249,6441,899.008.04.2017Andrew Fisher04.03.201118,09436,18818,09436,188 – –952.51,864.004.03.201426.03.201219,36338,726 – –19,36338,7261,162.026.03.201509.05.201320,22240,444 – –20,22240,4441,533.009.05.201608.04.2014––––15,44230,8841,899.008.04.2017Provident Financial plc Annual Report and Financial Statements 2014 Annual Report on Remuneration continued
on page 123), in 80,528 of the shares for no
consideration to the executive directors on 8 April
2014 and also transferred the legal ownership in
40,264 of the shares for no consideration to the
executive directors. KB Trustees has entered into
a dividend waiver agreement in respect of all the
shares it holds in the company at any time.
Statement of shareholder voting
at AGM
At the 2014 AGM the directors’ remuneration
policy received the following votes
from shareholders:
Total number
of votes
% of
votes cast
join the scheme were issued to eligible employees
in August 2014. No consideration is payable on
the grant of an option.
No directors exercised share options under the
Provident Financial plc Employee Savings-Related
Share Option Scheme (2003) or Provident
Financial Savings Related Share Option Scheme
2013 during the year. There was therefore no
notional gain (representing the difference between
the exercise price and the market price of the
shares at the date of exercise) on the exercise of
share options (2013: £12,672).
There were no changes in directors’ share options
between 1 January 2015 and 24 February 2015.
For
Against
Total votes cast
(for and against)
104,365,608
4,254,554
108,620,162
96.0
4.0
100.0
None of the directors has notified the company
of an interest in any other shares, transactions or
arrangements which requires disclosure.
The total number of votes withheld was 984,012.
At the 2014 AGM the directors’ Annual Report
on Remuneration received the following votes
from shareholders:
Total number
of votes
% of
votes cast
For
Against
Total votes cast
(for and against)
104,737,176
4,316,421
109,053,597
96.0
4.0
100.0
The total number of votes withheld was 550,577.
Savings-related share option
scheme
As set out on page 118, the executive directors
may participate in the Provident Financial Savings
Related Share Option Scheme 2013.
This scheme does not contain performance
conditions as it is an HMRC-approved scheme
designed for employees at all levels. Invitations to
Clawback
In accordance with the recommendations within
the Code and other best practice guidance,
the committee, having consulted with NBS,
introduced clawback provisions into all awards
under the annual bonus scheme, LTIS and the
PSP from December 2010 and into all awards
under the 2013 PSP. This enables the committee,
at its discretion, to clawback value overpaid in the
event of: (i) a material prior period error requiring
restatement of the group financial statements; or
(ii) an error in assessing the extent to which a
performance target (and/or any other condition)
had been met.
Dilution and use of equity
Following the demerger of the international
business in 2007 and the subsequent share
consolidation, the number of shares in issue
was halved. As a consequence of this, the
5% anti-dilution limit contained within the
company’s executive share incentive schemes
125
was completely utilised so that it was no longer
possible for the company to satisfy any new
awards granted under the executive share
incentive schemes using newly issued shares
(as opposed to satisfying awards by making
market purchases of shares). Had the demerger
not occurred, the company would have had
sufficient headroom under the then existing 5%
limit to continue to satisfy awards under the
executive share incentive schemes using newly
issued shares.
The committee considers the LTIS an important
means of incentivising and retaining the
executive directors and senior management and
consequently a resolution seeking shareholder
approval for the removal of the 5% anti-dilution
limit from the rules of the LTIS was passed at
the company’s 2008 AGM. Information on the
resolution was included in the shareholders’
circular and notice of the 2008 AGM.
Awards granted under the LTIS can therefore
be satisfied using newly issued shares, up to
the 10% anti-dilution limit in any 10 years, which
applies to all share schemes operated by the
company. In due course, the committee intends
to re-introduce the 5% limit when the LTIS can
be effectively operated in accordance with, and
subject to, a 5% anti-dilution limit.
The table below sets out the headroom available
for all share schemes and shares held in trust as
at 31 December.
Headroom
All share schemes
Shares held in trust
2014
2.8%
3.2%
2013
2.1%
2.9%
Payments for loss of office
There were no payments for loss of office during
the year.
Savings-related share option scheme Director’s nameOptions held at 01.01.2014Granted in 2014Exercised in 2014Options held at 31.12.2014Exercise price (p)Market value at date of exercise (p)Range of normal exercisable dates of options held 31.12.2014Peter Crook1,777 – –1,777868–01.12.2016 – 31.05.2017Andrew Fisher689––547––6895471,3051,644–01.12.2016 – 31.05.201701.12.2017 – 31.05.2018Total2,466 547–3,013Provident Financial plc Annual Report and Financial Statements 2014Remuneration 126
Remuneration continued
Annual Report on Remuneration continued
Total shareholder return: Provident
Financial plc vs FTSE 250
Graph (1) shows the total shareholder return
for Provident Financial plc against the FTSE
250 index for the past six years. This index
was chosen for comparison because the
company has been a member of this index
for the six-year period. Graph (2) shows the
comparison for the period from demerger of
the international business to 31 December 2014,
which the committee believes is a more accurate
representation of the company’s performance.
Table (3) shows the total remuneration figure for
Peter Crook, the Chief Executive, over the six-year
period. The total remuneration figure includes
the annual bonus paid together with LTIS and
PSP awards which vested based on the relevant
performance targets in those years. The annual
bonus, LTIS and PSP percentages show the
payout for each year as a percentage of the
maximum opportunity.
Chief executive relative pay
Table (4) shows the percentage year-on-year
change in salary, benefits and annual bonus
earned between the years ended 31 December
2012 and 31 December 2014 for Peter Crook,
the Chief Executive, compared to the average
for the corporate office employees during the
same period. The corporate office employees
are considered to be a more suitable comparator
group due to the range and composition of
employees and the wide range of different
remuneration structures and practices which
operate across the group.
1. Total shareholder return: Provident Financial vs. FTSE 250 – 2008 to 2014
500
400
300
200
100
0
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Provident Financial
FTSE 250
2. Total shareholder return: Provident Financial vs. FTSE 250 – 16.07.07 to 31.12.14
600
500
400
300
200
100
0
Jul 07
Dec 07 Jul 08 Dec 08 Jul 09 Dec 09 Jul 10 Dec 10 Jul 11 Dec 11 Jul 12 Dec 12 Jul 13
Dec 13
Jul 14
Dec 14
Provident Financial
FTSE 250
3. Chief Executive remuneration 2009-2014
2009
2,023
2010
2,727
2011
3,443
2012
4,326
2013
4,985
2014
6,601
Year ended 31 December
–
100
–
81
66
100
100
49
79
98
100
–
89
100
100
100
100
100
Single total figure of
remuneration (£’000)
Annual bonus (%)
LTIS vesting (%)
PSP vesting (%)
4. Chief Executive relative pay
2013/2014
2012/2013
%
Salary
Benefits Annual bonus
Salary
Benefits Annual bonus
Chief Executive
Average corporate
office employee
3.0%
1.9%
1.1%
11.4%
16.3%
9.5%
2.3%
4.9%
13.5%
13.0%
(7.0)%
(9.0)%
Across the group, the budgeted salary increase ranged from 0% to 3.5%.
Provident Financial plc Annual Report and Financial Statements 2014 Annual Report on Remuneration continued
127
Relative importance of spend on pay
Year ended 31st December
2014
123.2
2013
116.0
123.4
108.4
2012
114.3
96.1
%
change
2012/2013
%
change
2013/2014
1.4
12.8
6.2
13.8
Total employee
remuneration (£m)
Total shareholder
distributions (£m)
Relative importance of spend
on pay
The table above shows the total pay (including
bonuses) for all the group’s employees in the
2012, 2013 and 2014 financial years compared
to the distributions made to shareholders in the
same periods.
Share ownership guidelines
The company has share ownership guidelines
for executive directors which in 2014 required
them to acquire and maintain shares in the
company with a value of 125% of basic salary.
This guideline will be increased to 175% of basic
salary in 2015 and 200% of basic salary in
2016. Executive directors are required to retain
50% of vested LTIS awards, net of tax, until this
requirement has been reached.
The committee reviews the shareholdings of the
executive directors in the light of these guidelines
once a year, based on the market value of the
company’s shares at the date of assessment.
When performing the calculation to assess
progress against the guidelines, shares held by
a spouse, dependant, or in an ISA or pension
scheme are included, whilst unvested LTIS
awards and awards granted under the PSP
and 2013 PSP are not.
The executive directors complied with these
guidelines as at 31 December 2014:
Director’s name
Peter Crook
Andrew Fisher
Actual share ownership
as a percentage of salary
298%
253%
Pensions and life assurance
In December 2011, the Finance Act introduced
the Reduced Annual Allowance, which limited
the benefits that can be provided by the group’s
registered pension schemes on a tax-efficient
basis to a value of £50,000 in any year which
reduced to £40,000 from April 2014. As a result,
the company has provided a range of options
through which executive directors can choose to
receive retirement benefits with a value equivalent
to 30% of basic salary.
Pension entitlements
Details of the pension entitlements earned under
the company’s pension arrangements are set out
on page 128.
Provident Financial Staff
Pension Scheme
There is one director (2014: two) for whom
retirement benefits accrued in the year under the
cash balance section of the Provident Financial
Staff Pension Scheme (the pension scheme).
The pension scheme is a defined benefit scheme
with cash balance benefits.
Details of shares held by directors and their connected persons, are shown below.UnvestedDirectorTypeOwned outrightSubject to performance conditionsNot subject to performance conditionsTotal as at 31.12.14Peter CrookOwn name––––Held in Barclayshare Nominees Limited82,979––82,979Held in YBS Trustees (SIP)102––102LTIS–274,803–274,803PSP–181,19090,595271,785Total83,081455,99390,595629,669Andrew FisherOwn name50,297––50,297Held in YBS Trustees (SIP)112––112LTIS–196,380–196,380PSP–110,05455,027165,081Total50,409306,43455,027411,870Directors’ share options at 31 December 2014, granted under the Provident Financial plc Employee Savings-Related Share Option Scheme (2003) and the Provident Financial Savings Related Share Option Scheme 2013 are set out in the table on page 125.Provident Financial plc Annual Report and Financial Statements 2014Remuneration 128
Remuneration continued
Annual Report on Remuneration continued
Peter Crook was a member of the cash balance
section of the pension scheme until 3 April 2014,
when he transferred the value of his pension rights
into a Self Invested Personal Pension (SIPP).
The accumulated cash balance credit increases
each year by the lower of the increase in RPI plus
1.5% and 6.5%. At retirement, up to 25% of the
total value of the director’s retirement account can
be taken as a lump sum, with the balance used to
purchase an annuity. If the director dies in service,
a death benefit of six times salary plus the value
of the retirement account is payable.
Personal pension arrangements
Andrew Fisher also has a personal pension
arrangement to which the company did not make
any contributions in 2014 (2013: £18,364).
Unfunded Unapproved Retirement
Benefits Scheme
The company operates an Unfunded Unapproved
Retirement Benefits Scheme (UURBS) to provide
cash balance benefits to those employees affected
by the Reduced Annual Allowance. Details of the
pension credits earned under the UURBS are set
out in the table above.
Cash supplement
A further option is for directors to receive a cash
supplement in lieu of the benefits payable in
excess of the Reduced Annual Allowance.
Both the UURBS and the cash supplement can
also be used where employees are affected by
the HMRC Lifetime Allowance of £1.5m, which
reduced to £1.25m from 6 April 2014.
Audit
The elements of the directors’ remuneration
report (including pension entitlements and share
options set out on pages 120 to 128 of this report)
which are required to be audited, have been
audited in accordance with the Companies Act.
This Annual Report on Remuneration has been
approved by the remuneration committee and
the board and signed on its behalf.
Malcolm Le May
Chairman of the remuneration committee
24 February 2015
Age as at 31 December 2014Normal retirement ageAccrued retirement accountas at 31 December1Increase in retirement account22014201320142013Defined benefits£’000£’000£’000£’000Cash balancePeter Crook35160–1,105765Andrew Fisher45660––028UURBSPeter Crook51–792553239197Andrew Fisher56–498317181137Non-defined benefitsSelf Invested Personal PensionAndrew Fisher56––––181 The transfer value of the accrued retirement account is the same as the accrued retirement account.2 The increase in the transfer value of the accrued retirement account is the same as the increase in the retirement account. The total increases for each director in 2014 (which are included in the table of directors’ remuneration on page 120) were: Peter Crook: £246,000 and Andrew Fisher: £181,000.3 On 3 April 2014 Peter Crook opted out of the Cash Balance section of the pension scheme and took a transfer value of £1,112,000 to his Self Invested Personal Pension. 4 On 4 June 2013 Andrew Fisher opted out of the Cash Balance section of the pension scheme and took a transfer value of £830,000 to his Self Invested Personal Pension.Note – Any request for early retirement will require the consent of the Trustees of the pension scheme.Provident Financial plc Annual Report and Financial Statements 2014 Provident Financial plc
Annual Report and Financial Statements 2014
129
Financial
statements
130 Consolidated income statement
130 Consolidated statement
of comprehensive income
130 Earnings per share
131 Balance sheets
132 Statements of changes
in shareholders’ equity
134 Statements of cash flows
135 Statement of accounting policies
142 Financial and capital risk management
147 Notes to the financial statements
187 Independent auditor’s report
Financial statements
130
Consolidated income statement
For the year ended 31 December
Revenue
Finance costs
Operating costs
Administrative costs
Total costs
Profit before taxation
Profit before taxation, amortisation of acquisition intangibles and exceptional costs
Amortisation of acquisition intangibles
Exceptional costs
Tax charge
Profit for the year attributable to equity shareholders
All of the above activities relate to continuing operations.
Consolidated statement of comprehensive income
For the year ended 31 December
Profit for the year attributable to equity shareholders
Other comprehensive income:
– cash flow hedges
– actuarial movements on retirement benefit asset
– exchange differences on translation of foreign operations
– tax on items taken directly to other comprehensive income
– impact of change in UK tax rate
Other comprehensive income for the year
Total comprehensive income for the year
Earnings per share
For the year ended 31 December
Basic
Diluted
Note
1,2
3
1,4
1,4
12
1
5
Note
17
19
5
5
2014
£m
1,075.7
(77.5)
(491.6)
(282.0)
(851.1)
224.6
234.4
(2.5)
(7.3)
(49.0)
175.6
2014
£m
175.6
2.2
17.5
0.5
(4.2)
0.3
16.3
191.9
Note
6
6
2014
pence
126.5
124.5
Group
2013
£m
1,078.1
(74.2)
(559.5)
(262.0)
(895.7)
182.4
196.1
–
(13.7)
(41.4)
141.0
Group
2013
£m
141.0
2.7
(3.9)
(0.2)
0.3
0.3
(0.8)
140.2
Group
2013
pence
104.2
102.2
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014Dividends per shareFor the year ended 31 DecemberGroupNote2014 pence2013 penceProposed final dividend763.954.0Total dividend for the year798.085.0Paid in the year* 788.179.4*The total cost of dividends paid in the year was £123.4m (2013: £108.4m). Balance sheets
As at 31 December
ASSETS
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Investment in subsidiaries
Financial assets:
– amounts receivable from customers
– trade and other receivables
Retirement benefit asset
Deferred tax assets
Current assets
Financial assets:
– amounts receivable from customers
– derivative financial instruments
– cash and cash equivalents
– trade and other receivables
Total assets
LIABILITIES
Current liabilities
Financial liabilities:
– bank and other borrowings
– trade and other payables
Current tax liabilities
Non-current liabilities
Financial liabilities:
– bank and other borrowings
– derivative financial instruments
Deferred tax liabilities
Total liabilities
NET ASSETS
SHAREHOLDERS’ EQUITY
Share capital
Share premium
Other reserves
Retained earnings
TOTAL EQUITY
131
Note
2014
£m
Group
2013
£m
Company
2014
£m
2013
£m
11
12
13
14
15
18
19
20
15
17
21
18
1
22
23
22
17
20
1
1
24
26
71.2
84.3
27.4
–
155.6
–
56.0
–
394.5
–
8.1
22.8
–
79.7
–
29.2
3.5
143.3
1,693.6
0.2
145.9
24.5
1,864.2
2,258.7
1,526.9
5.5
119.0
15.5
1,666.9
1,810.2
(135.3)
(94.3)
(40.4)
(270.0)
(121.2)
(65.8)
(36.3)
(223.3)
(1,357.7)
(4.4)
(13.6)
(1,375.7)
(1,645.7)
613.0
30.3
268.3
19.0
295.4
613.0
(1,163.4)
(6.7)
–
(1,170.1)
(1,393.4)
416.8
28.9
150.6
17.2
220.1
416.8
–
–
7.0
496.3
–
983.8
56.0
–
1,543.1
–
–
7.7
580.5
588.2
2,131.3
(8.6)
(130.1)
(1.1)
(139.8)
(901.5)
(4.4)
(8.2)
(914.1)
(1,053.9)
1,077.4
30.3
268.3
629.6
149.2
1,077.4
–
–
7.7
376.8
–
930.3
29.2
–
1,344.0
–
–
13.6
569.5
583.1
1,927.1
(2.9)
(178.6)
(2.7)
(184.2)
(796.7)
(6.7)
(2.8)
(806.2)
(990.4)
936.7
28.9
150.6
627.7
129.5
936.7
The financial statements on pages 130 to 186 were approved by the board of directors on 24 February 2015 and signed on its behalf by:
Peter Crook
Chief Executive
Andrew Fisher
Finance Director
Company Number – 668987
Provident Financial plc Annual Report and Financial Statements 2014Financial statements
132
Statements of changes in shareholders’ equity
Group
At 1 January 2013
Profit for the year
Other comprehensive income:
– cash flow hedges
– actuarial movements on retirement benefit asset
– exchange differences on translation of foreign operations
– tax on items taken directly to other comprehensive income
– impact of change in UK tax rate
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with owners:
– issue of share capital
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge
– transfer of share-based payment reserve
– dividends
At 31 December 2013
At 1 January 2014
Profit for the year
Other comprehensive income:
– cash flow hedges
– actuarial movements on retirement benefit asset
– exchange differences on translation of foreign operations
– tax on items taken directly to other comprehensive income
– impact of change in UK tax rate
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with owners:
– issue of share capital
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge
– transfer of share-based payment reserve
– dividends
At 31 December 2014
Share
capital
£m
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
Note
28.7
–
148.1
–
–
–
–
–
–
–
–
0.2
–
–
–
–
–
28.9
28.9
–
–
–
–
–
–
–
–
1.4
–
–
–
–
–
30.3
–
–
–
–
–
–
–
2.5
–
–
–
–
–
150.6
150.6
–
–
–
–
–
–
–
–
117.7
–
–
–
–
–
268.3
13.2
–
2.7
–
–
(0.6)
(0.2)
1.9
1.9
–
(0.5)
0.6
7.4
(5.4)
–
17.2
17.2
–
2.2
–
–
(0.4)
–
1.8
1.8
–
(0.1)
0.2
8.7
(8.8)
–
19.0
185.4
141.0
–
(3.9)
(0.2)
0.9
0.5
(2.7)
138.3
–
–
(0.6)
–
5.4
(108.4)
220.1
220.1
175.6
–
17.5
0.5
(3.8)
0.3
14.5
190.1
–
–
(0.2)
–
8.8
(123.4)
295.4
17
19
5
5
24
25
7
17
19
5
5
24
25
7
Total
£m
375.4
141.0
2.7
(3.9)
(0.2)
0.3
0.3
(0.8)
140.2
2.7
(0.5)
–
7.4
–
(108.4)
416.8
416.8
175.6
2.2
17.5
0.5
(4.2)
0.3
16.3
191.9
119.1
(0.1)
–
8.7
–
(123.4)
613.0
The movement of £117.7m in the share premium account in 2014 is stated net of £3.1m of costs associated with the placing of ordinary shares in respect of the acquisition of Moneybarn
(see note 10).
Goodwill arising on acquisitions prior to 1 January 1998 was eliminated against shareholders’ funds under UK GAAP and was not reinstated on transition to
IFRS. Accordingly, retained earnings are shown after directly writing off cumulative goodwill of £1.6m (2013: £1.6m). In addition, cumulative goodwill of £2.3m
(2013: £2.3m) has been written off against the merger reserve in previous years.
Other reserves are further analysed in note 26.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Statements of changes in shareholders’ equity
133
Total
£m
911.5
127.6
2.7
(3.9)
0.3
0.3
(0.6)
127.0
2.7
(0.5)
–
3.6
0.8
–
(108.4)
936.7
936.7
125.1
2.3
17.5
(4.3)
0.3
15.8
140.9
119.1
(0.1)
–
4.6
(0.4)
–
(123.4)
1,077.4
Share
capital
£m
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
Note
28.7
–
148.1
–
623.7
–
–
–
–
–
–
–
0.2
–
–
–
–
–
–
28.9
28.9
–
–
–
–
–
–
–
1.4
–
–
–
–
–
–
30.3
–
–
–
–
–
–
2.5
–
–
–
–
–
–
150.6
150.6
–
–
–
–
–
–
–
117.7
–
–
–
–
–
–
268.3
2.7
–
(0.6)
(0.2)
1.9
1.9
–
(0.5)
0.6
3.6
0.8
(2.4)
–
627.7
627.7
–
2.3
–
(0.5)
–
1.8
1.8
–
(0.1)
0.2
4.6
(0.4)
(4.2)
–
629.6
111.0
127.6
–
(3.9)
0.9
0.5
(2.5)
125.1
–
–
(0.6)
–
–
2.4
(108.4)
129.5
129.5
125.1
–
17.5
(3.8)
0.3
14.0
139.1
–
–
(0.2)
–
–
4.2
(123.4)
149.2
17
19
24
25
14
7
17
19
24
25
14
7
Company
At 1 January 2013
Profit for the year
Other comprehensive income:
– cash flow hedges
– actuarial movements on retirement benefit asset
– tax on items taken directly to other comprehensive income
– impact of change in UK tax rate
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with owners:
– issue of share capital
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge
– share-based payment movement in investment in subsidiaries
– transfer of share-based payment reserve
– dividends
At 31 December 2013
At 1 January 2014
Profit for the year
Other comprehensive income:
– cash flow hedges
– actuarial movements on retirement benefit asset
– tax on items taken directly to other comprehensive income
– impact of change in UK tax rate
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with owners:
– issue of share capital
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge
– share-based payment movement in investment in subsidiaries
– transfer of share-based payment reserve
– dividends
At 31 December 2014
In accordance with the exemption allowed by section 408 of the Companies Act 2006, the company has not presented its own income statement or
statement of other comprehensive income. The retained profit for the financial year reported in the financial statements of the company was £125.1m
(2013: £127.6m).
Other reserves are further analysed in note 26.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 134
Statements of cash flows
For the year ended 31 December
Cash flows from operating activities
Cash generated from operations
Finance costs paid
Finance income received
Tax paid
Net cash generated from/(used in) operating activities
Cash flows from investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of Moneybarn
Long-term loans provided to subsidiaries
Dividends received from subsidiaries
Net cash (used in)/generated from investing activities
Cash flows from financing activities
Proceeds from bank and other borrowings
Repayment of bank and other borrowings
Dividends paid to company shareholders
Proceeds from issue of share capital
Purchase of own shares
Repayment of loans from subsidiaries
Net cash generated from/(used in) financing activities
Net increase/(decrease) in cash, cash equivalents and overdrafts
Cash, cash equivalents and overdrafts at beginning of year
Cash and cash equivalents acquired with Moneybarn
Cash, cash equivalents and overdrafts at end of year
Cash, cash equivalents and overdrafts at end of year comprise:
Cash at bank and in hand
Overdrafts (held in bank and other borrowings)
Total cash, cash equivalents and overdrafts
Note
30
12
13
13
10
7
24
26
10
21
22
2014
£m
221.5
(72.3)
–
(44.9)
104.3
(7.4)
(11.6)
1.1
(120.0)
–
–
(137.9)
341.0
(277.2)
(123.4)
119.1
(0.1)
–
59.4
25.8
109.7
5.2
140.7
145.9
(5.2)
140.7
Group
2013
£m
183.8
(70.0)
–
(39.6)
74.2
(3.0)
(7.3)
1.5
–
–
–
(8.8)
287.6
(206.8)
(108.4)
2.7
(0.5)
–
(25.4)
40.0
69.7
–
109.7
119.0
(9.3)
109.7
Company
2013
£m
107.5
(56.5)
81.4
–
132.4
–
(0.4)
0.4
–
(88.1)
105.0
16.9
65.0
(43.3)
(108.4)
2.7
(0.5)
(49.3)
(133.8)
15.5
(4.8)
–
10.7
13.6
(2.9)
10.7
2014
£m
(33.9)
(62.0)
83.3
–
(12.6)
–
(0.7)
0.3
(120.0)
(53.5)
112.5
(61.4)
123.7
(12.1)
(123.4)
119.1
(0.1)
(38.8)
68.4
(5.6)
10.7
–
5.1
7.7
(2.6)
5.1
Cash at bank and in hand includes £121.4m (2013: £86.3m) in respect of the liquid assets buffer, including other liquidity resources, held by Vanquis Bank
in accordance with the Prudential Regulation Authority’s (PRA) liquidity regime (see note 21). This buffer is not available to finance the group’s day-to-
day operations.
The statutory cash flow statement reflects the cash inflow/(outflow) after funding the growth in the receivables book. The group’s financial model is to fund the receivables book through
a combination of 20% equity and 80% debt. Accordingly, to assess the group’s capital generation to pay dividends to the company’s shareholders, capital generation is calculated as net cash
generated from/(used in) operating activities, after assuming that 80% of the growth in receivables is funded with borrowings, less net capital expenditure. Capital generated in 2014 on this
basis was £175.5m (2013: £139.2m) compared with a dividend payable in respect of 2014 of £140.6m (2013: £116.8m).
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 135
Statement of accounting policies
General information
The company is a public limited company incorporated and domiciled in
the UK. The address of its registered office is No. 1 Godwin Street, Bradford,
BD1 2SU. The company is listed on the London Stock Exchange.
Basis of preparation
The financial statements are prepared in accordance with IFRS adopted
for use in the European Union (EU), International Financial Reporting
Interpretations Committee (IFRIC) interpretations and the Companies Act
2006. The financial statements have been prepared on a going concern
basis under the historical cost convention, as modified by the revaluation
of derivative financial instruments to fair value. In preparing the financial
statements, the directors are required to use certain critical accounting
estimates and are required to exercise judgement in the application of
the group and company’s accounting policies.
The group and company’s principal accounting policies under IFRS, which
have been consistently applied to all the years presented unless otherwise
stated, are set out below:
(a) New and amended standards adopted by the group and company:
IFRS 9, ‘Financial instruments’, addresses the classification,
measurement and recognition of financial assets and financial liabilities.
The final version of the standard was issued in July 2014. The standard
primarily impacts the classification and measurement of financial assets
and liabilities and introduces the ‘expected credit loss’ model for the
measurement of the impairment of financial assets so it is no longer
necessary for a credit event to have occurred before a credit loss is
recognised. The group and company are in the process of assessing the
impact of standard and will adopt the standard in line with the mandatory
effective date of 1 January 2018, subject to endorsement by the EU.
Basis of consolidation
The consolidated income statement, consolidated statement of
comprehensive income, balance sheet, statement of changes in
shareholders’ equity, statement of cash flows and notes to the financial
statements include the financial statements of the company and all of its
subsidiary undertakings drawn up from the date control passes to the
group until the date control ceases.
Control is achieved when the group:
• has the power over the investee;
‘Offsetting financial assets and financial liabilities (amendments to
IAS 32)’ clarifies the requirements for offsetting financial instruments.
The amendments address inconsistencies in current practice when
applying the offsetting criteria in IAS 32 ‘Financial instruments:
Presentation’. The amendments clarify the meaning of ‘currently
has a legally enforceable right of set-off’ and that some gross
settlement systems may be considered equivalent to a net settlement.
The amendment has not had a material impact on the group or company.
• is exposed, or has rights, to variable return from its involvement with
the investee; and
• has the ability to use its power to affect returns.
All intra-group transactions, balances and unrealised gains on transactions
between group companies are eliminated on consolidation.
The accounting policies of subsidiaries are consistent with the accounting
policies of the group.
‘Recoverable amount disclosures (amendments to IAS 36 (May 2013))’
are narrow-scope amendments to IAS 36 ‘Impairment of assets’.
The amendment addresses the disclosure of information about the
recoverable amount of impaired assets if that amount is based on fair
value less costs of disposal. The amendment has not had a material
impact on the group or company.
‘Novation of derivatives and continuation of hedge accounting
(amendments to IAS 39)’ are narrow-scope amendments which allow
hedge accounting to continue in a situation where a derivative financial
instrument, which has been designated as a hedging instrument, is
novated to effect clearing with a central counterparty as a result of laws
or regulation, if specific conditions are met. The amendment has not
had a material impact on the group or company.
(b) New standards, amendments and interpretations issued but
not effective for the financial year beginning 1 January 2014
and not early adopted:
‘Defined benefit plans: Employee contributions (amendments to
IAS 19 (Nov 2013))’ simplifies the accounting for contributions that
are independent of the number of years of employee service (e.g.
employee contributions that are calculated according to a fixed
percentage of salary). The amendment is mandatory for accounting
periods starting on or after 1 July 2014. The amendment will be adopted
from 1 January 2015 following endorsement by the EU in December
2014, and is not expected to have a material impact on the group
or company.
Revenue
Revenue comprises interest and fee income earned by Vanquis Bank
and interest income earned by the Consumer Credit Division (CCD)
and Moneybarn.
Revenue excludes value added tax and intra-group transactions.
Within Vanquis Bank, interest is calculated on credit card advances to
customers using the effective interest rate on the daily balance outstanding.
Annual fees charged to customers’ credit card accounts are recognised
as part of the effective interest rate. Penalty charges and other fees are
recognised at the time the charges are made to customers on the basis
that performance is complete.
Within CCD and Moneybarn, revenue on customer receivables is recognised
using an effective interest rate. The effective interest rate is calculated using
estimated cash flows, being contractual payments adjusted for the impact of
customers repaying early but excluding the anticipated impact of customers
paying late or not paying at all. Directly attributable incremental issue
costs are also taken into account in calculating the effective interest rate.
Interest income continues to be accrued on impaired receivables using the
original effective interest rate applied to the loan’s carrying value.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 136
Statement of accounting policies continued
Finance costs
Finance costs principally comprise the interest on bank and other
borrowings (including retail deposits) and, for the company, on intra-group
loan arrangements, and are recognised on an effective interest rate basis.
Finance costs also include the fair value movement on those derivative
financial instruments held for hedging purposes which do not qualify for
hedge accounting under IAS 39.
Dividend income
Dividend income is recognised in the income statement when the company’s
right to receive payment is established.
Goodwill
All acquisitions are accounted for using the purchase method of accounting.
Goodwill is an intangible asset and is measured as the excess of the fair
value of the consideration over the fair value of the acquired identifiable
assets, liabilities and contingent liabilities at the date of acquisition. Gains
and losses on the disposal of a subsidiary include the carrying amount
of goodwill relating to the subsidiary sold.
Goodwill is allocated to cash-generating units for the purposes of impairment
testing. The allocation is made to those cash-generating units or groups
of cash-generating units that are expected to benefit from the business
combination in which the goodwill arose.
Goodwill is tested annually for impairment and is carried at cost less
accumulated impairment losses. Impairment is tested by comparing the
carrying value of the asset to the discounted expected future cash flows
from the relevant cash-generating unit. Expected future cash flows are
derived from the group’s latest budget projections and the discount rate
is based on the group’s weighted average cost of capital at the balance
sheet date.
Goodwill arising on acquisitions prior to 1 January 1998 was eliminated
against shareholders’ funds under UK GAAP and was not reinstated on
transition to IFRS. On disposal of a business, any such goodwill relating to
the business will not be taken into account in determining the profit or loss
on disposal.
Investments in subsidiaries
Investments in subsidiaries are stated at cost less, where appropriate,
provisions for impairment. Impairment is calculated by comparing the
carrying value of the investment to the higher of the net asset value of the
relevant subsidiary and its discounted expected future cash flows.
Leases
Leases in which a significant portion of the risks and rewards of ownership
are retained by the lessor are classified as operating leases. The leases
entered into by the group and company are solely operating leases. Costs in
respect of operating leases are charged to the income statement on a
straight-line basis over the lease term.
Other intangible assets
Other intangible assets include acquisition intangibles in respect of the
broker relationships at Moneybarn and stand-alone computer software and
computer software development costs across the group
The fair value of Moneybarn’s broker relationships on acquisition has been
estimated by discounting the expected future cash flows from Moneybarn’s
core broker relationships over their estimated useful economic life of 10
years. The asset will be amortised on a straight-line basis over its estimated
useful life. For more detail see key assumptions and estimates on page 141.
Computer software and computer software development assets represent
the costs incurred to acquire or develop software and bring it into use.
Directly attributable costs incurred in the development of software are
capitalised as an intangible asset if the software will generate future
economic benefits. Directly attributable costs include the cost of software
development employees and an appropriate portion of relevant directly
attributable overheads.
Computer software and computer software development costs are
amortised on a straight-line basis over their estimated useful economic life
which is generally estimated to be between five and 10 years. The residual
values and economic lives of intangible assets are reviewed by management
at each balance sheet date.
Other intangible assets are valued at cost less subsequent amortisation.
Amortisation is charged to the income statement as part of
administrative costs.
Foreign currency translation
Items included in the financial statements of each of the group’s subsidiaries
are measured using the currency of the primary economic environment
in which the subsidiary operates (the functional currency). The group’s
subsidiaries primarily operate in the UK and Republic of Ireland, with a pilot
credit card operation in Poland. The consolidated and company financial
statements are presented in sterling, which is the company’s functional and
presentational currency.
Transactions that are not denominated in the group’s functional currency
are recorded at the rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are
translated into the relevant functional currency at the exchange rates ruling
at the balance sheet date. Differences arising on translation are charged or
credited to the income statement, except when deferred in equity as effective
cash flow hedges.
If a foreign operation were to be disposed of, the cumulative amount of the
differences arising on translation recognised in other comprehensive income
would be recognised in the income statement when the gain or loss on
disposal is recognised.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Statement of accounting policies continued
137
Amounts receivable from customers
Customer receivables are initially recorded at the amount advanced to the
customer plus directly attributable issue costs. Subsequently, receivables
are increased by revenue and reduced by cash collections and any
deduction for impairment.
The group assesses whether there is objective evidence that customer
receivables are impaired at each balance sheet date. The principal criteria
for determining whether there is objective evidence of impairment is
delinquency in contractual payments.
Within Vanquis Bank and Moneybarn, where repayments are typically
made monthly, customer balances are deemed to be impaired when one
monthly contractual payment is missed. Impairment is calculated as the
difference between the carrying value of receivables and the present value
of estimated future cash flows discounted at the original effective interest
rate. Estimated future cash flows are based on the historical performance
of customer balances falling into different arrears stages and are
regularly reassessed.
Separate provisions are raised where forbearance is provided to the
customer and alternative payment arrangements are established.
Accounts under payment arrangements are separately identified according
to the type of payment arrangement. The carrying value of receivables under
each type of payment arrangement is calculated using historical cash flows
to predict future expected cash flows which are discounted at the original
effective interest rate.
Within the weekly home credit business of CCD, objective evidence of
impairment is based on the payment performance of loans in the previous
12 weeks as this is considered to be the most appropriate indicator of credit
quality. Loans are deemed to be impaired when the cumulative amount
of two or more contractual weekly payments have been missed in the
previous 12-week period since only at this point do the expected future cash
flows from loans deteriorate significantly. Loans with one missed weekly
payment over the previous 12-week period are not deemed to be impaired.
The amount of impairment loss is calculated on a portfolio basis by reference
to arrears stages and is measured as the difference between the carrying
value of the loans and the present value of estimated future cash flows
discounted at the original effective interest rate. Subsequent cash flows are
regularly compared to estimated cash flows to ensure that the estimates
are sufficiently accurate for impairment provisioning purposes.
In Vanquis Bank and Moneybarn, impairment is recorded through the use
of an allowance account whilst in CCD impairment charges are deducted
directly from the carrying value of receivables.
Impairment is charged to the income statement as part of operating costs.
Property, plant and equipment
Property, plant and equipment is shown at cost less accumulated
depreciation and impairment, except for land, which is shown at cost
less impairment.
Cost represents invoiced cost plus any other costs that are directly
attributable to the acquisition of the items. Repairs and maintenance costs
are expensed as incurred.
Depreciation is calculated to write down assets to their estimated realisable
values over their useful economic lives. The following principal bases
are used:
Land
Freehold and long
leasehold buildings
Short leasehold buildings
Equipment
(including computer hardware)
Motor vehicles
%
Nil
2½
Over the lease period
Method
–
Straight line
Straight line
10 to 33 1⁄3
25
Straight line
Reducing balance
The residual values and useful economic lives of all assets are reviewed,
and adjusted if appropriate, at each balance sheet date. All items of property,
plant and equipment, other than land, are tested for impairment whenever
events or changes in circumstances indicate that the carrying value may not
be recoverable. Land is subject to an annual impairment test. An impairment
loss is recognised for the amount by which the asset’s carrying value
exceeds the higher of the asset’s value in use or its fair value less costs
to sell.
Gains and losses on disposal of property, plant and equipment are
determined by comparing any proceeds with the carrying value of the asset
and are recognised within administrative costs in the income statement.
Depreciation is charged to the income statement as part of
administrative costs.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand which
includes amounts invested in money market funds and UK government gilts
held in accordance with the Prudential Regulation Authority’s (PRA) liquidity
regime. Bank overdrafts are presented in current liabilities to the extent that
there is no right of offset with cash balances.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 138
Statement of accounting policies continued
Derivative financial instruments
The group and company use derivative financial instruments, principally
interest rate swaps, cross-currency swaps and forward contracts, to
manage the interest rate and foreign exchange rate risk arising from the
group’s underlying business operations. No transactions of a speculative
nature are undertaken.
All derivative financial instruments are assessed against the hedge
accounting criteria set out in IAS 39, ‘Financial instruments: Recognition
and measurement’. Derivative financial instruments that meet the hedge
accounting requirements of IAS 39 are accordingly designated as either:
hedges of the fair value of recognised assets, liabilities or firm commitments
(fair value hedges); hedges of highly probable forecast transactions
(cash flow hedges); or hedges of net investments in foreign operations.
The relationship between hedging instruments and hedged items is
documented at the inception of a transaction, as well as the risk management
objectives and strategy for undertaking various hedging transactions.
The assessment of whether the derivative financial instruments used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items is documented, both at the hedge inception
and on an ongoing basis.
Derivative financial instruments are initially recognised at their fair value
on the date a derivative contract is entered into and are subsequently
re-measured at each reporting date to their fair value. Where derivative
financial instruments do not qualify for hedge accounting, movements in
the fair value are recognised immediately within the income statement.
Where hedge accounting criteria have been met, the resultant gain or loss
on the derivative financial instrument is recognised as follows:
Fair value hedges
Changes in the fair value of derivative financial instruments that are
designated and qualify as fair value hedges are recorded in the income
statement as part of finance costs, together with any changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk.
Cash flow hedges
The effective portion of changes in the fair value of derivative financial
instruments that are designated and qualify as cash flow hedges are
recognised in the hedging reserve within equity. The gain or loss relating
to the ineffective portion is recognised immediately in the income statement
as part of finance costs. Amounts deferred in equity are recognised in the
income statement when the income or expense on the hedged item is
recognised in the income statement.
Hedge accounting for both fair value and cash flow hedges is
discontinued when:
• it is evident from testing that a derivative financial instrument is not,
or has ceased to be, highly effective as a hedge; or
When a cash flow hedging instrument expires or is sold, or when a cash
flow hedge no longer meets the criteria for hedge accounting, any cumulative
gain or loss deferred in equity at that time is immediately transferred to the
income statement.
The fair values of various derivative financial instruments used for hedging
purposes are disclosed in note 17. Movements on the hedging reserve in
shareholders’ equity are shown in note 26. The full fair value of a derivative
financial instrument is classified as a non-current asset or liability when the
remaining maturity of the hedged item is more than 12 months from the
balance sheet date and as a current asset or liability when the remaining
maturity of the hedged item is less than 12 months from the balance
sheet date.
Net investment hedges
The group uses a combination of borrowings denominated in overseas
currencies and foreign currency forward contracts as a hedge against the
translation exposure on the parent’s net investment in overseas branches.
Where the hedge is fully effective at hedging the variability in the net assets
of those operations and/or the parent’s investment caused by changes
in exchange rates, the changes in value of the borrowings and forward
contracts are recognised in the statement of comprehensive income and
accumulated in the hedging reserve. When a hedge is no longer deemed
to be highly effective, the ineffective part of any change in value caused
by changes in exchange rates is recognised in the income statement with
previous gains or losses deferred within equity being recycled to the
income statement.
Borrowings
Borrowings are recognised initially at fair value, being issue proceeds less
any transaction costs incurred. Borrowings are subsequently stated at
amortised cost; any difference between proceeds less transaction costs
and the redemption value is recognised in the income statement over the
expected life of the borrowings using the effective interest rate.
Where borrowings are the subject of a fair value hedge, changes in the fair
value of the borrowing that are attributable to the hedged risk are recognised
in the income statement and a corresponding adjustment made to the
carrying value of borrowings.
Borrowings are classified as current liabilities unless the group or company
has an unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.
Dividends paid
Dividend distributions to the company’s shareholders are recognised in the
group and company’s financial statements as follows:
• Final dividend: when approved by the company’s shareholders at the
annual general meeting.
• the derivative financial instrument expires, or is sold, terminated
• Interim dividend: when paid by the company.
or exercised; or
• the underlying hedged item matures or is sold or repaid.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Statement of accounting policies continued
139
Retirement benefits
Defined benefit pension schemes
The charge in the income statement in respect of defined benefit pension
schemes comprises the actuarially assessed current service cost of
working employees, together with the interest on pension liabilities offset by
the interest on pension scheme assets. All charges are recognised within
administrative costs in the income statement.
The retirement benefit asset recognised in the balance sheet in respect of
defined benefit pension schemes is the fair value of the schemes’ assets less
the present value of the defined benefit obligation at the balance sheet date,
together with adjustments for unrecognised past service costs. A retirement
benefit asset is recognised to the extent that the group and company have an
unconditional right to a refund of the asset or if it will be recovered in future
years as a result of reduced contributions to the pension scheme.
The defined benefit obligation is calculated annually by independent actuaries
using the projected unit credit method. The present value of the defined
benefit obligation is determined by discounting the estimated future cash
outflows using interest rates of high quality corporate bonds that have terms
to maturity approximating to the terms of the related pension liability.
Actuarial gains and losses arising from experience adjustments and changes
in actuarial assumptions are recognised immediately in the statement of
comprehensive income.
Past service costs are recognised immediately in the income statement,
unless changes to the pension schemes are conditional on the employees
remaining in service for a specified period of time (the vesting period). In this
case, past service costs are amortised on a straight-line basis over the
vesting period.
Defined contribution pension schemes
Contributions to defined contribution pension schemes are charged to the
income statement on an accruals basis.
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in equity as a deduction,
net of tax, from the proceeds.
Where any group company purchases the company’s equity share capital,
the consideration paid, including any directly attributable incremental costs,
is included within a treasury shares reserve and deducted from equity until
the shares are no longer held by a group company or cancelled. Where such
shares are reissued outside of the group, any consideration received, net
of any directly attributable transaction costs, is included within the treasury
shares reserve.
Share-based payments
The company grants options under employee savings-related share option
schemes (typically referred to as Save As You Earn schemes (SAYE)) and
makes awards under the Performance Share Plan (PSP) and the Long Term
Incentive Scheme (LTIS). All of the schemes are equity-settled.
The cost of providing options and awards to group and company employees
is charged to the income statement of the group and company over the
vesting period of the related options and awards. The corresponding credit
is made to a share-based payment reserve within equity. The grant by the
company of options and awards over its equity instruments to the employees
of subsidiary undertakings is treated as an investment in the company’s
financial statements. The fair value of employee services received, measured
by reference to the fair value at the date of grant, is recognised over the
vesting period as an increase in investments in subsidiary undertakings, with
a corresponding credit to the share-based payment reserve within equity.
The cost of options and awards is based on their fair value. For PSP
schemes, the performance conditions are based on earnings per share
(EPS). Accordingly, the fair value of options and awards is determined using
a binomial option pricing model which is a suitable model for valuing options
with internal related targets such as EPS. A binomial model is also used
for calculating the fair value of SAYE options which have no performance
conditions attached. The value of the charge is adjusted at each balance
sheet date to reflect lapses and expected or actual levels of vesting, with
a corresponding adjustment to the share-based payment reserve.
For LTIS schemes, performance conditions are based on either divisional
profit before tax, EPS or Total Shareholder Return (TSR) targets.
Accordingly, the fair value of awards is determined using a combination of
the binomial and Monte Carlo option pricing models. The value of the charge
is adjusted at each balance sheet date to reflect lapses. Where the Monte
Carlo option pricing model is used to determine fair value, no adjustment is
made to reflect expected or actual levels of vesting as the probability of the
awards vesting is taken into account in the initial calculation of the fair value
of the awards.
A transfer is made from the share-based payment reserve to retained
earnings when options and awards vest or lapse. In respect of the SAYE
options, the proceeds received, net of any directly attributable transaction
costs, are credited to share capital and share premium when the options
are exercised.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 140
Statement of accounting policies continued
Taxation
The tax charge represents the sum of current and deferred tax. Current tax
is calculated based on taxable profit for the year using tax rates that have
been enacted or substantially enacted by the balance sheet date. Taxable profit
differs from profit before taxation as reported in the income statement
because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never
taxable or deductible.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of
taxable profit, and is accounted for using the balance sheet liability method.
Deferred tax is determined using tax rates (and laws) that have been enacted
or substantially enacted by the balance sheet date and are expected to apply
when the related deferred tax asset is realised or the deferred tax liability is
settled. Deferred tax is also provided on temporary differences arising on
investments in subsidiaries, except where the timing of the reversal of the
temporary difference is controlled by the company and it is probable that the
temporary difference will not reverse in the future.
Deferred tax assets are recognised to the extent that it is probable that future
taxable profits will be available against which the temporary differences can
be utilised.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities and
when the deferred tax assets and liabilities relate to income taxes levied by
the same taxation authority on either the taxable entity or different taxable
entities where there is an intention to settle the balances on a net basis.
Exceptional items
Exceptional items are items that are unusual because of their size, nature
or incidence and which the directors consider should be disclosed separately
to enable a full understanding of the group’s results.
Supplementary information
In order to assist shareholders and other users of the group’s financial
statements, supplementary commentary has been provided within the
group’s financial statements within highlighted boxes. This supplementary
information does not form part of the statutory, audited financial statements.
Key assumptions and estimates
In applying the accounting policies set out above, the group and company
make significant estimates and assumptions that affect the reported amounts
of assets and liabilities as follows:
Amounts receivable from customers (£1,849.2m)
The group reviews its portfolio of loans and receivables for impairment at
each balance sheet date. For the purposes of assessing the impairment of
customer loans and receivables, customers are categorised into arrears
stages as this is considered to be the most reliable indication of future
payment performance. The group makes judgements to determine whether
there is objective evidence which indicates that there has been an adverse
effect on expected future cash flows.
Customer accounts in Vanquis Bank and Moneybarn are deemed to be
impaired when one contractual monthly payment has been missed. In the
weekly home credit business, receivables are deemed to be impaired
when the cumulative amount of two or more contractual weekly payments
have been missed in the previous 12 weeks, since only at this point do the
expected future cash flows from loans deteriorate significantly.
The level of impairment in each of the group’s businesses is calculated
using models which use historical payment performance to generate the
estimated amount and timing of future cash flows from each arrears stage,
and are regularly tested using subsequent cash collections to ensure they
retain sufficient accuracy. The impairment models are regularly reviewed to
take account of the current economic environment, product mix and recent
customer payment performance. However, on the basis that the payment
performance of customers could be different from the assumptions used in
estimating future cash flows, a material adjustment to the carrying value of
amounts receivable from customers may be required.
To the extent that the net present value of estimated future cash flows differs
by +/– 1%, it is estimated that the amounts receivable from customers would
be approximately £18m (2013: £16m) higher/lower.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Statement of accounting policies continued
141
Tax (current tax liabilities £40.4m, deferred tax liabilities £13.6m)
The tax treatment of certain items cannot be determined precisely until tax
audits or enquiries have been completed by the tax authorities. In some
instances, this can be years after the item has first been reflected in the
financial statements. The group recognises liabilities for anticipated tax
audit and enquiry issues based on an assessment of the probability of such
liabilities falling due. If the outcome of such audits is that the final liability
is different from the amount originally estimated, such differences will be
recognised in the period in which the tax audit or enquiry is concluded.
Any differences may necessitate a material adjustment to the level of tax
balances held in the balance sheet.
If the probability assessment of uncertain tax liabilities was adjusted by +/–
5%, it is estimated that the group’s tax liabilities would be £1m (2013: £1m)
higher/lower.
Retirement benefit asset (£56.0m)
The valuation of the retirement benefit asset is dependent upon a series of
assumptions; the key assumptions being mortality rates, the discount rate
applied to liabilities and inflation rates.
Mortality estimates are based on standard mortality tables, adjusted where
appropriate to reflect the group’s own expected experience. Discount rates
are based on the market yields of high quality corporate bonds which
have terms closely linked with the estimated term of the retirement benefit
obligation. Inflation assumptions reflect long-term market expectations for
retail price inflation.
Sensitivity analysis of the group’s main assumptions is set out in note 19.
Key assumptions and estimates continued
Other intangible assets – broker relationships (£72.5m)
Moneybarn’s broker relationships have been allocated a fair value on
acquisition as the relationships are an important influence on the revenue-
generating capacity of the business.
The broker relationships have been valued using a dividend discount model
on the forecast surplus cash flows generated by Moneybarn’s core broker
relationships. This methodology is in line with the group’s existing valuation
model used for budgeting purposes. Forecast surplus cash flows have been
derived against the group’s target capital structure of a maximum gearing
ratio of 3.5 times and then discounted at an appropriate cost of capital to
derive the fair value of the intangible asset.
The calculation of the broker relationships intangible asset reflects a number
of key judgements and estimates, which have a material effect on the
carrying value of the asset. These include:
• Cash flow forecasts have been extracted from the budget produced by
Moneybarn following acquisition, which involves a number of judgements
and estimates, particularly in respect of new business volumes, collections
performance and the cost base of the business.
• A useful economic life of 10 years has been applied to Moneybarn’s
core broker relationships. Management consider this to be a reasonable
estimate based on Moneybarn’s current business model and that used
in constructing the budget.
• Moneybarn’s budget has been extended by a further five years from five
years to 10 years using high-level growth rates to reflect management’s
estimate of surplus cash flows over the whole useful economic life of
broker relationships.
• The surplus cash flows generated by Moneybarn have been calculated
as those over and above the equity retained in the business to meet the
group’s target capital structure. The group’s target capital structure of 20%
equity and 80% debt is considered to be an appropriate capital structure
for the Moneybarn business.
• The discount rate applied to the forecast surplus cash flows has been
estimated based on Moneybarn’s cost of capital prior to acquisition.
The nature and inherent uncertainty relating to the above judgements and
estimates means that the forecast cash flows may be materially different
from actual cash flows. A material future reduction in forecast surplus cash
flows from broker relationships would necessitate a full impairment review
and the possibility of a material impairment charge in future years.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 142
Financial and capital risk management
Financial risk management
The group’s activities expose it to a variety of financial risks, which can be categorised as credit risk, liquidity risk, interest rate risk and foreign exchange
rate risk. The objective of the group’s risk management framework is to identify and assess the risks facing the group and to minimise the potential adverse
effects of these risks on the group’s financial performance. Financial risk management is overseen by the risk advisory committee.
Further details of the group’s risk management framework are described on pages 90 to 96.
(a) Credit risk
Credit risk is the risk that the group will suffer loss in the event of a default by a customer or a bank counterparty. A default occurs when the customer
or bank fails to honour repayments as they fall due.
(i) Amounts receivable from customers
The group’s maximum exposure to credit risk on amounts receivable from customers as at 31 December 2014 is the carrying value of amounts receivable
from customers of £1,849.2m (2013: £1,606.6m).
Vanquis Bank
Credit risk within Vanquis Bank is managed by the Vanquis Bank credit committee which meets at least quarterly and is responsible for ensuring that the
approach to lending is within sound risk and financial parameters and that key metrics are reviewed to ensure compliance with policy.
A customer’s risk profile and credit line is evaluated at the point of application and at various times during the agreement. Internally generated scorecards
based on historic payment patterns of customers are used to assess the applicant’s potential default risk and their ability to manage a specific credit
line. For new customers, the scorecards incorporate data from the applicant, such as income and employment and data from an external credit bureau.
Each potential new customer receives a welcome call from contact centre staff to verify details and complete the underwriting process. Initial credit limits
are low, typically between £250 and £500 and the maximum credit limit is £3,500. For existing customers, the scorecards also incorporate data on actual
payment performance and product utilisation and take data from an external credit bureau each month to refresh customers’ payment performance position
with other lenders’ data. Credit lines can go up as well as down according to this point-in-time risk assessment.
Arrears management is a combination of central letters, inbound and outbound telephony, SMS, email and outsourced debt collection agency activities.
Contact is made with the customer to discuss the reasons for non-payment and specific strategies are employed to support the customer in returning to
a good standing or appropriate forbearance arrangements are put in place.
CCD
Credit risk within CCD is managed by the CCD credit committee which meets at least every two months and is responsible for approving credit control policy
and decisioning strategy.
Credit risk is managed using a combination of lending policy criteria, credit scoring (including behavioural scoring), policy rules, individual lending approval
limits, central underwriting, and a home visit to make a decision on applications for credit.
The loans offered by the weekly home credit business are short-term, typically a contractual period of around a year, with an average value of approximately
£500. The loans are underwritten in the home by an agent with emphasis placed on any previous lending experience with the customer and the agent’s
assessment of the credit risk based on a completed application form and the home visit. Once a loan has been made, the agent visits the customer weekly,
or in some cases monthly, to collect payment. The agent is well placed to identify signs of strain on a customer’s income and can moderate lending
accordingly. Equally, the regular contact and professional relationship that the agent has with the customer allows them to manage customers’ repayments
effectively even when the household budget is tight. This can be in the form of taking part-payments, allowing missed payments or occasionally restructuring
the debt in order to maximise cash collections.
Agents are primarily paid commission for what they collect and not for what they lend, so their main focus is on ensuring loans are affordable at the point
of issue and then on collecting cash. Affordability is reassessed by the agent each time an existing customer is re-served, or not as the case may be.
This normally takes place within 12 months of the previous loan because of the short-term nature of the product.
Arrears management within the home credit business is a combination of central letters, central telephony, and field activity undertaken by field management.
This will often involve a home visit to discuss the customer’s reasons for non-payment and to agree a suitable resolution.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Financial and capital risk management
143
Financial risk management continued
Moneybarn
Credit risk within Moneybarn is managed by the Moneybarn credit committee which meets at least monthly and is responsible for approving underwriting
parameters, decisioning strategy and credit control policy.
A customer’s credit risk profile and ability to afford the proposed contract is initially evaluated both at the point of application, and subsequently should the
customer fall into arrears. A scorecard based on historic payment patterns of customers is used to assess the applicant’s potential default risk. The scorecard
incorporates data from the applicant, such as income and employment, and data from an external credit bureau. The application assessment process involves
verification of key aspects of the customer data. Certain policy rules including customer age, proposed loan size and vehicle type are also assessed in the
decisioning process, as well as affordability checks to ensure that, at the time of application, the customer can afford the loan repayments.
Arrears management is conducted by way of a combination of letters, inbound and outbound telephony, SMS, email and outsourced debt collection agency
activities. Contact is made with the customer to discuss the reasons for non-payment and specific strategies are employed to support the customer in
returning to a good standing and retaining use of the vehicle. These include appropriate forbearance arrangements, or where the contract has become
unsustainable for the customer then an appropriate exit strategy is implemented.
(ii) Bank counterparties
The group’s maximum exposure to credit risk on bank counterparties as at 31 December 2014 was £12.1m (2013: £21.1m).
Counterparty credit risk arises as a result of cash deposits placed with banks and the use of derivative financial instruments with banks and other financial
institutions which are used to hedge interest rate risk and foreign exchange rate risk.
Counterparty credit risk is managed by the group’s treasury committee and is governed by a board-approved counterparty policy which ensures that the
group’s cash deposits and derivative financial instruments are only made with high-quality counterparties with the level of permitted exposure to a counterparty
firmly linked to the strength of its credit rating. In addition, there is a maximum exposure limit for all institutions, regardless of credit rating. This is linked to the
group’s regulatory capital base in line with the group’s regulatory reporting requirements on large exposures to the PRA.
(b) Liquidity risk
Liquidity risk is the risk that the group will have insufficient liquid resources available to fulfil its operational plans and/or to meet its financial obligations as
they fall due.
Liquidity risk is managed by the group’s centralised treasury department through daily monitoring of expected cash flows in accordance with a board-
approved group funding and liquidity policy. This process is monitored regularly by the treasury committee.
The group’s funding and liquidity policy is designed to ensure that the group is able to continue to fund the growth of the business. The group therefore
maintains headroom on its committed borrowing facilities to fund growth and contractual maturities for at least the following 12 months, after assuming
that Vanquis Bank will fund 100% of its receivables book through retail deposits. As at 31 December 2014, the group’s committed borrowing facilities had
a weighted average period to maturity of 3.1 years (2013: 3.2 years) and the headroom on these committed facilities amounted to £111.5m (2013: 235.2m).
Following the one-year extension to May 2018 of the group’s syndicated bank facility in January 2015, the weighted average period to maturity of the group’s
committed borrowing facillity increased to 3.3 years.
The group is less exposed than other mainstream lenders to liquidity risk as the loans issued by the home credit business are of short-term duration
(typically around one year), whereas the group’s borrowings extend over a number of years.
As a PRA-regulated institution, Vanquis Bank is required to maintain a liquid assets buffer, and other liquid resources, in order to ensure that it has sufficient
liquid resources to fulfil its operational plans and meet its financial obligations as they fall due. As at 31 December 2014, the liquid assets buffer, including
other liquidity resources, held by Vanquis Bank amounted to £121.4m (2013: £86.3m).
In addition, from 1 October 2015 (with a transitional period extending to 1 January 2018), the group and Vanquis Bank will be required to meet the liquidity
coverage ratio (LCR). The LCR requires institutions to match net liquidity outflows during a 30 day period with a buffer of ‘high quality’ liquid assets.
The group and Vanquis Bank have developed systems and controls to monitor and forecast the LCR and have been submitting regulatory reports on the ratio
since 1 January 2014. Reporting and forecasting to date has provided assurance to the group and Vanquis Bank boards that the LCR requirement can be met
both in advance of and following the implementation date.
A maturity analysis of the undiscounted contractual cash flows of the group’s bank and other borrowings, including derivative financial instruments settled
on a net and gross basis, is shown below.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 144
Financial and capital risk management continued
Financial risk management continued
The table below shows the future cash payable under current drawings. This reflects both the interest payable and the repayment of the borrowing on maturity. Due to the seasonal nature of
the home credit business, drawings under the group’s revolving bank facilities are typically drawn for only three months at any time despite having the ability to draw the borrowings for much
longer under the committed borrowing facility. In the table below, the cash flows of borrowings made under the group’s syndicated revolving bank facility are required to be shown as being due
within one year, despite the group having the ability to redraw these amounts until the contractual maturity of the underlying facility in May 2017 (note – the syndicated revolving bank facility was
extended by a further year in January 2015 and now has a maturity date of May 2018).
Financial liabilities
2014 – group
Bank and other borrowings:
– bank facilities
– senior public bonds
– private placement loan notes
– subordinated loan notes
– retail bonds
– retail deposits
Total bank and other borrowings
Derivative financial instruments – settled net
Trade and other payables
Total
Financial assets
2014 – group
Derivative financial instruments – settled net
Trade and other receivables
Total
Financial liabilities
2013 – group
Bank and other borrowings:
– bank facilities
– senior public bonds
– private placement loan notes
– subordinated loan notes
– retail bonds
– retail deposits
Total bank and other borrowings
Derivative financial instruments – settled net
Trade and other payables
Total
Financial assets
2013 – group
Derivative financial instruments – settled gross
Derivative financial instruments – settled net
Trade and other receivables
Total
Repayable
on demand
£m
< 1 year
£m
1–2 years
£m
2–5 years
£m
Over
5 years
£m
Total
£m
5.2
–
–
–
–
–
5.2
–
–
5.2
288.7
20.0
6.4
6.3
17.9
130.8
470.1
3.2
94.3
567.6
–
20.0
16.0
–
67.9
146.7
250.6
0.7
–
251.3
–
310.0
79.8
–
145.8
352.1
887.7
–
–
887.7
Repayable
on demand
£m
< 1 year
£m
1–2 years
£m
2–5 years
£m
–
–
–
0.2
24.5
24.7
–
–
–
–
–
–
Repayable
on demand
£m
< 1 year
£m
1–2 years
£m
2–5 years
£m
7.3
–
–
–
–
–
7.3
–
–
7.3
168.1
20.0
43.8
0.3
18.0
75.4
325.6
3.5
65.8
394.9
–
20.0
16.6
6.3
18.0
115.0
175.9
3.4
–
179.3
–
60.0
78.0
–
207.9
281.1
627.0
0.8
–
627.8
Repayable
on demand
£m
< 1 year
£m
1–2 years
£m
2–5 years
£m
–
–
–
–
6.2
0.1
15.5
21.8
–
–
–
–
–
–
–
–
–
–
51.6
–
98.9
–
150.5
–
–
150.5
Over
5 years
£m
–
–
–
Over
5 years
£m
–
270.0
69.5
–
104.7
–
444.2
–
–
444.2
Over
5 years
£m
–
–
–
–
293.9
350.0
153.8
6.3
330.5
629.6
1,764.1
3.9
94.3
1,862.3
Total
£m
0.2
24.5
24.7
Total
£m
175.4
370.0
207.9
6.6
348.6
471.5
1,580.0
7.7
65.8
1,653.5
Total
£m
6.2
0.1
15.5
21.8
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Financial and capital risk management continued
145
Financial risk management continued
(c) Interest rate risk
Interest rate risk is the risk of a change in external interest rates which leads to an increase in the group’s cost of borrowing.
The group’s exposure to movements in interest rates is managed by the treasury committee and is governed by a board-approved interest rate hedging
policy which forms part of the group’s treasury policies.
The group seeks to limit the net exposure to changes in interest rates. This is achieved through a combination of issuing fixed-rate debt and by the use
of derivative financial instruments such as interest rate swaps.
A 2% movement in the interest rate applied to borrowings during 2014 and 2013 would not have had a material impact on the group’s profit before taxation
or equity as the group’s interest rate risk was substantially hedged.
(d) Foreign exchange rate risk
Foreign exchange rate risk is the risk of a change in foreign currency exchange rates leading to a reduction in profits or equity.
The group’s exposure to movements in foreign exchange rates is monitored monthly by the treasury committee and is governed by a board-approved foreign
exchange rate risk management policy which forms part of the group’s treasury policies.
The group’s exposures to foreign exchange rate risk during 2014 arise solely from: (i) the issuance of US dollar private placement loan notes, which were fully
hedged into sterling through the use of cross-currency swaps; and (ii) the home credit operations in the Republic of Ireland and the Vanquis Bank operations
in Poland, which are hedged by matching euro/zloty-denominated net assets with euro/zloty-denominated borrowings or forward contracts as closely as
practicable. All US dollar private placement loan notes were settled in August 2014.
As at 31 December 2014, a 2% movement in the sterling to US dollar exchange rate would have led to a £nil (2013: £nil) movement in external borrowings
with an opposite movement of £nil (2013: £nil) in the hedging reserve within equity. Due to the hedging arrangements in place, there would have been no
impact on reported profits in 2014 (2013: £nil).
As at 31 December 2014, a 2% movement in the sterling to euro exchange rate would have led to a £1.1m (2013: £1.1m) movement in customer receivables with
an opposite movement of £1.1m (2013: £1.1m) in external borrowings. Due to the natural hedging of matching euro-denominated assets with euro-denominated
liabilities, there would have been a £nil impact on reported profits and equity (2013: £nil).
As at 31 December 2014, a 2% movement in the sterling to zloty exchange rate would have led to a £0.3m (2013: £nil) movement in customer receivables with
an opposite movement of £0.3m (2013: £nil) in the borrowings. Due to the net investment hedge in place, there would have been no impact on reported profits
or equity (2013: £nil).
(e) Market risk
Market risk is the risk of loss due to adverse market movements caused by active trading positions taken in interest rates, foreign exchange markets, bonds
and equities.
The group’s corporate policies do not permit it to undertake position taking or trading books of this type and therefore it does not do so.
Capital risk management
The group’s objective in respect of capital risk management is to maintain an efficient capital structure whilst satisfying the requirements of the group’s
banking covenants and the regulatory capital requirements set by the PRA. The group primarily manages its capital base against two measures as
described below:
(a) Gearing
In order to maintain an efficient capital structure, the group has a maximum target gearing ratio of 3.5 times. This provides a comfortable level of headroom
against the group’s banking covenant of 5.0 times and regulatory capital requirements. The maximum target gearing ratio of 3.5 times is fully aligned with the
group’s target of distributing 80% of post-tax earnings by way of dividends whilst retaining sufficient capital to support receivables growth consistent with
management’s medium-term growth plans for the group.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 146
Financial and capital risk management continued
Capital risk management continued
(a) Gearing continued
As at 31 December 2014, the gearing ratio stood at 2.4 times (2013: 3.0 times), calculated as follows:
Group
Borrowings
Exchange rate adjustment
Arrangement fees
Liquid assets buffer, including other liquid resources
Borrowings for gearing purposes
Shareholders’ equity
Pension asset
Deferred tax on pension asset
Hedging reserve
Equity for gearing purposes
Gearing (times)
Note
22
22
22
21
19
20
26
2014
£m
1,493.0
–
7.5
(121.4)
1,379.1
613.0
(56.0)
11.2
3.3
571.5
2.4
2013
£m
1,284.6
(5.2)
7.2
(86.3)
1,200.3
416.8
(29.2)
5.8
5.1
398.5
3.0
The gearing ratio is lower than the maximum target of 3.5 times due to: (i) the group’s strong capital generation over the last 2 years, particularly as a result of the capital released from the 32.5%
reduction in the receivables book of the home credit business over that period; and (ii) the equity raised to fund the acquisition of Moneybarn in August 2014 in order to preserve regulatory capital.
The group’s gearing ratio would have been 2.7 times at 31 December 2014 had the Moneybarn acquisition and associated raising of equity not taken place.
(b) Regulatory capital
The group is the subject of consolidated supervision by the PRA. As part of this supervision, it is required to maintain a certain level of regulatory capital
(known as its Individual Capital Guidance (ICG)) in order to mitigate against unexpected losses. The ICG remains confidential between the PRA and the
relevant institution and should not be publicly disclosed.
The group has complied with the Capital Requirements Directive (CRD) IV since 1 January 2014. Regulatory capital differs from the group’s shareholders’ equity included in the balance sheet as
it excludes goodwill and other intangible assets, the group’s pension asset, net of deferred tax, the fair value of derivative financial instruments, and the proposed dividend, but includes the group’s
subordinated loan notes. The proposed dividend is calculated in accordance with the group’s recent practice of maintaining 1.3 times dividend cover on profits generated in the year.
A reconciliation of the group’s equity to regulatory capital in accordance with CRD IV, is set out below:
Group
Shareholders’ equity
Other intangible assets
Goodwill
Deferred tax on acquired intangible asset
Pension asset
Deferred tax on pension asset
Hedging reserve
Dividend accrued on profits recognised
Tier 1 capital
Tier 2 capital – subordinated loan notes
Total regulatory capital held
Note
12
11
19
20
26
2014
£m
613.0
(84.3)
(71.2)
14.2
(56.0)
11.2
3.3
(86.7)
343.5
0.5
344.0
2013
£m
416.8
(8.1)
–
–
(29.2)
5.8
5.1
(66.3)
324.1
1.7
325.8
When tier 2 subordinated loan notes have less than five years until maturity, the amount eligible for inclusion within regulatory capital reduces by 20% per annum for each year. Accordingly, the
amount of the subordinated loan notes eligible for regulatory capital purposes as at 31 December 2014 amounts to 20% of the balance outstanding (2013: 40%).
The treasury committee is responsible for monitoring the level of regulatory capital. The level of surplus regulatory capital against the ICG is reported to the
board on a monthly basis in the group’s management accounts. The group regularly forecasts regulatory capital requirements as part of the budgeting and
strategic planning process. The group is required to report quarterly to the PRA on the level of regulatory capital it holds. As at 31 December 2014, the group’s
total regulatory capital was comfortably in excess of the ICG set by the PRA.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 147
Notes to the financial statements
1 Segment reporting
IFRS 8 requires segment reporting to be based on the internal financial information reported to the chief operating decision maker. The group’s chief operating decision maker is deemed to be the
executive committee comprising both Peter Crook (Chief Executive), and Andrew Fisher (Finance Director) whose primary responsibility it is to manage the group’s day-to-day operations and
analyse trading performance. The group’s segments comprise Vanquis Bank, CCD, Moneybarn and Central which are those segments reported in the group’s management accounts used by the
executive committee as the primary means for analysing trading performance. The executive committee assesses profit performance using profit before tax measured on a basis consistent with
the disclosure in the group financial statements.
Group
Vanquis Bank
CCD
Moneybarn
Central costs
Total group before amortisation of acquisition intangibles and exceptional costs
Amortisation of acquisition intangibles
Exceptional costs
Total group
Revenue
2014
£m
2013
£m
470.8
591.1
13.8
–
1,075.7
–
–
1,075.7
381.0
697.1
–
–
1,078.1
–
–
1,078.1
Profit/(loss)
before taxation
2014
£m
140.4
103.9
5.8
(15.7)
234.4
(2.5)
(7.3)
224.6
2013
£m
106.1
102.5
–
(12.5)
196.1
–
(13.7)
182.4
Exceptional costs in 2014 of £7.3m comprise: (i) £3.4m of business restructuring costs in CCD which represent £4.0m of redundancy costs associated with
225 field administration employees following the ongoing deployment of technology in CCD, net of a £0.6m exceptional credit associated with those employees
made redundant who were part of the group’s defined benefit pension scheme (see note 19); and (ii) £3.9m of expenses incurred in relation to the acquisition
of Moneybarn (see note 10). The exceptional cost in 2013 of £13.7m related to the cost of a business restructuring within CCD, including the redundancy costs
associated with a headcount reduction of 520 employees. The exceptional cost was stated net of an exceptional curtailment credit of £1.6m associated with
those employees made redundant who were part of the group’s defined benefit pension scheme (see note 19).
All of the above activities relate to continuing operations. Revenue between business segments is not material.
Group
Vanquis Bank
CCD
Moneybarn
Central
Total before intra-group elimination
Intra-group elimination
Total group
Segment assets
Segment liabilities
Net assets
2014
£m
1,252.1
628.6
166.7
271.7
2,319.1
(60.4)
2,258.7
2013
£m
969.8
783.8
–
85.4
1,839.0
(28.8)
1,810.2
2014
£m
(961.7)
(500.3)
(163.7)
(80.4)
(1,706.1)
60.4
(1,645.7)
2013
£m
(753.3)
(612.5)
–
(56.4)
(1,422.2)
28.8
(1,393.4)
2014
£m
290.4
128.3
3.0
191.3
613.0
–
613.0
2013
£m
216.5
171.3
–
29.0
416.8
–
416.8
Segment net assets are based on the statutory accounts of the companies forming the group’s business segments adjusted to assume repayment of intra-group balances and rebasing the
borrowings of CCD to reflect a borrowings to receivables ratio of 80%. The impact of this is an increase in the notional allocation of group borrowings to CCD of £60.4m (2013: £28.8m) and
an increase in the notional cash allocated to central activities of the same amount. The intra-group elimination adjustment removes this notional allocation to state borrowings and cash on a
consolidated group basis.
The significant increase in central net assets reflects the goodwill (£71.2m), and intangible assets (£72.5m) arising on acquisition of Moneybarn which are held on consolidation.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 148
Notes to the financial statements continued
1 Segment reporting continued
The group’s businesses operate principally in the UK and Republic of Ireland, other than a branch in Poland which was established as part of Vanquis Bank’s
pilot credit card operation in Poland. The revenue in respect of the branch in 2014 amounted to £5.2m (2013: £2.2m) and the loss amounted to £10.6m
(2013: £7.6m). The net liabilities of the branch amounted to £18.7m at 31 December 2014 (2013: £9.5m), comprising assets of £22.3m (2013: £16.0m) and
liabilities of £41.0m (2013: £25.5m). These figures are included within the Vanquis Bank figures in the tables above. Subsequent to the 2014 year end,
a decision was made to withdraw from the Polish pilot credit card operation.
Group
Vanquis Bank
CCD
Moneybarn
Central
Total group
Capital expenditure
Depreciation
Amortisation
2014
£m
6.1
12.0
0.2
0.7
19.0
2013
£m
2.0
7.9
–
0.4
10.3
2014
£m
1.5
3.9
0.1
1.1
6.6
2013
£m
1.3
4.2
–
1.2
6.7
2014
£m
0.5
4.1
0.1
2.5
7.2
2013
£m
0.8
3.6
–
–
4.4
Capital expenditure in 2014 comprises expenditure on intangible assets of £7.4m (2013: £3.0m) and property, plant and equipment of £11.6m (2013: £7.3m).
The acquired intangible asset in respect of Moneybarn’s broker relationships is held on consolidation and, therefore, the amortisation charge has been allocated to Central in the above analysis,
consistent with the net asset analysis.
2 Revenue
Revenue is recognised by applying the effective interest rate (EIR) to the carrying value of a loan. The EIR is calculated at inception and represents the rate which exactly discounts the future
contractual cash receipts from a loan to the amount of cash advanced under that loan, plus directly attributable issue costs (e.g. aggregator/broker fees). In addition, in CCD the EIR takes account
of customers repaying early.
Interest income
Fee income
Total revenue
All fee income earned relates to Vanquis Bank.
2014
£m
942.0
133.7
1,075.7
Group
2013
£m
962.0
116.1
1,078.1
Interest income relates to the interest charges on Vanquis Bank credit cards and the service charge on home credit loans. Fee income in Vanquis Bank predominantly reflects default and overlimit
fees as well as other ancillary income streams such as interchange income and Repayment Option Plan (ROP) fees. Fee income in 2014 represented 28% (2013: 30%) of Vanquis Bank revenue.
3 Finance costs
Interest payable on:
Bank borrowings
Senior public and retail bonds
Private placement loan notes
Subordinated loan notes
Retail deposits
Total finance costs
Group
2013
£m
13.1
37.9
8.2
0.3
14.7
74.2
2014
£m
15.4
38.9
6.7
0.3
16.2
77.5
The group’s blended funding rate in 2014 was 6.5%, down from 6.8% in 2013. This primarily reflects the development of the retail deposits programme in Vanquis Bank during 2014. Retail deposits
represent approximately 38% of the group’s funding at the end of 2014 compared with approximately 34% in 2013. The all-in blended cost of taking retail deposits in 2014, after the cost of holding
a liquid assets buffer and other liquid resources in adherence with the PRA’s liquidity regime, was 3.4% (2013: 3.8%). The group funding rate is expected to moderate further to approximately 6%
in 2015.
Interest cover continues to be one of the group’s banking covenants. It is calculated as profit before tax, interest and amortisation divided by finance costs, excluding net hedge ineffectiveness,
and has a minimum requirement of 2.0 times. Interest cover, prior to exceptional costs, in 2014 was 4.1 times compared with 3.7 times in 2013.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
4 Profit before taxation
Profit before taxation is stated after charging/(crediting):
Amortisation of other intangible assets:
– computer software (note 12)
– acquired intangibles (note 12)
Depreciation of property, plant and equipment (note 13)
Loss on disposal of property, plant and equipment (note 13)
Operating lease rentals:
– property
Employment costs (prior to exceptional curtailment credit and redundancy costs (note 9(b)))
Exceptional curtailment credit (note 19(b))
Exceptional redundancy costs (note 9(b))
Exceptional fees incurred on the acquisition of Moneybarn (note 10)
Impairment of amounts receivable from customers (note 15)
149
2014
£m
4.7
2.5
6.6
0.2
12.6
155.0
(0.6)
4.0
3.9
327.8
Group
2013
£m
4.4
–
6.7
0.2
10.0
147.6
(1.6)
12.6
-
399.1
Operating costs include impairment of amounts receivable from customers; commission paid to self-employed agents (which broadly represents 40% of home credit’s costs) and marketing
and customer acquisition costs. Administrative costs reflect all other costs incurred in running the business, the largest of which is employment costs (see note 9).
Auditor’s remuneration
Fees payable to the company’s auditor for the audit of parent company and consolidated financial statements
Fees payable to the company’s auditor and its associates for other services:
– audit of company’s subsidiaries pursuant to legislation
– other services pursuant to legislation
Total auditor’s remuneration
5 Tax charge
Tax charge in the income statement
Current tax
– UK
– overseas
Total current tax
Deferred tax (note 20)
Impact of change in UK tax rate (note 20)
Total tax charge
2014
£m
0.1
0.3
0.8
1.2
2014
£m
(46.6)
(0.7)
(47.3)
(3.0)
1.3
(49.0)
Group
2013
£m
0.1
0.2
0.1
0.4
Group
2013
£m
(37.7)
(0.5)
(38.2)
(2.5)
(0.7)
(41.4)
The tax credit in respect of exceptional costs in 2014 amounted to £0.8m (2013: credit of £3.2m) and represents tax relief in respect of the exceptional
restructuring costs in CCD.
The effective tax rate for 2014 prior to the amortisation of acquisition intangibles and exceptional costs, is 21.5% in line with the UK statutory corporation tax rate which reduced from 23% to 21%
with effect from 1 April 2014. A further reduction in the UK statutory corporation tax rate will take place with effect from 1 April 2015 when the rate reduces from 21% to 20%. The group is
expected to benefit from the rate reduction and the effective tax rates for future periods are expected to be similar to the UK statutory corporation tax rate.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 150
Notes to the financial statements continued
5 Tax charge continued
As the changes to the UK statutory corporation tax rate were enacted in the 2013 Finance Act, deferred tax balances at 31 December 2013 were re-measured
at 20% on the basis that that the temporary differences on which the deferred tax balances were calculated were expected to reverse after 1 April 2015.
In 2014, movements in the deferred tax balances have been measured at the statutory corporation tax rate for the year of 21.50% (2013: 23.25%).
The deferred tax balances at 31 December 2014 have then been re-measured at 20% as the temporary differences on which deferred tax has been
calculated are expected to reverse after 1 April 2015. A tax credit of £1.3m in 2014 (2013: charge of £0.7m) represents the income statement adjustment
as a result of this change and an additional deferred tax credit of £0.3m (2013: £0.3m) has been taken directly to other comprehensive income in respect
of items reflected directly in other comprehensive income.
Tax (charge)/credit on items taken directly to other comprehensive income
Current tax charge on cash flow hedges
Deferred tax (charge)/credit on actuarial movements on retirement benefit asset
Tax (charge)/credit on items taken directly to other comprehensive income prior to impact of change in UK tax rate
Impact of change in UK tax rate
Total tax (charge)/credit on items taken directly to other comprehensive income
Group
2013
£m
(0.6)
0.9
0.3
0.3
0.6
2014
£m
(0.4)
(3.8)
(4.2)
0.3
(3.9)
The rate of tax charge on the profit before taxation for the year is higher than (2013: lower than) the average standard rate of corporation tax in the UK
of 21.50% (2013: 23.25%). This can be reconciled as follows:
Profit before taxation
Profit before taxation multiplied by the average standard rate of corporation tax in the UK of 21.50% (2013: 23.25%)
Effects of:
– benefit of lower tax rates overseas
– adjustment in respect of prior years
– non deductible general expenses
– non deductible expenses relating to the acquisition of Moneybarn
– impact of change in UK tax rate
Total tax charge
2014
£m
224.6
(48.3)
0.6
(1.4)
(0.4)
(0.8)
1.3
(49.0)
Group
2013
£m
182.4
(42.4)
0.7
1.3
(0.3)
–
(0.7)
(41.4)
The profits of the home credit business in the Republic of Ireland have been taxed at the Republic of Ireland statutory tax rate of 12.5% (2013: 12.5%) rather than the UK statutory tax rate of 21.50%
(2013: 23.25%) giving rise to a beneficial impact on the group tax charge of £0.6m (2013: £0.7m).
The £1.4m charge (2013: £1.3m credit) in respect of prior years represents an increase in the prior year tax charge in respect of historic tax liabilities net of the benefit of securing tax deductions
for employee share awards which are higher than those originally anticipated.
During 2014, the group incurred £3.9m of expenses in relation to the acquisition of Moneybarn which have been included in exceptional costs. As tax deductions are unlikely to be available for
such costs, these give rise to an increase in the tax charge of £0.8m (2013: £nil).
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
151
6 Earnings per share
The group presents basic and diluted earnings per share (EPS) data on its ordinary shares. Basic EPS is calculated by dividing the profit for the year attributable to equity shareholders by the
weighted average number of ordinary shares outstanding during the year, adjusted for treasury shares (own shares held). Diluted EPS calculates the effect on EPS assuming conversion of all
dilutive potential ordinary shares. Dilutive potential ordinary shares are calculated as follows:
(i)
(ii)
For share awards outstanding under performance-related share incentive schemes such as the Performance Share Plan (PSP) and the Long Term Incentive Scheme (LTIS), the
number of dilutive potential ordinary shares is calculated based on the number of shares which would be issuable if: (i) the end of the reporting period is assumed to be the end of the
schemes’ performance period; and (ii) the performance targets have been met as at that date.
For share options outstanding under non-performance related schemes such as the Save As You Earn scheme (SAYE), a calculation is performed to determine the number of shares
that could have been acquired at fair value (determined as the average annual market share price of the company’s shares) based on the monetary value of the subscription rights
attached to outstanding share options. The number of shares calculated is compared with the number of share options outstanding, with the difference being the dilutive potential
ordinary shares.
The group also presents an adjusted EPS, prior to the amortisation of acquisition intangibles and exceptional items.
Reconciliations of basic and diluted earnings per share are set out below:
Group
Earnings per share
Shares in issue during the year
Own shares held
Basic earnings per share
Dilutive effect of share options and awards
Diluted earnings per share
2014
2013
Weighted
average
number of
shares
m
Earnings
£m
Per share
amount
pence
Earnings
£m
Weighted
average
number of
shares
m
Per share
amount
pence
142.3
(3.5)
138.8
2.2
141.0
175.6
–
175.6
126.5
(2.0)
124.5
141.0
–
141.0
139.1
(3.8)
135.3
2.7
138.0
104.2
(2.0)
102.2
The directors have elected to show an adjusted earnings per share prior to the amortisation of acquisition intangibles which arose on the acquisition of
Moneybarn on 20 August 2014 (see note 10) and prior to exceptional costs (see note 1). This is presented to show the earnings per share generated by the
group’s underlying operations. A reconciliation of basic and diluted earnings per share to adjusted basic and diluted earnings per share is as follows:
Group
Basic earnings per share
Amortisation of acquisition intangibles, net of tax
Exceptional costs, net of tax
Adjusted basic earnings per share
Diluted earnings per share
Amortisation of acquisition intangibles, net of tax
Exceptional costs, net of tax
Adjusted diluted earnings per share
2014
2013
Weighted
average
number of
shares
m
Earnings
£m
Per share
amount
pence
Earnings
£m
Weighted
average
number of
shares
m
Per share
amount
pence
175.6
1.9
6.5
184.0
175.6
1.9
6.5
184.0
138.8
–
–
138.8
141.0
–
–
141.0
126.5
1.4
4.7
132.6
124.5
1.4
4.6
130.5
141.0
–
10.5
151.5
141.0
–
10.5
151.5
135.3
–
–
135.3
138.0
–
–
138.0
104.2
–
7.8
112.0
102.2
–
7.6
109.8
Adjusted basic EPS has grown by 18.4% in 2014 primarily due to the strong performance of Vanquis Bank. This growth is lower than the 19.5% growth in profit before tax, amortisation of
acquisition intangibles and exceptional costs as a result of the 5.9m placement of shares for the acquisition of Moneybarn, partly offset by the reduction in the corporation tax rate from 23% to 21%
on 1 April 2014.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 152
Notes to the financial statements continued
7 Dividends
2012 final
2013 interim
2013 final
2014 interim
Dividends paid
– 48.4p per share
– 31.0p per share
– 54.0p per share
– 34.1p per share
Group and company
2014
£m
–
–
74.4
49.0
123.4
2013
£m
66.0
42.4
–
–
108.4
The directors are recommending a final dividend in respect of the financial year ended 31 December 2014 of 63.9p per share (2013: 54.0p) which will
amount to an estimated dividend payment of £91.6m (2013: £74.4m). If approved by the shareholders at the annual general meeting on 7 May 2015, this
dividend will be paid on 19 June 2015 to shareholders who are on the register of members at 22 May 2015. This dividend is not reflected in the balance
sheet as at 31 December 2014 as it is subject to shareholder approval.
As a result of adjusted EPS growth of 18.4% in 2014, the directors have proposed an increase in the final dividend of 18.3% which, together with the 10.0% increase in the interim dividend,
makes a total full-year dividend increase of 15.3%. Accordingly, dividend cover, prior to the amortisation of acquisition intangibles and exceptional costs, in 2014 was 1.35 times, compared with
the minimum target of 1.25 times.
8 Directors’ remuneration
The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories specified
in IAS 24, ‘Related party disclosures’.
Short-term employee benefits
Post-employment benefits
Share-based payment charge
Total
Group and company
2014
£m
3.6
0.4
3.7
7.7
2013
£m
4.0
0.6
2.9
7.5
The directors’ remuneration above reflects:
– Short-term employee benefits comprise salary/fees, bonus and benefits earned in the year.
– Post-employment benefits represent the sum of: (i) the increase in the transfer value of the accrued pension benefits (less directors’ contributions) for those directors who are members of
the group’s defined benefit pension scheme; (ii) company contributions into personal pension arrangements for all other directors; and (iii) amounts accrued under the Unfunded, Unapproved
Retirement Benefit Scheme (UURBS).
– The share-based payment charge is the proportion of the group’s share-based payment charge that relates to those options and awards granted to the directors.
– This differs to the director’s remuneration report on pages 116 to 128 which does not include the share-based payment charge of £3.7m (2013: £2.9m) but includes the value of LTIS and PSP
share awards due to vest in 2015 of £6.6m (2013: £5.2m). The value is calculated assuming 100% of share awards vest at the average share price during the last three months of the year.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
9 Employee information
(a) The average monthly number of persons employed by the group was as follows:
Vanquis Bank
CCD
Moneybarn
Central
Total group
Analysed as:
Full time
Part time
Total group
153
Group
2014
Number
2013
Number
1,021
2,390
102
55
3,568
3,105
463
3,568
909
2,869
–
55
3,833
3,236
597
3,833
Employees comprise all head office and branch employees within CCD, head office and contact centre employees within Vanquis Bank, Moneybarn and corporate office employees and executive
directors. It does not include the 7,700 self-employed agents within CCD. The 16.7% reduction in CCD employee numbers reflects the impact of the business restructuring which took place during
2013 and 2014. Vanquis Bank employee numbers have increased by 12% during 2014 due to the growth of the business, including the continued expansion of the second contact centre in CCD’s
head office in Bradford.
(b) Employment costs
Aggregate gross wages and salaries paid to the group’s employees
Employers’ National Insurance contributions
Pension charge, prior to exceptional pension credit
Share-based payment charge (note 25)
Total employment cost prior to exceptional costs
Exceptional pension credit (note 19)
Exceptional redundancy costs (note 1)
Total employment costs
2014
£m
123.2
14.4
8.7
8.7
155.0
(0.6)
4.0
158.4
Group
2013
£m
116.0
13.5
10.7
7.4
147.6
(1.6)
12.6
158.6
The pension charge comprises the retirement benefit charge for defined benefit schemes, contributions to the stakeholder pension plan, contributions to personal pension arrangements and
amounts accrued under the UURBS. The increase in the share-based payment charge from £7.4m in 2013 to £8.7m in 2014 primarily reflects the impact of prior year provision releases in 2013
following the departure of Chris Gillespie, a former executive director.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 154
Notes to the financial statements continued
10 Acquisition of Moneybarn
The group completed the acquisition of the entire share capital of Duncton Group Limited, which trades as Moneybarn, the UK’s largest non-standard vehicle
finance business, on 20 August 2014 for consideration of £120m. The consideration was satisfied by the payment of £120m in cash on completion to Duncton
Group Limited’s shareholders, funded through the proceeds of a placing of 5.9m new ordinary shares in Provident Financial plc with institutional investors.
The acquisition of Moneybarn broadens the product offering to the group’s target customer base and creates a third leg of earnings that complements the
group’s organic growth opportunities.
Costs of £3.9m associated with the acquisition including due diligence, legal, advisory and tax fees have been charged as an exceptional cost in 2014
(see note 1). Costs of £3.1m associated with the placing of ordinary shares in respect of the acquisition have been deducted from the share premium account.
Prior to acquisition, Moneybarn reported under UK GAAP. A detailed conversion of Moneybarn’s financial statements to IFRS has been completed post
acquisition which reduced Moneybarn’s net assets on acquisition by approximately £11m, principally in respect of: (i) higher impairment provisions due to the
impact of discounting future expected cash flows at the effective interest rate; and (ii) a change in policy in respect of the deferral of the acquisition costs of
new accounts.
The provisional fair values of the identifiable assets and liabilities of Moneybarn as at the acquisition date were as follows:
Intangible assets (a)
Property, plant and equipment
Deferred tax assets/(liabilities) (c)
Amounts receivable from customers (b)
Cash and cash equivalents
Trade and other receivables
Trade and other payables (c)
Corporation tax liabilities
Bank and other borrowings (d)
Net identifiable (liabilities)/assets acquired
Goodwill
Cash consideration
Book value on
acquisition
£m
Fair value
adjustments
£m
Recognised on
acquisition
£m
1.0
0.9
2.6
135.0
5.2
4.8
(5.2)
(1.7)
(144.9)
(2.3)
75.0
–
(14.1)
(3.8)
–
–
(1.0)
–
(5.0)
51.1
76.0
0.9
(11.5)
131.2
5.2
4.8
(6.2)
(1.7)
(149.9)
48.8
71.2
120.0
The fair value adjustments applied to Moneybarn’s net assets comprise:
a) £75.0m has been attributed to the fair value of Moneybarn’s existing broker relationships which are an important influence on the revenue-generating
capacity of the business (see note 12).
b) An adjustment to receivables of £3.8m has been made to reflect the fair value of the receivables book at the acquisition date. This adjustment principally
relates to the expected losses on those accounts which are not yet in arrears and therefore have not yet attracted an impairment provision under IAS 39
‘Financial instruments: Recognition and measurement’. Expected losses are currently only taken account of as part of the calculation of fair value on
the acquisition of a receivables book in accordance with IFRS 3 ‘Business combinations’. Expected loss provisions have not been established on new
Moneybarn accounts originated post acquisition in line with both the group’s accounting policies and IAS 39.
c) The tax effect of the other fair value adjustments of £14.1m together with £1.0m of additional potential liabilities which were not provided against at the
acquisition date have been made.
d) The existing Moneybarn borrowings were refinanced shortly following acquisition, utilising the group’s existing committed facilities at a substantially lower
cost of funds. The fair value of debt on acquisition has been increased to include the break costs of £5.0m that were incurred in settling Moneybarn’s
existing debt.
The goodwill of £71.2m represents the benefit of the group’s lower cost funding and synergies available from the acquisition in respect of underwriting,
collections and distribution channels. In accordance with the group’s accounting policies, goodwill is not amortised but is subject to an annual impairment
review. None of the goodwill is expected to be deductible for corporation tax purposes.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
155
10 Acquisition of Moneybarn continued
An analysis of the fair value of the receivables acquired compared with the gross contractual amounts of the receivables book and the contractual cash flows
not expected to be collected is as follows:
Amounts receivable from customers
Gross
contractual
amounts
£m
Contractual
cash flows
not expected
to be collected
£m
225.0
24.7
Fair value
£m
131.2
The gross contractual amounts of receivables relates to the total contractual amount due from the customers over the life of the contract. Cash flows not
expected to be collected are the undiscounted cash flows not expected to be collected based on historical experience.
Moneybarn generated revenue of £13.8m and a profit before tax, amortisation of acquired intangible assets and exceptional items of £5.8m in the four months
following acquisition. In the eight months prior to acquisition, Moneybarn generated revenue of £24.2m and a profit before tax and exceptional costs of £4.6m.
Had the acquisition completed on the first day of the financial year and Moneybarn had benefited from the group’s lower cost of funding in the first eight
months of the year, the group’s revenue would have been £24.2m higher at £1,099.9m and group profit before tax, amortisation of acquisition intangibles
and exceptional costs would have been £9.2m higher at £243.6m.
11 Goodwill
Cost
At 1 January
Acquisition of Moneybarn
At 31 December
Accumulated amortisation
At 1 January and 31 December
Net book value at 31 December
Net book value at 1 January
Group
2013
£m
2.1
–
2.1
2.1
–
–
2014
£m
2.1
71.2
73.3
2.1
71.2
–
The £71.2m of goodwill in 2014 reflects the surplus of consideration over identifiable assets of Moneybarn (see note 10). In 2012, the carrying value of goodwill in respect of Cheque Exchange
Limited, a small subsidiary originally acquired in 2001 and now subsumed within CCD, was fully impaired based on expected future cash flows.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements
156
Notes to the financial statements continued
12 Other intangible assets
Group
Cost
At 1 January
Acquisition of Moneybarn (note 10)
Additions
Disposals
At 31 December
Accumulated amortisation
At 1 January
Acquisition of Moneybarn (note 10)
Charged to the income statement
Disposals
At 31 December
Net book value at 31 December
Net book value at 1 January
Acquisition
intangibles
£m
Computer
software
£m
–
75.0
–
–
75.0
–
–
2.5
–
2.5
72.5
–
39.7
1.6
7.4
(4.2)
44.5
31.6
0.6
4.7
(4.2)
32.7
11.8
8.1
2014
Total
£m
39.7
76.6
7.4
(4.2)
119.5
31.6
0.6
7.2
(4.2)
35.2
84.3
8.1
Acquisition
intangibles
£m
Computer
software
£m
–
–
–
–
–
–
–
–
–
–
–
–
36.8
–
3.0
(0.1)
39.7
27.3
–
4.4
(0.1)
31.6
8.1
9.5
2013
Total
£m
36.8
–
3.0
(0.1)
39.7
27.3
–
4.4
(0.1)
31.6
8.1
9.5
Acquisition intangibles represents the fair value of the broker relationships arising on acquisition of Moneybarn on 20 August 2014 (see note 10). The intangible asset has been calculated based
on the discounted cash flows associated with Moneybarn’s core broker relationships and is being amortised over an estimated useful life of 10 years.
The £7.4m (2013: £3.0m) of computer software expenditure principally relates to externally purchased and internally developed software in CCD supporting modernisation of the home credit
business and the systems to support the build-out of Satsuma.
13 Property, plant and equipment
Group
Cost
At 1 January 2014
Acquisition of Moneybarn (note 10)
Additions
Disposals
At 31 December 2014
Accumulated depreciation
At 1 January 2014
Acquisition of Moneybarn (note 10)
Charged to the income statement
Disposals
At 31 December 2014
Net book value at 31 December 2014
Net book value at 1 January 2014
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
3.9
–
–
–
3.9
3.3
–
–
–
3.3
0.6
0.6
0.8
0.6
3.7
(0.5)
4.6
0.6
0.1
0.1
(0.5)
0.3
4.3
0.2
54.1
0.7
7.9
(3.5)
59.2
32.1
0.3
6.5
(2.2)
36.7
22.5
22.0
Total
£m
58.8
1.3
11.6
(4.0)
67.7
36.0
0.4
6.6
(2.7)
40.3
27.4
22.8
The loss on disposal of property, plant and equipment in 2014 amounted to £0.2m (2013: £0.2m) and represented proceeds received of £1.1m (2013: £1.5m)
less the net book value of disposals of £1.3m (2013: £1.7m).
Additions in 2014 principally comprises expenditure in respect of the new Vanquis Bank head office at 20 Fenchurch Street, London and the routine replacement of IT equipment in both CCD
and Vanquis Bank and motor vehicles for field employees within CCD.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014
Notes to the financial statements continued
13 Property, plant and equipment continued
Group
Cost
At 1 January 2013
Additions
Disposals
At 31 December 2013
Accumulated depreciation
At 1 January 2013
Charged to the income statement
Disposals
At 31 December 2013
Net book value at 31 December 2013
Net book value at 1 January 2013
Company
Cost
At 1 January 2014
Additions
Disposals
At 31 December 2014
Accumulated depreciation
At 1 January 2014
Charged to the income statement
Disposals
At 31 December 2014
Net book value at 31 December 2014
Net book value at 1 January 2014
157
Total
£m
57.5
7.3
(6.0)
58.8
33.6
6.7
(4.3)
36.0
22.8
23.9
Total
£m
15.0
0.7
(0.8)
14.9
7.3
1.1
(0.5)
7.9
7.0
7.7
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
4.1
0.1
(0.3)
3.9
3.2
0.1
–
3.3
0.6
0.9
0.8
–
–
0.8
0.6
–
–
0.6
0.2
0.2
52.6
7.2
(5.7)
54.1
29.8
6.6
(4.3)
32.1
22.0
22.8
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
3.9
–
–
3.9
3.3
–
–
3.3
0.6
0.6
0.2
–
–
0.2
0.1
–
–
0.1
0.1
0.1
10.9
0.7
(0.8)
10.8
3.9
1.1
(0.5)
4.5
6.3
7.0
The loss on disposal of property, plant and equipment in 2014 amounted to £nil (2013: £nil) and represented proceeds received of £0.3m (2013: £0.4m)
less the net book value of disposals of £0.3m (2013: £0.4m).
Company
Cost
At 1 January 2013
Additions
Disposals
At 31 December 2013
Accumulated depreciation
At 1 January 2013
Charged to the income statement
Disposals
At 31 December 2013
Net book value at 31 December 2013
Net book value at 1 January 2013
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
4.1
0.1
(0.3)
3.9
3.2
0.1
–
3.3
0.6
0.9
0.2
–
–
0.2
0.1
–
–
0.1
0.1
0.1
10.9
0.3
(0.3)
10.9
3.0
1.1
(0.2)
3.9
7.0
7.9
Total
£m
15.2
0.4
(0.6)
15.0
6.3
1.2
(0.2)
7.3
7.7
8.9
Provident Financial plc Annual Report and Financial Statements 2014Financial statements
158
Notes to the financial statements continued
14 Investment in subsidiaries
Cost
At 1 January
Additions
Disposals
At 31 December
Accumulated impairment losses
At 1 January
Charged to the income statement
At 31 December
Net book value at 31 December
Net book value at 1 January
Company
2014
£m
2013
£m
408.6
120.0
(0.4)
528.2
31.8
0.1
31.9
496.3
376.8
407.8
0.8
–
408.6
31.8
–
31.8
376.8
376.0
The directors consider the value of investments to be supported by their underlying assets.
The additions to investments in 2014 represent the gross consideration of £120.0m in respect of the acquisition of Moneybarn (see note 10). The additions to investments in 2013 of £0.8m
represented the issue of share options/awards by the company to its subsidiaries’ employees. Under IFRIC 11, the fair value of these options/awards is required to be treated as a capital contribution
and an investment in the relevant subsidiary, net of any share options/awards that have vested. The adjustment in respect of IFRIC 11 in 2014 amounted to a credit of £0.4m and has been treated
as a disposal.
The following are the subsidiary undertakings which, in the opinion of the directors, principally affect the profit or assets of the group or are a guaranteeing
subsidiary of the group’s syndicated bank facility. A full list of subsidiary undertakings will be annexed to the next annual return of the company to be filed with
the Registrar of Companies. All subsidiaries are consolidated and held directly by the company except for those noted below, which are held by wholly owned
intermediate companies.
Vanquis Bank
Vanquis Bank Limited
CCD
Provident Financial Management Services Limited
Provident Personal Credit Limited
Greenwood Personal Credit Limited
Moneybarn
Duncton Group Limited
Moneybarn Group Limited
Moneybarn No. 1 Limited
Central
Provident Investments plc
* Shares held by wholly owned intermediate companies.
The above companies operate principally in their country of incorporation.
Activity
Financial
services
Management
services
Financial
services
Financial
services
Financial
services
Financial
services
Financial
services
Financial
intermediary
Country of
incorporation
Class
of capital
%
holding
England
Ordinary
England
Ordinary
England
Ordinary
England
Ordinary
England
Ordinary
England
Ordinary
England
Ordinary
England
Ordinary
100
100
100*
100*
100
100*
100*
100
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014
Notes to the financial statements continued
159
15 Amounts receivable from customers
On inception of a loan, receivables represent the amounts initially advanced to customers plus directly attributable issue costs. Subsequently, receivables are increased by the revenue recognised
and reduced by cash collections and any deduction for impairment. Revenue is recognised on the net value of the receivable after deduction for impairment and not on the gross receivable prior
to impairment.
Illustrative examples of revenue and impairment accounting in home credit can be found in the investor section of the company’s website.
Group
Vanquis Bank
CCD
Moneybarn
Total group
Due within
one year
£m
Due in
more than
one year
£m
1,109.4
532.8
51.4
1,693.6
–
55.3
100.3
155.6
2014
Total
£m
1,109.4
588.1
151.7
1,849.2
Due within
one year
£m
Due in
more than
one year
£m
866.6
660.3
–
1,526.9
–
79.7
–
79.7
2013
Total
£m
866.6
740.0
–
1,606.6
Vanquis Bank’s UK receivables grew by 28.0% in 2014 as a result of growth in UK customer numbers of 27.0% together with the success of the credit line increase programme to good-quality
existing customers through the ‘low and grow’ approach to lending. £15.5m of Vanquis Bank’s receivables at the end of 2014 relate to the pilot credit card operation in Poland (2013: £5.3m).
CCD receivables comprise £583.1m in respect of the home credit business (2013: £738.2m), £5.0m in respect of Satsuma (2013: £1.8m). Home credit receivables showed a 21.1% fall in 2014
reflecting the impact of significantly tighter credit standards which restricted the recruitment of more marginal customers into the business together with relatively subdued demand for the
majority of the year.
The average effective interest rate for the year ended 31 December 2014 was 31% for Vanquis Bank (2013: 32%), 112% for CCD (2012: 110%) and 29% for
Moneybarn. The average period to maturity of the amounts receivable from customers within CCD is 6.0 months (2013: 6.0 months) and within Moneybarn
is 32 months. Within Vanquis Bank, there is no fixed term for repayment of credit card loans other than a general requirement for customers to make a
monthly minimum repayment towards their outstanding balance. For the majority of customers, this is currently the greater of 1.5% of the amount owed
plus any fees and interest charges in the month and £5.
The fair value of amounts receivable from customers is approximately £2.9 billion (2013: £2.3 billion). Fair value has been derived by discounting expected
future cash flows (net of collection costs) at the group’s weighted average cost of capital at the balance sheet date. The credit quality of amounts receivable
from customers is as follows:
Credit quality of amounts receivable from customers
Neither past due nor impaired
Past due but not impaired
Impaired
Total
Credit quality of amounts receivable from customers
Neither past due nor impaired
Past due but not impaired
Impaired
Total
Vanquis
Bank
£m
1,022.0
–
87.4
1,109.4
Vanquis
Bank
%
92.1
–
7.9
100.0
CCD
£m
Moneybarn
£m
258.4
64.6
265.1
588.1
119.2
–
32.5
151.7
CCD
%
Moneybarn
%
43.9
11.0
45.1
100.0
78.6
–
21.4
100.0
2014
Group
£m
1,399.6
64.6
385.0
1,849.2
2014
Group
%
75.7
3.5
20.8
100.0
Vanquis
Bank
£m
785.9
–
80.7
866.6
Vanquis
Bank
%
90.7
–
9.3
100.0
2013
Group
£m
1,045.2
99.4
462.0
1,606.6
2013
Group
%
65.0
6.2
28.8
100.0
CCD
£m
259.3
99.4
381.3
740.0
CCD
%
35.1
13.4
51.5
100.0
Past due but not impaired balances all relate to home credit loans within CCD. There are no accounts/loans within Vanquis Bank or Moneybarn which are past due but not impaired. In home credit,
past due but not impaired balances relate to loans which are contractually overdue. However, contractually overdue loans are not deemed to be impaired unless the customer has missed two or
more cumulative weekly payments in the previous 12-week period since only at this point do the expected future cash flows from loans deteriorate materially.
The improved arrears profile in Vanquis Bank reflects the record low arrears currently being experienced by the business. The improvement in the arrears profile of CCD reflects the significant
improvement in the credit quality of the receivables book as a result of the tighter credit standards introduced in September 2013 and the benefit from the implementation of standardised arrears
and collections processes.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 160
Notes to the financial statements continued
15 Amounts receivable from customers continued
The following table sets out the ageing analysis of past due but not impaired balances within the home credit business of CCD based on contractual arrears
since the inception of the loan:
Ageing analysis of past due but not impaired balances
One week overdue
Two weeks overdue
Three weeks or more overdue
Past due but not impaired
Group
2013
£m
63.3
19.2
16.9
99.4
2014
£m
44.8
11.6
8.2
64.6
Impairment in Vanquis Bank and Moneybarn is deducted from the carrying value of amounts receivable from customers by the use of an allowance account.
The movement in the allowance account during the year is as follows:
Vanquis Bank allowance account
At 1 January
Charge for the year
Amounts written off during the year
Amounts recovered during the year
At 31 December
Moneybarn allowance account
On acquisition
Charge for the period
Amounts written off during the period
Amounts recovered during the period
At 31 December
Within CCD, impairments are deducted directly from amounts receivable from customers without the use of an allowance account.
The impairment charge in respect of amounts receivable from customers reflected within operating costs can be analysed as follows:
Impairment charge on amounts receivable from customers
Vanquis Bank
CCD
Moneybarn
Total group
2014
£m
128.8
149.1
(123.3)
24.0
178.6
2014
£m
149.1
177.5
1.2
327.8
Group
2013
£m
91.4
129.4
(99.4)
7.4
128.8
Group
2014
£m
27.0
1.2
(1.1)
–
27.1
Group
2013
£m
129.4
269.7
–
399.1
The impairment charge in Vanquis Bank comprises £144.9m (2013: £126.3m) in respect of the UK business and £4.2m (2013: £3.1m) in respect of the Polish
pilot operation.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
15 Amounts receivable from customers continued
Interest income recognised on amounts receivable from customers which have been impaired can be analysed as follows:
Interest income recognised on impaired amounts receivable from customers
Vanquis Bank
CCD
Moneybarn
Total group
161
2014
£m
30.9
299.8
2.5
333.2
Group
2013
£m
28.2
367.2
–
395.4
IFRS requires interest revenue to be recognised on the net carrying value of a receivable after deductions for impairment and not on the outstanding amount of the loan prior to impairment.
Using Vanquis Bank as an example, whilst interest revenue for customer statement balances is broadly calculated on the gross receivables balance of £1,288.0m (subject to the normal suspension
of interest where applicable and the timing of customer payments), interest revenue for IFRS purposes is calculated based on the net receivables balance of £1,109.4m, which is stated after the
deduction of the impairment allowance account of £178.6m. The non-standard customers served by the group are generally more likely to miss payments compared with more mainstream
customers. As the group recognises impairment events early – after missing two weekly payments in the last 12 weeks in home credit and after missing one monthly payment in Vanquis Bank
and Moneybarn – the group’s level of revenue on impaired loans is comparatively high.
The currency profile of amounts receivable from customers is as follows:
Currency profile of amounts receivable from customers
Sterling
Euro
Zloty
Total group
2014
£m
1,779.8
53.9
15.5
1,849.2
Group
2013
£m
1,545.1
56.2
5.3
1,606.6
Euro receivables represent loans issued by the home credit business in the Republic of Ireland, and amount to 9% of CCD’s receivables (2013: 8%). Zloty receivables relate to the Vanquis Bank pilot
credit card operation in Poland.
Under IFRS 7, ‘Financial Instruments’, receivables are classed as Level 2 as they are not traded on an active market and the fair value is therefore determined
through future cash flows.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 162
Notes to the financial statements continued
16 Financial instruments
The following table sets out the carrying value of the group’s financial assets and liabilities in accordance with the categories of financial instruments set out
in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown within non-financial assets/liabilities:
Group
Assets
Cash and cash equivalents
Amounts receivable from customers
Derivative financial instruments
Trade and other receivables
Retirement benefit asset
Property, plant and equipment
Goodwill
Other intangible assets
Total assets
Liabilities
Bank and other borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Deferred tax liabilities
Total liabilities
Loans and
receivables
£m
Available for
sale
£m
Amortised
cost
£m
Hedging
derivatives
£m
Non-financial
assets/liabilities
£m
80.2
1,849.2
–
24.5
–
–
–
–
1,953.9
–
–
–
–
–
–
65.7
–
–
–
–
–
–
–
65.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,493.0)
–
(94.3)
–
–
(1,587.3)
–
–
0.2
–
–
–
–
–
0.2
–
(4.4)
–
–
–
(4.4)
–
–
–
–
56.0
27.4
71.2
84.3
238.9
–
–
–
(40.4)
(13.6)
(54.0)
Financial assets held as available for sale relate to UK government gilts held as part of Vanquis Bank’s liquid assets buffer (see note 21).
Group
Assets
Cash and cash equivalents
Amounts receivable from customers
Derivative financial instruments
Trade and other receivables
Retirement benefit asset
Property, plant and equipment
Other intangible assets
Deferred tax assets
Total assets
Liabilities
Bank and other borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Total liabilities
Loans and
receivables
£m
Available for
sale
£m
Amortised
cost
£m
Hedging
derivatives
£m
Non-financial
assets/liabilities
£m
58.6
1,606.6
–
15.5
–
–
–
–
1,680.7
–
–
–
–
–
60.4
–
–
–
–
–
–
–
60.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,284.6)
–
(65.8)
–
(1,350.4)
–
–
5.5
–
–
–
–
–
5.5
–
(6.7)
–
–
(6.7)
–
–
–
–
29.2
22.8
8.1
3.5
63.6
–
–
–
(36.3)
(36.3)
2014
Total
£m
145.9
1,849.2
0.2
24.5
56.0
27.4
71.2
84.3
2,258.7
(1,493.0)
(4.4)
(94.3)
(40.4)
(13.6)
(1,645.7)
2013
Total
£m
119.0
1,606.6
5.5
15.5
29.2
22.8
8.1
3.5
1,810.2
(1,284.6)
(6.7)
(65.8)
(36.3)
(1,393.4)
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
16 Financial instruments continued
The following table sets out the carrying value of the company’s financial assets and liabilities in accordance with the categories of financial instruments
set out in IAS 39. Assets and liabilities outside the scope of IAS 39 are shown within non-financial assets/liabilities:
163
Company
Assets
Cash and cash equivalents
Investment in subsidiaries
Trade and other receivables
Retirement benefit asset
Property, plant and equipment
Total assets
Liabilities
Bank and other borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Deferred tax liabilities
Total liabilities
Company
Assets
Cash and cash equivalents
Investment in subsidiaries
Trade and other receivables
Retirement benefit asset
Property, plant and equipment
Total assets
Liabilities
Bank and other borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Deferred tax liabilities
Total liabilities
Loans and
receivables
£m
Amortised
cost
£m
Hedging
derivatives
£m
Non-financial
assets/liabilities
£m
7.7
–
1,564.3
–
–
1,572.0
–
–
–
–
–
–
–
–
–
–
–
–
(910.1)
–
(130.1)
–
–
(1,040.2)
–
–
–
–
–
–
–
(4.4)
–
–
–
(4.4)
–
496.3
–
56.0
7.0
559.3
–
–
–
(1.1)
(8.2)
(9.3)
Loans and
receivables
£m
Amortised
cost
£m
Hedging
derivatives
£m
Non-financial
assets/liabilities
£m
13.6
–
1,499.8
–
–
1,513.4
–
–
–
–
–
–
–
–
–
–
–
–
(799.6)
–
(178.6)
–
–
(978.2)
–
–
–
–
–
–
–
(6.7)
–
–
–
(6.7)
–
376.8
–
29.2
7.7
413.7
–
–
–
(2.7)
(2.8)
(5.5)
2014
Total
£m
7.7
496.3
1,564.3
56.0
7.0
2,131.3
(910.1)
(4.4)
(130.1)
(1.1)
(8.2)
(1,053.9)
2013
Total
£m
13.6
376.8
1,499.8
29.2
7.7
1,927.1
(799.6)
(6.7)
(178.6)
(2.7)
(2.8)
(990.4)
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 164
Notes to the financial statements continued
17 Derivative financial instruments
The majority of derivative financial instruments held by the group are interest rate swaps used to fix the interest rates paid on the group’s borrowings. Until August 2014, cross currency swaps
were also held to fix the foreign exchange rate on the group’s borrowings denominated in US dollars. The cross currency swaps matured on repayment of the US dollar private placements.
The contractual/notional amounts and the fair values of derivative financial instruments are set out below:
2014
2013
Group
Interest rate swaps
Cross-currency swaps
Foreign exchange contracts
Total group
Analysed as
– due within one year
– due in more than one year
Company
Interest rate swaps
Total company
Analysed as
– due within one year
– due in more than one year
Contractual/
notional
amount
£m
120.0
–
6.5
126.5
Contractual/
notional
amount
£m
120.0
120.0
Contractual/
notional
amount
£m
120.0
36.3
7.1
163.4
Contractual/
notional
amount
£m
120.0
120.0
Assets
£m
Liabilities
£m
–
–
0.2
0.2
0.2
–
0.2
(4.4)
–
–
(4.4)
–
(4.4)
(4.4)
2014
Assets
£m
Liabilities
£m
–
–
–
–
–
(4.4)
(4.4)
–
(4.4)
(4.4)
Assets
£m
Liabilities
£m
–
5.4
0.1
5.5
5.5
–
5.5
(6.7)
–
–
(6.7)
–
(6.7)
(6.7)
2013
Assets
£m
Liabilities
£m
–
–
–
–
–
(6.7)
(6.7)
–
(6.7)
(6.7)
The fair value of derivative financial instruments has been calculated by discounting contractual future cash flows using relevant market interest rate yield
curves and foreign exchange rates prevailing at the balance sheet date.
(a) Hedging reserve movements
The fair value of derivative financial instruments is required to be reflected in the balance sheet. Generally, providing the derivative financial instruments meet certain accounting requirements,
any movement in the fair value of the derivative financial instruments caused by fluctuations in interest rates or foreign exchange rates is deferred in the hedging reserve and does not impact the
income statement. The group’s derivative financial instruments all currently meet these criteria. If the interest rates payable on interest rate swaps are higher than the current interest rate at the
balance sheet date, then a derivative liability is recognised. Conversely, if the interest rates payable on interest rate swaps are lower than the current floating interest rate at the balance sheet date,
then a derivative asset is recognised.
The movement in the hedging reserve within equity as a result of the changes in the fair value of derivative financial instruments can be summarised
as follows:
Interest rate swaps
2004 cross-currency swaps
Foreign exchange contracts
Net credit to the hedging reserve
Group
Company
2014
£m
2.3
(0.2)
0.1
2.2
2013
£m
2.7
(0.2)
0.2
2.7
2014
£m
2.3
–
–
2.3
2013
£m
2.7
–
–
2.7
Under IFRS 7, ‘Financial instruments: Disclosures’, all derivative financial instruments are classed as Level 2 as they are not traded in an active market and the
fair value is therefore determined through discounting future cash flows, using appropriate market rates and yield curves.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014
Notes to the financial statements continued
165
17 Derivative financial instruments continued
(b) Income statement
There was no impact on the income statement of the group and the company in the year in respect of the movement in the fair value of ineffective interest
rate swaps, previously designated as cash flow hedges (2013: £nil).
(c) Interest rate swaps
The group and company use interest rate swaps in order to manage the interest rate risk on the group’s borrowings. The group has entered into various
interest rate swaps which were designated and effective under IAS 39 as cash flow hedges at inception. The movement in the fair value of effective interest
rate swaps during the year was as follows:
Liability at 1 January
Credited to the hedging reserve
Liability at 31 December
The weighted average interest rate and period to maturity of the interest rate swaps held by the group and company were as follows:
Group and company
2014
£m
(6.7)
2.3
(4.4)
2013
£m
(9.4)
2.7
(6.7)
Group and company
Sterling
(d) Cross-currency swaps
Weighted
average
interest
rate
%
Range of
interest
rates
%
2014
Weighted
average
period to
maturity
years
Weighted
average
interest
rate
%
Range of
interest
rates
%
2013
Weighted
average
period to
maturity
years
3.2
3.1-3.3
1.4
3.2
3.1-3.3
2.4
The group and company used cross-currency swaps in order to manage the interest rate and foreign exchange rate risk arising on the group’s US private
placement loan notes issued in 2003 and 2004. All of the cross-currency swaps have now matured, in line with the maturity and repayment of the
underlying borrowing.
2003 private placement loan notes
The group and company put in place cross-currency swaps to swap the principal and fixed-rate interest of the 2003 US dollar private placement loan notes
into fixed-rate sterling liabilities. The maturity dates of the cross-currency swaps matched the underlying loan notes. These swaps were designated as cash
flow hedges and were effective under IAS 39 until maturity. The fair value movements in the swaps and the corresponding exchange rate movements on the
underlying loan notes were deferred in the hedging reserve within equity.
The cross-currency swaps used to hedge the 2003 US dollar private placement loan notes matured in 2013. The movement in the fair value of the swaps
can be analysed as follows:
Liability at 1 January
Exchange rate movement
Liability at 31 December
Group
2013
£m
(1.9)
1.9
–
2014
£m
–
–
–
There was no difference between the translation of the 2003 US dollar private placement loan notes at the year-end exchange rate compared with
the contracted exchange rate (2013: £nil). There was no exchange rate movement in the year of this difference in translation (2013: debit of £1.9m).
Corresponding entries were made within borrowings.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 166
Notes to the financial statements continued
17 Derivative financial instruments continued
2004 private placement loan notes
The group put in place cross-currency swaps to swap the principal and fixed rate interest of the 2004 US dollar private placement loan notes into floating
rate sterling-denominated interest liabilities. The maturity dates of the cross-currency swaps matched the underlying loan notes which were repaid on
14 August 2014.
The swaps were designated as cash flow and fair value hedges. The cash flow hedge portion of the swaps were designated as cash flow hedges and were
effective under IAS 39 until maturity. The fair value movements in the swaps and the exchange movements in the underlying loan notes were deferred in the
hedging reserve within equity.
The fair value hedge portion of the swaps were designated and were effective under IAS 39 as fair value hedges during the year. As a result, fair value
movements in the swaps were charged to the income statement with a corresponding entry made to the underlying loan notes within borrowings for the
effective portion of the swaps, leaving a net charge within the income statement reflecting the net fair value loss on the fair value hedge in the year.
In 2013, the swaps had a range of interest rates of LIBOR + 1.61% to LIBOR + 1.63% and a weighted average period to maturity of 0.6 years.
The movement in the fair value of the swaps can be analysed as follows:
Asset at 1 January
Exchange rate movement
Charged to the hedging reserve
Asset at 31 December
Group
2013
£m
8.1
(2.5)
(0.2)
5.4
2014
£m
5.4
(5.2)
(0.2)
–
There is no difference between the translation of the 2004 US dollar private placement loan notes at the year-end exchange rate compared with the
contracted exchange rate (2013: debit of £5.2m). The exchange rate movement of £5.2m credit (2013: £2.5m) reflects the movement in the year of this
difference in translation. Corresponding entries are made within borrowings.
The amount charged to the hedging reserve reflects the difference between the movement in the fair value of the cash flow hedge portion of the cross-
currency swaps and the cash flow hedge portion of the exchange rate movements described above.
(e) Foreign exchange contracts
The group uses foreign exchange contracts in order to manage the foreign exchange rate risk arising from CCD’s euro operations in the Republic of Ireland
and Vanquis Bank’s branch in Poland. An asset of £0.2m is held in the group balance sheet as at 31 December 2014 in respect of foreign exchange contracts
(2013: £0.1m).
The group’s foreign exchange contracts comprise forward foreign exchange contracts to buy sterling and sell euros for a total notional amount of £6.5m
(2013: £7.1m). These contracts have a range of maturity dates from 20 January 2015 to 20 October 2015 (2013: 18 February 2014 to 16 December 2014).
These contracts were designated as cash flow hedges and were effective under IAS 39. Accordingly, the movement in fair value of £0.1m has been credited
to the hedging reserve within equity (2013: £0.2m).
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
18 Trade and other receivables
Non-current assets
Amounts owed by group undertakings
167
Company
2013
£m
930.3
2014
£m
983.8
There are £nil amounts past due and there is no impairment provision held against amounts owed by group undertakings due for repayment in more than
one year (2013: £nil). The amounts owed by group undertakings are unsecured, due for repayment in more than one year and accrue interest at rates linked
to LIBOR.
Current assets
Trade receivables
Other receivables
Amounts owed by group undertakings
Prepayments and accrued income
Total
Group
Company
2014
£m
0.1
8.5
–
15.9
24.5
2013
£m
0.1
3.6
–
11.8
15.5
2014
£m
–
–
578.1
2.4
580.5
2013
£m
–
–
567.5
2.0
569.5
Trade and other receivables include utility prepayments, prepaid marketing costs, amounts receivable from CCD voucher providers and amounts paid on behalf of the group’s pension scheme
but not yet recharged.
There are no amounts past due in respect of trade and other receivables due in less than one year (2013: £nil). Within the company, an impairment provision
of £122.5m (2013: £122.5m) is held against amounts owed by group undertakings due in less than one year representing the deficiency in the net assets
of those group undertakings. There has been no charge or credit to the company income statement in 2014 (2013: credit of £0.8m).
Amounts owed by group undertakings are unsecured, repayable on demand or within one year, and generally accrue interest at rates linked to LIBOR.
The maximum exposure to credit risk of trade and other receivables equates to the carrying value (2013: carrying value) set out above. There is no collateral
held in respect of trade and other receivables (2013: £nil).
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 168
Notes to the financial statements continued
19 Retirement benefit asset
(a) Pension schemes – defined benefit
The retirement benefit asset reflects the difference between the present value of the group’s obligation to current and past employees to provide a defined benefit pension and the fair value of
assets held to meet that obligation. As at 31 December 2014, the fair value of the assets exceeded the obligation and hence a net pension asset has been recorded. The group’s defined benefit
pension scheme has been substantially closed to new members since 1 January 2003.
The group operates a defined benefit scheme: the Provident Financial Staff Pension Scheme. The scheme has been substantially closed to new members
since 1 January 2003. The scheme covers 22% of employees with company-provided pension arrangements and is of the funded, defined benefit type.
All future benefits in the scheme are now provided on a ‘cash balance’ basis, with a defined amount being made available at retirement, based on a
percentage of salary that is revalued up to retirement with reference to increases in price inflation. This retirement account is then used to purchase an
annuity on the open market. The scheme also provides pension benefits that were accrued in the past on a final salary basis, but which are no longer linked
to final salary. The scheme also provides death benefits.
The scheme is a UK registered pension scheme under UK legislation and is not contracted-out of the Second State Pension. The scheme is governed by a
Trust Deed and Rules, with trustees responsible for the operation and the governance of the scheme. The Trustees work closely with the group on funding
and investment strategy decisions. The most recent actuarial valuation of the scheme was carried out as at 1 June 2012 by a qualified independent actuary.
The valuation used for the purposes of IAS 19 ‘Employee benefits’ has been based on the results of the 2012 valuation, updated to take account of the
requirements of IAS 19 in order to assess the liabilities of the scheme as at the balance sheet date. Scheme assets are stated at fair value as at the balance
sheet date.
The group is entitled to a refund of any surplus, subject to tax, if the scheme winds up after all benefits have been paid.
The group is exposed to a number of risks, the most significant of which are as follows:
• Investment risk – the liabilities for IAS 19 purposes are calculated using a discount rate set with reference to corporate bond yields. If the assets
underperform this yield a deficit will arise. The scheme has a long-term objective to reduce the level of investment risk by investing in assets that better
match liabilities.
• Change in bond yields – a decrease in corporate bond yields will increase the liabilities, although this will be partly offset by an increase in matching assets.
• Inflation risk – part of the liabilities are linked to inflation. If inflation increases then liabilities will increase, although this will be partly offset by an increase
in assets. As part of a long-term de-risking strategy, the scheme will further increase its portfolio in inflation matched assets.
• Life expectancies – the scheme’s final salary benefits provide pensions for the rest of members’ lives (and for their spouses’ lives). If members live longer
than assumed, then the liabilities in respect of final salary benefits increase.
The net retirement benefit asset recognised in the balance sheet of the group and company is as follows:
Equities
Other diversified return seeking investments
Corporate bonds
Fixed interest gilts
Index-linked gilts
Cash and money market funds
Total fair value of scheme assets
Present value of funded defined benefit obligation
Net retirement benefit asset recognised in the balance sheet
Group and company
£m
249.2
65.5
137.8
80.6
164.9
2.1
700.1
(644.1)
56.0
2014
%
36
9
20
11
24
–
100
£m
237.4
–
156.7
–
145.2
74.5
613.8
(584.6)
29.2
2013
%
39
–
25
–
24
12
100
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
19 Retirement benefit asset continued
169
The amounts recognised in the income statement were as follows:
Current service cost
Interest on scheme liabilities
Interest on scheme assets
Contributions from subsidiaries
Net (charge)/credit recognised in the income statement before exceptional curtailment credit
Exceptional curtailment credit
Net (charge)/credit recognised in the income statement
Group
Company
2014
£m
(5.8)
(25.5)
26.9
–
(4.4)
0.6
(3.8)
2013
£m
(7.1)
(24.5)
25.6
–
(6.0)
1.6
(4.4)
2014
£m
(5.8)
(25.5)
26.9
12.4
8.0
0.6
8.6
2013
£m
(7.1)
(24.5)
25.6
13.7
7.7
1.6
9.3
The exceptional curtailment credit of £0.6m (2013: £1.6m) relates to the reduction in headcount of 225 (2013: 520) following the business restructuring
within CCD (see note 1).
The net (charge)/credit recognised in the income statement of the group and company has been included within administrative costs.
Movements in the fair value of scheme assets were as follows:
Fair value of scheme assets at 1 January
Interest on scheme assets
Contributions by subsidiaries
Actuarial movement on scheme assets
Contributions by the group/company
Net benefits paid out
Fair value of scheme assets at 31 December
2014
£m
613.8
26.9
–
77.9
13.1
(31.6)
700.1
Group
2013
£m
570.7
25.6
–
20.1
14.5
(17.1)
613.8
Company
2013
£m
570.7
25.6
13.7
20.1
0.8
(17.1)
613.8
2014
£m
613.8
26.9
12.4
77.9
0.7
(31.6)
700.1
Provident Financial plc Annual Report and Financial Statements 2014Financial statementsThe valuation of the pension scheme has increased from £29.2m at 31 December 2013 to £56.0m at 31 December 2014. A high level reconciliation of the movement is as follows:Group and company£mPension asset as at 31 December 201329Cash contributions made by the group13Return on assets being held to meet pension obligations77Reduction in future liabilities due to CCD business restructuring1Actuarially based cost of new benefits (4)Increase in discount rate used to discount future liabilities(84)Increase in inflation rates used to forecast pensions24Pension asset as at 31 December 201456 170
Notes to the financial statements continued
19 Retirement benefit asset continued
The group contributions to the defined benefit pension scheme in the year ending 31 December 2015 are expected to be approximately £12m.
Movements in the present value of the defined benefit obligation were as follows:
Present value of the defined benefit obligation at 1 January
Current service cost
Interest on scheme liabilities
Exceptional curtailment credit
Actuarial movement on scheme liabilities
Net benefits paid out
Present value of the defined benefit obligation at 31 December
Group and company
2014
£m
(584.6)
(5.8)
(25.5)
0.6
(60.4)
31.6
(644.1)
2013
£m
(547.7)
(7.1)
(24.5)
1.6
(24.0)
17.1
(584.6)
The liabilities of the scheme are based on the current value of expected benefit payments over the next 90 years. The weighted average duration of the
scheme is approximately 22 years.
The principal actuarial assumptions used at the balance sheet date were as follows:
Price inflation – RPI
Price inflation – CPI
Rate of increase to pensions in payment
Inflationary increases to pensions in deferment
Discount rate
Group and company
2014
%
2013
%
3.1
2.1
2.9
2.1
3.7
3.4
2.4
3.1
2.4
4.4
The pension increase assumption shown above applies to pensions increasing in payment each year in line with RPI up to 5%. Pensions accrued prior
to 2000 are substantially subject to fixed 5% increases each year. In deferment increases prior to retirement are linked to CPI.
The mortality assumptions used in the valuation of the defined benefit pension scheme are based on the mortality experience of self-administered pension
schemes and allow for future improvements in life expectancy.
The group uses the S1PA standard tables as the basis for projecting mortality adjusted for the following factors:
• A 5% upwards adjustment to mortality rates for males and a 15% upwards adjustment for females is made in order to reflect lower life expectancies
within the scheme compared to average pension schemes; and
• Future mortality improvements are in line with CMI 2013 projections with long-term trend improvements of 1.25% per annum.
In more simple terms, it is assumed that members who retire in the future at age 65 will live on average for a further 24 years if they are male
(2013: 24 years) and for a further 25 years if they are female (2013: 25 years).
The table below shows the sensitivity on the defined benefit obligation (not including any impact on assets) of changes in the key assumptions.
Depending on the scenario, there would also be compensating asset movements.
Discount rate decreased by 0.1%
Inflation increased by 0.1%
Life expectancy increased by one year
Group and company
2014
£m
14.3
9.1
19.0
2013
£m
12.0
8.0
18.0
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
19 Retirement benefit asset continued
The actual return on scheme assets compared to the expected return is as follows:
Interest on scheme assets
Actuarial movement on scheme assets
Actual return on scheme assets
Actuarial gains and losses are recognised through other comprehensive income in the period in which they occur.
An analysis of the amounts recognised in the statement of comprehensive income is as follows:
Actuarial movement on scheme assets
Actuarial movement on scheme liabilities
Total movement recognised in other comprehensive income in the year
Cumulative movement recognised in other comprehensive income
The history of the net retirement benefit asset recognised in the balance sheet and experience adjustments for the group is as follows:
171
Group and company
2014
£m
26.9
77.9
104.8
2013
£m
25.6
20.1
45.7
Group and company
2014
£m
77.9
(60.4)
17.5
(76.2)
2013
£m
20.1
(24.0)
(3.9)
(93.7)
Group and company
Fair value of scheme assets
Present value of funded defined benefit obligation
Retirement benefit asset recognised in the balance sheet
Experience gains/(losses) on scheme assets:
– amount (£m)
– percentage of scheme assets (%)
Experience gains/(losses) on scheme liabilities:
– amount (£m)
– percentage of scheme liabilities (%)
(b) Pension schemes – defined contribution
2014
£m
700.1
(644.1)
56.0
77.9
11.9
4.1
0.7
2013
£m
613.8
(584.6)
29.2
20.1
3.3
(0.9)
(0.2)
2012
£m
570.7
(547.7)
23.0
25.3
4.4
16.3
3.0
2011
£m
525.0
(511.5)
13.5
(13.4)
(2.6)
(6.1)
(1.2)
2010
£m
514.1
(473.1)
41.0
26.0
5.1
–
–
The group operates a stakeholder pension plan into which group companies contribute a proportion of pensionable earnings of the member (typically
ranging between 5.1% and 10.6%) dependent on the proportion of pensionable earnings contributed by the member through a salary sacrifice arrangement
(typically ranging between 3.0% and 8.0%). The assets of the scheme are held separately from those of the group and company. The pension charge
in the consolidated income statement represents contributions paid by the group in respect of the plan and amounted to £4.5m for the year ended
31 December 2014 (2013: £4.3m). Contributions made by the company amounted to £0.4m (2013: £0.4m). No contributions were payable to the fund at the
year-end (2013: £nil).
The group contributed £0.1 to personal pension plans in the year (2013: £nil), £0.4m into the Undefined, Unapproved Retirement Benefit Scheme (UURBS)
(2013: £0.4m) and £nil into cash supplements (2013: £0.1m).
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 172
Notes to the financial statements continued
20 Deferred tax
Deferred tax is a future tax liability or asset resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.
Deferred tax arises primarily in respect of derivative financial instruments, the group’s pension asset, deductions for employee share awards which are recognised differently for tax purposes
and property, plant and equipment which is depreciated on a different basis for tax purposes. The deferred tax liability recognised on the acquisition of Moneybarn relates primarily to the intangible
asset in respect of Moneybarn’s broker relationships which will be amortised in future periods but for which tax deductions will not be available. This is presented net of deferred tax assets in
respect of the transitional adjustments arising in Moneybarn on adoption of IFRS, tax relief for which is available in post acquisition periods.
Deferred tax is calculated in full on temporary differences under the balance sheet liability method. Following the changes in corporation tax rates in 2013,
deferred tax balances at 31 December 2013 were re-measured at 20% on the basis that the temporary differences on which the deferred tax was calculated
were expected to reverse after 1 April 2015. In 2014, movements in the deferred tax balances have been measured at the statutory corporation tax rate
for the year of 21.50% (2013: 23.25%). The deferred tax balances at 31 December 2014 have then been re-measured at 20% as the temporary differences
on which deferred tax has been calculated are expected to reverse after 1 April 2015. A tax credit of £1.3m in 2014 (2013: charge of £0.7m) represents
the income statement adjustment as a result of this change. An additional deferred tax credit of £0.3m (2013: £0.3m) has been taken directly to other
comprehensive income in respect of items reflected directly in other comprehensive income. The movement in the deferred tax balance during the year
can be analysed as follows:
(Liability)/asset
At 1 January
Charge to the income statement (note 5)
Acquisition of Moneybarn (note 10)
(Charge)/credit on other comprehensive income prior to impact of change in UK tax rate (note 5)
Impact of change in UK tax rate:
– credit/(charge) to the income statement
– credit to other comprehensive income
At 31 December
An analysis of the deferred tax (liability)/asset for the group is set out below:
Group – (liability)/asset
At 1 January
Credit/(charge) to the income statement
Acquisition of Moneybarn (note 10)
(Charge)/credit on other comprehensive
income prior to change in UK tax rate
Impact of change in UK tax rate:
– credit/(charge) to the income statement
– credit/(charge) to other comprehensive
income
At 31 December
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
1.7
0.3
–
–
–
–
2.0
7.6
(1.6)
(11.5)
(0.4)
1.2
–
(4.7)
(5.8)
(1.7)
–
(3.8)
0.1
0.3
(10.9)
Group
2013
£m
6.1
(2.5)
–
0.3
(0.7)
0.3
3.5
2014
£m
3.5
(3.0)
(11.5)
(4.2)
1.3
0.3
(13.6)
2014
£m
(2.8)
(1.5)
–
(4.3)
0.1
0.3
(8.2)
2014
Total
£m
3.5
(3.0)
(11.5)
(4.2)
1.3
0.3
(13.6)
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
1.7
0.3
–
–
(0.3)
–
1.7
9.7
(0.5)
–
(0.6)
(0.8)
(0.2)
7.6
(5.3)
(2.3)
–
0.9
0.4
0.5
(5.8)
Company
2013
£m
(0.9)
(2.7)
–
0.3
0.2
0.3
(2.8)
2013
Total
£m
6.1
(2.5)
–
0.3
(0.7)
0.3
3.5
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
20 Deferred tax continued
An analysis of the deferred tax liability for the company is set out below:
Company – liability
At 1 January
Credit/(charge) to the income statement
(Charge)/credit on other comprehensive
income prior to impact of change in UK
tax rate
Impact of change in UK tax rate:
– credit/(charge) to the income statement
– credit/(charge) to other comprehensive
income
At 31 December
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
(0.4)
0.1
–
–
–
(0.3)
3.4
0.1
(5.8)
(1.7)
(0.5)
(3.8)
–
–
3.0
0.1
0.3
(10.9)
2014
Total
£m
(2.8)
(1.5)
(4.3)
0.1
0.3
(8.2)
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
(0.6)
0.2
–
–
–
(0.4)
5.0
(0.6)
(0.6)
(0.2)
(0.2)
3.4
(5.3)
(2.3)
0.9
0.4
0.5
(5.8)
173
2013
Total
£m
(0.9)
(2.7)
0.3
0.2
0.3
(2.8)
Deferred tax assets have been recognised in respect of all tax losses and other temporary timing differences because it is probable that these assets will
be recovered.
21 Cash and cash equivalents
Cash and cash equivalents includes cash at bank, floats held by agents within CCD and Vanquis Bank’s liquid assets buffer, including other liquid resources, held in accordance with the
PRA’s liquidity regime. The PRA requires regulated entities to maintain a liquid assets buffer and other liquid resources to ensure they have available funds to help protect against unforeseen
circumstances. The amount of the liquid assets buffer is calculated using Individual Liquidity Guidance (ILG) set by the PRA based on the Individual Liquidity Adequacy Assessment (ILAA)
prepared by Vanquis Bank. In addition, further liquid resources must be maintained based upon daily stress tests linked to three key liquidity risks of Vanquis Bank, namely retail deposits
maturities, undrawn credit card lines and operating cash flows. This results in a dynamic liquid resources requirement, largely driven by retail deposits maturities in the following three months.
Vanquis Bank’s liquid assets buffer, including other liquid resources, amounts to £121.4m in 2014 (2013: £86.3m) and is held in a combination of UK government gilts of £65.7m (2013: £60.4m)
and a designated money market fund with exposure to the UK government only of £55.7m (2013: £25.9m)
Cash at bank and in hand
2014
£m
145.9
Group
2013
£m
119.0
Company
2013
£m
13.6
2014
£m
7.7
In addition to cash and cash equivalents, the group had £5.2m of bank overdrafts at 31 December 2014 (2013: £9.3m) and the company had £2.6m of bank
overdrafts (2013: £2.9m) both of which are disclosed within bank and other borrowings (see note 22).
The currency profile of cash and cash equivalents is as follows:
Sterling
Euro
Zloty
Total cash and cash equivalents
2014
£m
143.5
0.2
2.2
145.9
Group
2013
£m
117.6
–
1.4
119.0
Company
2013
£m
13.5
–
0.1
13.6
2014
£m
7.0
–
0.7
7.7
Cash and cash equivalents are non-interest bearing other than the amounts held by Vanquis Bank as a liquid assets buffer and other liquid resources
in adherence with the PRA’s liquidity regime which bear interest at rates linked to sterling Government bonds.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 174
Notes to the financial statements continued
22 Bank and other borrowings
(a) Borrowing facilities and borrowings
Borrowings principally comprise syndicated and bilateral bank facilities arranged for periods of up to five years, together with overdrafts and uncommitted loans which are repayable on demand,
senior public bonds (see note 22(d)), loan notes privately placed with UK institutions (see note 22(e)), retail bonds (see note 22(f)), retail deposits issued by Vanquis Bank (see note 22(g)) and
subordinated loan notes (see note 22(h)). As at 31 December 2014, borrowings under these facilities amounted to £1,493.0m (2013: £1,284.6m).
(b) Maturity profile of bank and other borrowings
The maturity of borrowings, together with the maturity of facilities, is as follows:
Group
Repayable:
On demand
In less than one year
Included in current liabilities
Between one and two years
Between two and five years
In more than five years
Included in non-current liabilities
Total group
2014
2013
Borrowing
facilities
available
£m
Borrowings
£m
Borrowing
facilities
available
£m
Borrowings
£m
23.9
130.1
154.0
192.4
1,144.1
140.2
1,476.7
1,630.7
5.2
130.1
135.3
192.1
1,030.8
134.8
1,357.7
1,493.0
24.1
111.9
136.0
508.5
492.1
405.2
1,405.8
1,541.8
9.3
111.9
121.2
270.1
489.3
404.0
1,163.4
1,284.6
Borrowings are stated after deducting £7.5m of unamortised arrangement fees (2013: £7.2m) and after £nil in respect of the fair value adjustment of derivative
financial instruments (2013: credit of £5.2m) (see note 17(d)).
Company
Repayable:
On demand
In less than one year
Included in current liabilities
Between one and two years
Between two and five years
In more than five years
Included in non-current liabilities
Total company
2014
2013
Borrowing
facilities
available
£m
Borrowings
£m
Borrowing
facilities
available
£m
Borrowings
£m
23.9
6.0
29.9
60.0
820.3
140.2
1,020.5
1,050.4
2.6
6.0
8.6
59.7
707.0
134.8
901.5
910.1
24.1
–
24.1
400.6
233.3
405.2
1,039.1
1,063.2
2.9
–
2.9
162.2
230.5
404.0
796.7
799.6
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014In order to reconcile the borrowings shown in the table above and the headroom on committed facilities shown in 22(i), the facilities and borrowings in respect of amounts repayable on demand should be deducted and unamortised arrangement fees should be added back to borrowings and the fair value adjustments in respect of derivative financial instruments should be deducted from borrowings as follows:20142013GroupFacilities £mBorrowings £mFacilities £mBorrowings £mTotal group facilities and borrowings1,630.71,493.01,541.81,284.6Repayable on demand(23.9)(5.2)(24.1)(9.3)Unamortised arrangement fees–7.5–7.2Fair value adjustment in respect of derivative financial instruments––(5.2)(5.2)Total group committed facilities and borrowings1,606.81,495.31,512.51,277.3Headroom on committed facilities111.5235.2 Notes to the financial statements continued
175
22 Bank and other borrowings continued
(b) Maturity profile of bank and other borrowings (continued)
As at 31 December 2014, the weighted average period to maturity of the group’s committed facilities, including retail deposits, was 3.1 years (2013: 3.2 years)
and for the company’s committed facilities was 3.5 years (2013: 3.7 years). Excluding retail deposits, the weighted average period to maturity of the group’s
committed facilities was 3.5 years (2013: 3.6 years). On 12 January 2015, the group exercised its options to extend its £382.5m syndicated bank facility
maturing in May 2017 by a further year to May 2018. After adjusting for this renewal, the weighted average period to maturity of the group’s committed
facilities is 3.3 years, 3.9 years, excluding retail deposits and the weighted average period to maturity of the company’s committed facilities is 3.9 years.
(c) Interest rate and currency profile of bank and other borrowings
Before taking account of the various interest rate swaps and cross-currency swap arrangements entered into by the group and company, the interest rate
and foreign exchange rate exposure on borrowings is as follows:
Group
Sterling
US dollar
Euro
Zloty
Total group
Company
Sterling
Euro
Zloty
Total company
Fixed
£m
Floating
£m
1,089.6
–
–
–
1,089.6
331.5
–
54.5
17.4
403.4
Fixed
£m
Floating
£m
509.3
–
–
509.3
328.9
54.5
17.4
400.8
2014
Total
£m
1,421.1
–
54.5
17.4
1,493.0
2014
Total
£m
838.2
54.5
17.4
910.1
Fixed
£m
Floating
£m
950.1
41.5
–
–
991.6
230.1
–
56.3
6.6
293.0
Fixed
£m
Floating
£m
513.0
–
–
513.0
223.7
56.3
6.6
286.6
2013
Total
£m
1,180.2
41.5
56.3
6.6
1,284.6
2013
Total
£m
736.7
56.3
6.6
799.6
As detailed in note 17, the group and company have entered into various interest rate swaps and had entered into various cross-currency swap arrangements
to hedge the interest rate and foreign exchange rate exposures on borrowings. After taking account of the aforementioned interest rate swaps, the group’s
fixed rate borrowings are £1,209.6m (2013: £1,111.6m) and the company’s fixed rate borrowings are £629.3m (2013: £633.0m). After taking account of
cross-currency swaps, the group and company have no foreign exchange rate exposure to borrowings denominated in US dollars (2013: £nil).
(d) Senior public bonds
On 23 October 2009, the company issued £250.0m of senior public bonds. The bonds have an annual coupon of 8.0% and are repayable on 23 October 2019.
(e) Private placement loan notes
On 24 April 2003, the group issued loan notes as follows:
(i) US$44m of 5.81% loan notes matured and repaid on 24 April 2010; and
(ii) US$76m of 6.34% loan notes matured and repaid on 24 April 2013.
On 12 August 2004, the group issued loan notes as follows:
(i) US$30m of 6.02% loan notes matured and repaid on 12 August 2011;
(ii) US$67m of 6.45% loan notes matured and repaid on 12 August 2014; and
(iii) £2m of 7.01% loan notes matured and repaid on 12 August 2014.
As set out in note 22(c), cross-currency swaps had been put in place to swap the proceeds and liabilities for principal and interest under the US
dollar-denominated loan notes into sterling.
On 13 January 2011, the company entered into a committed £100.0m facility agreement with the Prudential/M&G Investments UK Companies Financing Fund
to provide a 10-year term loan which amortises between years five and 10. The first repayment of £10.0m is due on 13 January 2016. The facility bears
interest at rates linked to LIBOR.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 176
Notes to the financial statements continued
22 Bank and other borrowings continued
The company subsequently entered into the following arrangements with third-party debt providers:
• 3 February 2011 – ¤10m facility agreement over a seven-year period at rates linked to EURIBOR, repaid at the company’s option, one year ahead
of maturity, on 24 May 2014;
• 4 March 2011 – £20m private placement loan notes over a seven-year period at rates linked to LIBOR; and
• 24 May 2011 – ¤14.5m private placement loan notes over a four-year period at rates linked to EURIBOR.
(f) Retail bonds
The company has issued four retail bonds on the ORB platform established by the London Stock Exchange as follows:
Issue date
14 April 2010
25 March 2011
4 April 2012
27 March 2013
Total group and company
Amount
£m
25.2
50.0
120.0
65.0
260.2
Rate
%
Maturity date
7.5%*
14 April 2020
7.5% 30 September 2016
7.0%
4 October 2017
6.0% 27 September 2021
*represents an all-in cost of 7.5%, comprising a 7.0% interest rate payable to the bond holder and 0.5% payable to the distributor.
(g) Retail deposits
Vanquis Bank is a PRA regulated bank and commenced taking retail deposits in July 2011. As at 31 December 2014, £580.3m (2013: £435.1m) of fixed-rate,
fixed-term retail deposits of one, two, three, four and five years had been taken. The deposits in issue at 31 December 2014 have been issued at rates of
between 1.66% and 4.65%.
(h) Subordinated loan notes
On 15 June 2005, the company issued £100.0m of subordinated loan notes repayable on 15 June 2015. £94.0m of the liability was settled in 2009.
The rights of repayment to holders of the loan notes are subordinated to all other borrowings and liabilities of the company upon a winding up of the
company and, in certain circumstances, upon its administration.
(i) Undrawn committed borrowing facilities
The group’s funding and liquidity policy is designed to ensure that the group is able to continue to fund the growth of the business. The group therefore maintains headroom on its committed
borrowing facilities to fund growth and contractual maturities for at least the following 12 months, after assuming that Vanquis Bank will fund 100% of its receivables book through retail deposits.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014A reconciliation of the movement in retail deposits is set out below:Group2014 £m2013 £mAt 1 January435.1327.4New funds received190.7187.7Maturities(69.7)(114.9)Retentions26.631.8Cancellations(8.9)(3.2)Capitalised interest6.56.3At 31 December580.3435.1 Notes to the financial statements continued
22 Bank and other borrowings continued
The undrawn committed borrowing facilities at 31 December were as follows:
Expiring within one year
Expiring within one to two years
Expiring in more than two years
Total group and company
177
Group and company
2014
£m
–
–
111.5
111.5
2013
£m
–
235.2
–
235.2
The table above excludes the additional capacity for Vanquis Bank to take retail deposits up to the value of the intercompany loan from Provident Financial plc of £342.2m as at 31 December 2014.
Accordingly, Vanquis Bank’s retail deposits capacity at 31 December 2014 amounts to £342m. The group’s total funding capacity at the end of 2014 therefore amounts to £453.1m, being the group’s
headroom on undrawn committed borrowing facilities of £111.5m plus the amount of Vanquis Bank’s intercompany loan of £342.2m.
(j) Weighted average interest rates and periods to maturity
Before taking account of the various interest rate swaps and cross-currency swap arrangements entered into by the group and company, the weighted
average interest rate and the weighted average period to maturity of the group and company’s fixed-rate borrowings is as follows:
Group
Sterling
US dollar
Company
Sterling
Weighted
average
interest
rate
%
5.18
–
2014
Weighted
average
period to
maturity
years
3.27
–
2014
Weighted
average
interest
rate
%
5.66
6.39
2013
Weighted
average
period to
maturity
years
3.90
0.61
2013
Weighted
average
interest
rate
%
Weighted
average
period to
maturity
years
Weighted
average
interest
rate
%
Weighted
average
period to
maturity
years
7.41
4.26
7.41
5.26
After taking account of interest rate swaps and cross-currency swaps, the sterling-weighted average fixed interest rate for the group was 4.98%
(2013: 5.70%) and for the company was 6.62% (2013: 6.62%). The sterling-weighted average period to maturity on the same basis is 3.3 years (2013: 4.1 years)
for the group and 4.3 years (2013: 5.2 years) for the company. There is £nil foreign exchange or interest rate risk denominated in US dollars after taking
account of cross-currency swaps (2013: £nil).
(k) Fair values
The fair values of the group and company’s bank and other borrowings are compared to their book values as follows:
Group
Bank loans and overdrafts
Senior public bonds
Sterling private placement loan notes
US dollar private placement loan notes
Euro private placement loan notes
Retail bonds
Retail deposits
Subordinated loan notes
Total group
2014
2013
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
268.7
250.0
120.0
–
7.8
260.2
580.3
6.0
1,493.0
268.7
284.8
138.5
–
8.6
278.2
607.1
6.3
1,592.2
154.6
250.0
122.0
36.3
20.4
260.2
435.1
6.0
1,284.6
154.6
279.0
135.0
36.8
22.2
279.9
457.4
6.6
1,371.5
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 178
Notes to the financial statements continued
22 Bank and other borrowings continued
Company
Bank loans and overdrafts
Senior public bonds
Sterling private placement loan notes
Euro private placement loan notes
Retail bonds
Subordinated loan notes
Total company
2014
2013
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
266.1
250.0
120.0
7.8
260.2
6.0
910.1
266.1
284.8
138.5
8.6
278.2
6.3
982.5
143.0
250.0
120.0
20.4
260.2
6.0
799.6
143.0
279.0
135.0
22.2
281.1
6.6
866.9
The fair value of the sterling, US dollar and euro private placement loan notes, the retail deposits and the subordinated loan notes have been calculated by
discounting the expected future cash flows at the relevant market interest rate yield curves prevailing at the balance sheet date. The fair value of the senior
public bonds and retail bonds equate to their publicly quoted market price at the balance sheet date.
23 Trade and other payables
Current liabilities
Trade payables
Amounts owed to group undertakings
Other payables including taxation and social security
Accruals
Total
Group
2013
£m
4.5
–
6.1
55.2
65.8
2014
£m
3.3
–
11.0
80.0
94.3
Company
2013
£m
–
156.3
1.4
20.9
178.6
2014
£m
–
104.5
1.4
24.2
130.1
The amounts owed to group undertakings are unsecured, due for repayment in less than one year and accrue interest at rates linked to LIBOR.
Accruals principally relate to normal operating accruals such as rent, rates and utilities, interest accrued on the group’s borrowings and national insurance accrued in respect of share-based
payments. The increase during 2014 principally reflects the acquisition of Moneybarn and interest accruals relating to retail deposits.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
179
24 Share capital
Group and company
Ordinary shares of 208⁄11p each
– £m
– number (m)
The movement in the number of shares in issue during the year was as follows:
Group and company
At 1 January
Shares issued pursuant to the exercise/vesting of options and awards
Placing of ordinary shares to in respect of the acquisition of Moneybarn
At 31 December
2014
Issued and
fully paid
2013
Issued and
fully paid
Authorised
Authorised
40.0
193.0
30.3
146.4
40.0
193.0
28.9
139.6
2014
m
139.6
0.9
5.9
146.4
2013
m
138.4
1.2
–
139.6
The shares issued pursuant to the exercise/vesting of options and awards comprised 886,497 ordinary shares (2013: 1,198,034) with a nominal value
of £183,746 (2013: £248,320) and an aggregate consideration of £2.2m (2013: £2.7m). In addition the shares issued as part of the placing in respect of
Moneybarn comprised 1,225,257 ordinary shares with a nominal value of 5,911,330 and an aggregate consideration of £120.0m. Costs associated with the
placement, amounting to £3.1m, have been deducted from the share premium account.
Provident Financial plc sponsors the Provident Financial plc 2007 Employee Benefit Trust (EBT) which is a discretionary trust established for the benefit
of the employees of the group. The company has appointed Kleinwort Benson (Jersey) Trustees Limited to act as trustee of the EBT. The trustee has waived
the right to receive dividends on the shares it holds. As at 31 December 2014, the EBT held 3,100,176 (2013: 2,789,343) shares in the company with a cost
of £0.6 (2013: £0.6m) and a market value of £76.3 m (2013: £45.3m). The shares have been acquired by the EBT to meet obligations under the Provident
Financial Long Term Incentive Scheme 2006 and the 2013 Performance Share Plan.
Provident Financial plc also sponsors the Performance Share Plan Trust which was established to operate in conjunction with the Performance Share Plan
(PSP). As at 31 December 2014, awards under the PSP, held in the name of the individual subject to the award, were 942,626 (2013: 994,627) ordinary
shares with a cost of £0.2 m (2013: £0.2m) and a market value of £23.2 m (2013: £16.2m).
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 180
Notes to the financial statements continued
25 Share-based payments
The group issues share options and awards to senior employees as part of its employee remuneration packages. The group operates three share schemes: the Long Term Incentive Scheme
(LTIS), employees’ savings-related share option schemes typically referred to as Save As You Earn schemes (SAYE), and the Performance Share Plan (PSP). The group also previously operated
senior executive share option schemes (ESOS/SESO), although no options have been granted under these schemes since 2006.
When a share option or award is granted, a fair value is calculated based on the current share price, probability of the option/award vesting, the group’s recent share price volatility, and the risk
associated with the option/award. The fair value of all options is charged to the income statement on a straight-line basis over the vesting period of the underlying option/award.
The charge to the income statement in 2014 was £8.7m for the group (2013: £7.4m) and £4.6m for the company (2013: £3.6m).
During 2014, awards/options have been granted under the LTIS, PSP and SAYE schemes (2013: awards/options granted under the LTIS, PSP and SAYE schemes). The increase in the share-
based payment charge from £7.4m in 2013 to £8.7m in 2014, principally reflects the release of prior year provisions in 2013 following the departure of Chris Gillespie, a former executive director.
The fair value per award/option granted and the assumptions used in the calculation of the share-based payment charge are as follows:
Group
PSP
LTIS
2014
SAYE
PSP
LTIS
2013
SAYE
Grant date
Share price at grant date (£)
Exercise price (£)
Shares awarded/under option (number)
Vesting period (years)
Expected volatility
Award/option life (years)
Expected life (years)
Risk-free rate
Expected dividends expressed as a dividend yield
Fair value per award/option (£)
8 April 2014
18.99
–
202,689
3
21.8%
3
3
1.41%
n/a
18.99
8 April 2014
18.99
–
413,853
3
5 Sep 2014
21.31
16.44
269,202
3 and 5
21.8% 21.2%-22.2%
Up to 5
Up to 5
1.41% 1.23%-1.75%
4.4%
4.16-4.27
3
3
n/a
13.97-18.99
9 May 2013
16.00
–
299,618
3
24.0%
3
3
0.69%
n/a
16.00
1 Mar 2013
15.01
–
535,014
3
23 Aug 2013
17.15
13.05
200,259
3 and 5
23.9% 23.7%-27.2%
Up to 5
Up to 5
0.67% 0.88%-1.64%
5.0%
3.37-3.72
3
3
n/a
6.03-15.01
Company
PSP
LTIS
2014
SAYE
PSP
LTIS
2013
SAYE
Grant date
Share price at grant date (£)
Exercise price (£)
Shares awarded/under option (number)
Vesting period (years)
Expected volatility
Award/option life (years)
Expected life (years)
Risk-free rate
Expected dividends expressed as a dividend yield
Fair value per award/option (£)
8 April 2014
18.99
–
132,316
3
21.8%
3
3
1.41%
n/a
18.99
8 April 2014
18.99
–
175,366
3
5 Sep 2014
21.31
16.44
15,290
3 and 5
21.8% 21.2%-22.2%
Up to 5
Up to 5
1.41% 1.23%-1.75%
4.4%
4.16-4.27
n/a
13.97
3
3
9 May 2013
16.00
–
204,498
3
24.0%
3
3
0.69%
n/a
16.00
1 Mar 2013
15.01
–
282,755
3
23 Aug 2013
17.15
13.05
5,931
3 and 5
23.9% 23.7%-27.2%
Up to 5
Up to 5
0.67% 0.88%-1.64%
5.0%
3.37-3.72
n/a
10.52
3
3
The expected volatility is based on historical volatility over the last three or five years depending on the length of the option/award. The expected life is the
average expected period to exercise. The risk-free rate of return is the yield on zero coupon UK Government bonds.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
181
25 Share-based payments continued
A reconciliation of award/share option movements during the year is shown below:
Group
Outstanding at 1 January 2014
Awarded/granted
Lapsed
Exercised
Outstanding at
31 December 2014
Exercisable at 31 December 2014
Number
775,506
202,689
(655)
(258,015)
719,525
–
Group
Outstanding at 1 January 2013
Awarded/granted
Lapsed
Exercised
Outstanding at
31 December 2013
Exercisable at 31 December 2013
Number
623,886
299,618
(86,623)
(61,375)
775,506
–
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
SAYE
Weighted
average
exercise
price
£
9.56
16.44
10.56
7.91
12.25
8.12
SAYE
Weighted
average
exercise
price
£
7.97
13.05
8.95
6.62
9.56
6.81
Number
902,784
269,202
(86,737)
(270,589)
814,660
22,650
Number
1,185,345
200,259
(97,910)
(384,910)
902,784
24,945
Number
1,938,223
413,853
(265,058)
(730,675)
1,356,343
–
Number
2,271,742
535,014
(74,548)
(793,985)
1,938,223
–
ESOS/SESO
Weighted
average
exercise
price
£
5.77
–
–
–
5.77
5.77
ESOS/SESO
Weighted
average
exercise
price
£
5.77
–
–
5.77
5.77
5.77
Number
10,820
–
–
–
10,820
10.820
Number
14,890
–
–
(4,070)
10,820
10,820
Share awards outstanding under the LTIS scheme at 31 December 2014 had an exercise price of £nil (2013: £nil) and a weighted average remaining
contractual life of 1.2 years (2013: 1.0 years). Share options outstanding under the ESOS/SESO schemes at 31 December 2014 had an exercise price of
577p (2013: 577p) and a weighted average remaining contractual life of nil years (2013: nil years). Share options outstanding under the SAYE schemes at
31 December 2014 had exercise prices ranging from 656p to 1,644p (2013: 491p to 1,305p) and a weighted average remaining contractual life of 2.0 years
(2013: 1.9 years). Share awards outstanding under the PSP schemes at 31 December 2014 had an exercise price of £nil (2013: £nil) and a weighted average
remaining contractual life of 1.2 years (2013: 1.3 years).
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 182
Notes to the financial statements continued
25 Share-based payments continued
Company
Outstanding at 1 January 2014
Awarded/granted
Lapsed
Exercised
Outstanding at
31 December 2014
Exercisable at 31 December 2014
Number
505,134
132,316
–
(163,470)
473,980
–
Company
Outstanding at 1 January 2013
Awarded/granted
Lapsed
Exercised
Outstanding at
31 December 2013
Exercisable at 31 December 2013
Number
419,748
204,498
(75,164)
(43,948)
505,134
–
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
Number
1,050,358
175,366
(235,799)
(325,444)
664,481
–
Number
1,197,956
282,755
(1,234)
(429,119)
1,050,358
–
SAYE
Weighted
average
exercise
price
£
9.90
16.44
8.88
7.71
13.79
–
SAYE
Weighted
average
exercise
price
£
7.97
13.05
10.56
6.60
9.90
6.85
Number
25,508
15,290
(1,591)
(8,362)
30,845
–
Number
36,032
5,931
(852)
(15,603)
25,508
4,055
ESOS/SESO
Weighted
average
exercise
price
£
–
–
–
–
–
–
ESOS/SESO
Weighted
average
exercise
price
£
5.77
–
–
5.77
–
–
Number
–
–
–
–
–
–
Number
4,070
–
–
(4,070)
–
–
Share awards outstanding under the LTIS scheme at 31 December 2014 had an exercise price of £nil (2013: £nil) and a weighted average remaining
contractual life of 1.1 years (2013: 1.1 years). Share options outstanding under the SAYE schemes at 31 December 2014 had exercise prices ranging from
662p to 1,644p (2013: 656p to 1,305p) and a weighted average remaining contractual life of 2.3 years (2013: 1.7 years). Share awards outstanding under the
PSP schemes at 31 December 2014 had an exercise price of £nil (2013: £nil) and a weighted average remaining contractual life of 1.2 years (2013: 1.3 years).
There were no share options outstanding under the ESOS/SESO schemes at 31 December 2014.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
183
26 Other reserves
Group
At 1 January 2013
Other comprehensive income:
– cash flow hedges (note 17)
– tax on items taken directly to other comprehensive income (note 5)
– impact of change in UK tax rate
Other comprehensive income for the year
Transactions with owners:
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge (note 25)
– transfer of share-based payment reserve
At 31 December 2013
At 1 January 2014
Other comprehensive income:
– cash flow hedges (note 17)
– tax on items taken directly to other comprehensive income (note 5)
Other comprehensive income for the year
Transactions with owners:
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge (note 25)
– transfer of share-based payment reserve
At 31 December 2014
Profit
retained by
subsidiary
£m
Capital
redemption
reserve
£m
0.8
3.6
–
–
–
–
–
–
–
–
0.8
0.8
–
–
–
–
–
–
–
–
0.8
–
–
–
–
–
–
–
–
3.6
3.6
–
–
–
–
–
–
–
–
3.6
Hedging
reserve
£m
(7.0)
2.7
(0.6)
(0.2)
1.9
–
–
–
–
(5.1)
(5.1)
–
2.2
(0.4)
1.8
–
–
–
–
(3.3)
Treasury
shares
reserve
£m
Share-based
payment
reserve
£m
(1.0)
16.8
Total
other
reserves
£m
13.2
–
–
–
–
(0.5)
0.6
–
–
(0.9)
(0.9)
–
–
–
–
(0.1)
0.2
–
–
(0.8)
–
–
–
–
–
–
7.4
(5.4)
18.8
18.8
–
–
–
–
–
–
8.7
(8.8)
18.7
2.7
(0.6)
(0.2)
1.9
(0.5)
0.6
7.4
(5.4)
17.2
17.2
–
2.2
(0.4)
1.8
(0.1)
0.2
8.7
(8.8)
19.0
The capital redemption reserve represents profits on the redemption of preference shares arising in prior years, together with the capitalisation of the nominal value of shares purchased
and cancelled, net of the utilisation of this reserve to capitalise the nominal value of shares issued to satisfy scrip dividend elections.
The hedging reserve reflects the corresponding entry to the fair value of hedging derivatives held on the balance sheet as either assets or liabilities (see note 17).
The treasury shares reserve represents shares acquired by the company, through various trusts, both from the market and through a fresh issue to satisfy awards under the group’s various
share schemes (see note 24). The cost of the shares is treated as a deduction from equity. When the relevant awards vest, the cost of the shares provided to employees is transferred to
retained earnings.
The share-based payment reserve reflects the corresponding credit entry to the cumulative share-based payment charges made through the income statement as there is no cash cost or
reduction in assets from the charges. When options and awards vest, that element of the share-based payment reserve relating to those awards and options is transferred to retained earnings.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 184
Notes to the financial statements continued
26 Other reserves continued
Company
At 1 January 2013
Other comprehensive income:
– cash flow hedges (note 17)
– tax on items taken directly to other comprehensive income
– impact of change in UK tax rate
Other comprehensive income for the year
Transactions with owners:
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge (note 25)
– share-based payment movement in investment in subsidiaries (note 14)
– transfer of share-based payment reserve
At 31 December 2013
At 1 January 2014
Other comprehensive income:
– cash flow hedges (note 17)
– tax on items taken directly to other comprehensive income
– impact of change in UK tax rate
Other comprehensive income for the year
Transactions with owners:
– purchase of own shares
– transfer of own shares on vesting of share awards
– share-based payment charge (note 25)
– share-based payment movement in investment in subsidiaries (note 14)
– transfer of share-based payment reserve
At 31 December 2014
Non-
distributable
reserve
£m
Merger
reserve
£m
Capital
redemption
reserve
£m
Hedging
reserve
£m
Treasury
shares
reserve
£m
Share-based
payment
reserve
£m
Total
other
reserves
£m
609.2
2.3
3.6
–
–
–
–
–
–
–
–
–
609.2
609.2
–
–
–
–
–
–
–
–
–
609.2
–
–
–
–
–
–
–
–
–
2.3
2.3
–
–
–
–
–
–
–
–
–
2.3
–
–
–
–
–
–
–
–
–
3.6
3.6
–
–
–
–
–
–
–
–
–
3.6
(7.2)
2.7
(0.6)
(0.2)
1.9
–
–
–
–
–
(5.3)
(5.3)
2.3
(0.5)
–
1.8
–
–
–
–
–
(3.5)
(1.0)
16.8
623.7
–
–
–
–
(0.5)
0.6
–
–
–
(0.9)
(0.9)
–
–
–
–
(0.1)
0.2
–
–
–
(0.8)
–
–
–
–
–
–
3.6
0.8
(2.4)
18.8
18.8
–
–
–
–
–
–
4.6
(0.4)
(4.2)
18.8
2.7
(0.6)
(0.2)
1.9
(0.5)
0.6
3.6
0.8
(2.4)
627.7
627.7
2.3
(0.5)
–
1.8
(0.1)
0.2
4.6
(0.4)
(4.2)
629.6
The non-distributable reserve was created as a result of an intra-group reorganisation to create a more efficient capital structure that more accurately reflects the group’s management structure.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Notes to the financial statements continued
27 Commitments
Commitments under operating leases are as follows:
Due within one year
Due between one and five years
Due in more than five years
Total
185
Group
Company
2014
£m
13.8
30.7
59.7
104.2
2013
£m
13.7
34.0
51.9
99.6
2014
£m
2.5
12.0
20.3
34.8
2013
£m
1.9
9.7
13.7
25.3
Operating lease commitments relate to the future rental payments until the first break on: (i) the CCD head office property in Bradford; (ii) the 240 CCD branches nationwide; and (iii) the new
Vanquis Bank head office in London and contact centre in Chatham.
Other group commitments are as follows:
Unutilised credit card facilities at 31 December
The company has £nil unutilised credit card facilities at 31 December 2014 (2013: £nil).
2014
£m
505.2
Group
2013
£m
361.0
The group and company had £nil capital expenditure commitments contracted with third parties but not provided for at 31 December 2014 (2013: £nil).
28 Related party transactions
The company recharges the pension scheme referred to in note 19 with a proportion of the costs of administration and professional fees incurred by
the company. The total amount recharged during the year was £0.6m (2013: £0.6m) and the amount due from the pension scheme at 31 December 2014
was £0.2m (2013: £0.1m).
Details of the transactions between the company and its subsidiary undertakings, which comprise management recharges and interest charges
on intra-group balances, along with any balances outstanding at 31 December are set out below:
Company
Vanquis Bank
CCD
Moneybarn
Other central companies
Total
Management
recharge
£m
3.2
7.3
–
–
10.5
2014
2013
Interest
(credit)/
charge
£m
(23.5)
(55.5)
(4.4)
0.5
(82.9)
Outstanding
balance
£m
Management
recharge
£m
339.8
969.1
161.5
109.5
1,579.9
2.6
7.8
–
–
10.4
Interest
(credit)/
charge
£m
Outstanding
balance
£m
(18.1)
(63.2)
–
2.1
(79.2)
286.2
1,114.4
–
63.3
1,463.9
The outstanding balance represents the gross intercompany balance receivable by the company, against which a provision of £122.5m (2013: £122.5m) is held.
During 2014, the company received a dividend of £70.0m from Provident Financial Management Services Limited, a subsidiary within CCD (2013: £75.0m)
and a £42.5m dividend from Vanquis Bank Limited (2013: £30.0m).
There are no transactions with directors other than those disclosed in the directors’ remuneration report.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 186
Notes to the financial statements continued
29 Contingent liabilities
A contingent liability is a liability that is not sufficiently certain to qualify for recognition as a provision where uncertainty exists regarding the outcome of future events. The only contingent liabilities
within the group relate to bank guarantees provided from one subsidiary to another and a charge in respect of the Unfunded Unapproved Retirement Benefits Scheme (UURBS).
The company has a contingent liability for guarantees given in respect of borrowing facilities of certain subsidiaries to a maximum of £114.1m (2013: £285.1m).
At 31 December 2014, the fixed and floating rate borrowings in respect of these guarantees amounted to £2.6m (2013: £49.9m). No loss is expected to arise.
These guarantees are defined as financial guarantees under IAS 39 and their fair value at 31 December 2014 was £nil (2013: £nil).
A floating charge is held over CCD’s receivables of up to £15m in respect of the funded pension benefit promises made to executive directors and certain
members of the senior management affected by the reduced annual allowance to pension schemes introduced in 2011 under the UURBS. No loss is expected
to arise.
30 Reconciliation of profit after taxation to cash generated from/(used in) operations
Profit after taxation
Adjusted for:
– tax charge
– finance costs
– finance income
– dividends received
– share-based payment charge
– retirement benefit charge/(credit) prior to exceptional pension credit
– exceptional curtailment credit
– amortisation of intangible assets
– depreciation of property, plant and equipment
– loss on disposal of property, plant and equipment
– impairment provision in investment in subsidiaries
Changes in operating assets and liabilities:
– amounts receivable from customers
– trade and other receivables
– trade and other payables
– contributions into the retirement benefit scheme
Cash generated from/(used in) operations
Note
5
3
28
25
19
19
12
13
13
14
19
2014
£m
175.6
49.0
77.5
–
–
8.7
4.4
(0.6)
7.2
6.6
0.2
–
Group
2013
£m
141.0
41.4
74.2
–
–
7.4
6.0
(1.6)
4.4
6.7
0.2
–
(111.4)
(92.3)
(4.4)
21.8
(13.1)
221.5
7.3
3.6
(14.5)
183.8
Company
2013
£m
127.6
4.2
59.7
(81.4)
(105.0)
3.6
(7.7)
(1.6)
–
1.2
–
–
–
105.5
2.2
(0.8)
107.5
2014
£m
125.1
1.7
61.4
(83.3)
(112.5)
4.6
(8.0)
(0.6)
–
1.1
–
0.1
–
(11.7)
(11.1)
(0.7)
(33.9)
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014
187
Independent auditor’s report
Opinion on financial statements
of Provident Financial plc
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and of the parent
company’s affairs as at 31 December 2014 and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with
IFRSs as adopted by the European Union and as applied in accordance with the provisions
of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the
Companies Act 2006 and, as regards the group financial statements, Article 4 of the
IAS Regulation.
The financial statements comprise the consolidated income statement, the consolidated statement of
comprehensive income, the consolidated and parent company balance sheets, the consolidated and
parent company statement of cash flows, the consolidated and parent company statement of changes
in shareholders’ equity, the statement of accounting policies, the financial and capital risk management
section and the related notes 1 to 30. The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent
company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Going concern
As required by the Listing Rules we have reviewed the directors’ statement contained within the
Directors’ report on page 108 that the group is a going concern. We confirm that:
• we have concluded that the directors’ use of the going concern basis of accounting in the preparation
of the financial statements is appropriate; and
• we have not identified any material uncertainties that may cast significant doubt on the group’s ability
to continue as a going concern.
However, because not all future events or conditions can be predicted, this statement is not a guarantee
as to the group’s ability to continue as a going concern.
The assessed risks of material misstatement described below are those that had the greatest
effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the
engagement team:
Our assessment of risks
of material misstatement
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 188
Independent auditor’s report continued
Risk
How the scope of our audit responded to the risk
Impairment losses against loans
and receivables (Consumer Credit Division,
Vanquis Bank and Moneybarn)
The assessment of the group’s calculation of
impairment losses against loans and receivables
is complex and requires management to make
significant judgements regarding the level and timing
of future cash flows to be received from customers.
Further detail in respect of these assumptions is
set out in the critical judgements and uncertainties
section of the accounting policies note on page 140.
Revenue recognition (Consumer Credit Division,
Vanquis Bank and Moneybarn)
Revenue recognition and specifically the application
of the requirement in IAS 39 to recognise income on
loans using an effective interest rate (‘EIR’) method
is a complex area. It requires management to make
significant judgements relating to the expected
life of each loan and the timing of cash flows with
the accounting entries generated through the use
of complex spreadsheet models. Further detail
in respect of these assumptions is set out in the
critical judgements and uncertainties section of the
accounting policies note on page 140.
Defined benefit pension scheme asset
Determining the key assumptions used to calculate
the present value of the £56.0m retirement
benefit obligation requires significant management
judgement in relation to inflation rates, discount
rates and mortality rates.
Provision for taxation liabilities
The group is required to exercise judgement in
the assessment of the key assumptions used
to determine the taxation liabilities, including the
probability of liabilities arising and the quantum
of any such liabilities.
We tested the key controls relating to the identification and recording of impairment losses and the
mechanical accuracy of the models used to calculate impairment. This included using our in-house
IT specialists to test the data flows from source systems to the models in order to determine whether
the data used to calculate impairment provisions was complete and accurate. For each of the models,
we have understood the complexities and key judgements and have tailored our work to address
these accordingly.
We challenged the appropriateness of the key assumptions used in the impairment models,
including specifically the identification of impaired accounts and the estimation of future cash
flows. This involved analysis of the group’s historical cash collection experience and challenging
the appropriateness of those key assumptions in the context of internal and external factors
affecting the business, including operational changes in the Consumer Credit Division and current
macroeconomic trends.
We tested the key controls relating to the recording of revenue which focused on the flow of data
from source systems into the revenue models and automated IT controls, with support from our
in-house IT specialists, to determine whether the data used was complete and accurate. We also
tested the mechanical accuracy of the models which are used to determine revenue and the related
controls. For each of the models, we have understood the complexities and key judgements and have
tailored our work to address these accordingly.
We challenged the assumptions used in the recognition of revenue, including the impact of early
redemptions by assessing whether the revenue recognition policies adopted were in compliance with
IFRS. We considered the assumptions in respect of future behavioural cash flows by reference to the
group’s historical experience and macroeconomic factors including inflation rates, benefit changes
and utility prices.
We used our in-house actuarial specialists to assist us in evaluating the appropriateness of the
principal actuarial assumptions used in the calculation of the retirement benefit obligation, as set out
in note 19. This involved benchmarking management’s assumptions against those used by a range
of organisations as at 31 December 2014 and considering the consistency of those judgements
compared to prior year.
Utilising the experience of our in-house taxation specialists, we evaluated the completeness of the
group’s taxation liabilities, including the appropriateness of the key assumptions relating to the likely
quantum of any liabilities and the probability of them occurring in order to assess whether the level
of provision is appropriate. We also reviewed correspondence with tax authorities to determine
whether the liabilities considered by management were complete.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Independent auditor’s report continued
189
Moneybarn fair value adjustments
In August 2014, the group acquired the entire share
capital of Duncton Group Limited for £120m, as set
out in note 10. On acquisition, IFRS 3 requires assets
and liabilities acquired to be recognised at their fair
values. Intangible assets must also be recognised
at fair value if they are separable or arise from other
contractual rights.
The determination of fair values requires the
exercise of significant judgement and our work
in this respect was focused on two key areas:
We performed a detailed review of the acquisition accounting against the requirements of IAS 38
and IFRS 13, which involved an independent challenge of management’s identification of intangibles
on acquisition.
In respect of the broker relationship intangible we:
• challenged the key judgements in respect of the valuation of the intangible broker relationships,
related to the forecast cash flows, the discount rate and its estimated useful economic life with
reference to management’s historical budgeting accuracy and external economic data.
In relation to the loan book valuation we:
• tested the underlying controls used to calculate the provision, using our in-house data specialists
• the recognition of the £75.0m broker relationship
to review the scripts used to generate the cash flow model; and
• challenged the assumptions used in the calculation with reference to historical data.
intangible which was determined by using
a discounted cash flow model. This required
the exercise of management judgement in
the estimation of the forecast future cash
flows, useful economic life and selection of
an appropriate discount rate; and
• the £3.8m adjustment to recognise the loan book
at fair value which required judgement to be
applied in respect of the estimated discounted
future cash flows to be derived from unimpaired
loans at the acquisition date.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee on pages 97 and 98.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to
express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the
risks described above, and we do not express an opinion on these individual matters.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 190
Independent auditor’s report continued
Our application of materiality
An overview of the scope of our audit
Opinion on other matters prescribed
by the Companies Act 2006
We define materiality as the magnitude of misstatement in the financial statements that makes it
probable that the economic decisions of a reasonably knowledgeable person would be changed
or influenced. We use materiality both in planning the scope of our audit work and in evaluating the
results of our work.
We determined materiality for the group to be £16.8m (2013: £14.7m), which is 7.5% (2013: 7.5%),
normalised by adding back one-off restructuring costs of pre-tax profit (as set out on page 130).
The increase in our materiality level has been driven solely by an increased in reported profit before tax.
We agreed with the audit committee that we would report to the Committee all audit differences in
excess of £336,000 (2013: £297,000), as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the audit committee on disclosure matters
that we identified when assessing the overall presentation of the financial statements.
Our audit work on the principal trading subsidiaries comprised statutory audits which were executed
at levels of materiality applicable to each individual entity which were lower than group materiality and
ranged from £300,000 to £15m.
Our group audit was scoped by obtaining an understanding of the group and its environment, including
group-wide controls, and assessing the risks of material misstatement at the group level. Based on
that assessment, our group audit scope focused on all of the principal trading subsidiaries within the
group’s three reportable segments which account for 100% of the group’s profit before tax. Two of the
segments are audited directly by the group audit team and the other is audited by a separate component
team, under the supervision of the group team who have maintained continual communication
throughout the audit. They were also selected to provide an appropriate basis for undertaking audit
work to address the risks of material misstatement identified above.
In our opinion:
• the part of the Directors’ Remuneration Report to be audited (pages 120 to 128) has been properly
prepared in accordance with the Companies Act 2006; and
• 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.
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Independent auditor’s report continued
191
Matters on which we are required to report by exception
Adequacy of explanations received
and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
Directors’ remuneration
Corporate Governance Statement
• adequate accounting records have not been kept by the parent company, or returns adequate
for our audit have not been received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records
and returns.
We have nothing to report in respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures
of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report
to be audited is not in agreement with the accounting records and returns.
We have nothing to report arising from these matters.
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement
relating to the company’s compliance with ten provisions of the UK Corporate Governance Code.
We have nothing to report arising from our review.
Our duty to read other information
in the Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our
opinion, information in the annual report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group
acquired in the course of performing our audit; or
• otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our
knowledge acquired during the audit and the directors’ statement that they consider the annual report
is fair, balanced and understandable and whether the annual report appropriately discloses those
matters that we communicated to the audit committee which we consider should have been disclosed.
We confirm that we have not identified any such inconsistencies or misleading statements.
Provident Financial plc Annual Report and Financial Statements 2014Financial statements 192
Independent auditor’s report continued
Matters on which we are required to report by exception continued
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.
Our responsibility is to audit and express an opinion on the financial statements in accordance with
applicable law and International Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply
with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools
aim to ensure that our quality control procedures are effective, understood and applied. Our quality
controls and systems include our dedicated professional standards review team and independent
partner reviews.
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
those further matters we have expressly agreed to report to them on in our engagement letter 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.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements
sufficient to give reasonable assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the group’s and the parent company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the annual report to identify material
inconsistencies with the audited financial statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the
course of performing the audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Respective responsibilities
of directors and auditor
Scope of the audit
of the financial statements
Peter Birch FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Manchester, United Kingdom
24 February 2015
Financial statements continuedProvident Financial plc Annual Report and Financial Statements 2014 Provident Financial plc
Annual Report and Financial Statements 2014
193
Shareholder
information
194 Information for shareholders
Shareholder information
194
Shareholder information
Information for shareholders
Financial calendar –
2014 final dividend
Dividend announced
24 February 2015
Annual general meeting
7 May 2015
Ex-dividend date for ordinary shares
21 May 2015
Record date for the dividend
Payment date for the dividend
22 May 2015
19 June 2015
Share price
The Company’s shares are listed on the
London Stock Exchange under share code
‘PFG.L’. The share price is quoted daily in
a number of national newspapers and is
available on our website at
www.providentfinancial.com
Individual Savings Account (ISA)
Shareholders may take out an ISA which
includes shares in the company with a provider
of their choice. However, the company has made
arrangements for its shareholders and employees
to use Redmayne-Bentley’s ISA and general share
dealing services. Shareholders who are eligible
and who wish to discuss associated fees and
charges should contact:
Phil Armitage
Redmayne-Bentley LLP
9 Bond Court
Leeds
LS1 2JZ
Telephone: 0113 200 6433
Redmayne-Bentley LLP is a Limited Liability
Partnership. Registered in England and Wales.
Registered No: OC344361 Registered office:
9 Bond Court, Leeds LS1 2JZ. Members of
the London Stock Exchange Authorised and
Regulated by the Financial Conduct Authority.
VAT number: GB 165 8810 81 LEI:
21380053IRIPK1R3JQ58.
Tax on dividends
The following information is intended to provide
general guidance to individuals who are tax
resident in the UK. It does not constitute
professional advice. Shareholders who are in
any doubt as to their personal tax position should
seek their own professional advice, as should
shareholders who are not resident in the UK.
A UK tax resident individual shareholder who
receives a dividend is entitled to a tax credit
in respect of the dividend.
The tax credit is 1⁄9th of the dividend
(corresponding to 10% of the dividend and the
associated tax credit).
A UK tax resident individual shareholder is
therefore treated as having paid tax at 10% on the
aggregate of the dividend and the associated tax
credit; as basic rate taxpayers are liable to tax on
the dividend and the associated tax credit at 10%,
they will have no further liability to tax in respect
of the dividend. UK tax resident individuals cannot
claim a refund of the 10% tax credit.
The tax liability on dividends for UK tax resident
higher-rate taxpayers is an amount equal to
32.5% of the aggregate of the dividend and
the associated tax credit less the tax credit.
This equates to a liability for additional tax equal
to 25% of the dividend.
For taxpayers whose income exceeds £150,000
and are subject to tax at the additional rate, the tax
liability on dividends (the ‘dividend additional rate’)
is an amount equal to 37.5% of the aggregate of
the dividend and the associated tax credit less the
tax credit. This equates to a liability for additional
tax equal to 30.55% of the dividend.
Registrars
The company’s registrar is:
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Telephone: 0871 664 0300
(from within the UK)
Calls cost 10p a minute plus network extras.
Telephone: +44 (0)20 8639 3399
(from outside the UK)
Lines are open 8.30am–5.30pm
Monday to Friday.
Capita share portal
Capita Asset Services offers a share portal
service which enables registered shareholders
to manage their Provident Financial shareholdings
quickly and easily online. Once registered
for this service, you will have access to your
personal shareholding and a range of services
including: setting up or amending dividend
bank mandates, proxy voting and amending
personal details. For further information visit
www.capitashareportal.com
Capita Dividend
Reinvestment Plan
Capita Asset Services offers a Dividend
Reinvestment Plan whereby shareholders
can acquire further shares in the company
by using their cash dividends to buy additional
shares. For further information contact Capita
Asset Services:
Telephone: 0871 664 0381
(from within the UK)
Calls cost 10p a minute plus network extras.
Telephone: +44 (0)20 8639 3402
(from outside the UK)
Lines are open 8.30am–5.30pm
Monday to Friday
Special requirements
A black-and-white large text version of this
document (without pictures) is available on
request from the Company Secretary at the
address overleaf. A PDF version of the full annual
report including financial statements is available
on our website.
Provident Financial plc Annual Report and Financial Statements 2014 195
Provident Financial plc
Advisors
Independent auditor
Deloitte LLP
2 Hardman Street
Manchester
M60 2AT
Company advisors
and stockbrokers
J.P. Morgan Cazenove
25 Bank Street
London
E14 5JP
Solicitors
Addleshaw Goddard LLP
Sovereign House
Sovereign Street
Leeds
LS1 1HQ
Allen & Overy LLP
One Bishops Square
London
E1 6AD
Eversheds LLP
Bridgewater Place
Water Lane
Leeds
LS11 5DR
Provident Financial plc Annual Report and Financial Statements 2014Shareholder informationCompany detailsRegistered office and contact details:Provident Financial plc No. 1 Godwin Street Bradford West Yorkshire BD1 2SUTelephone: +44 (0)1274 351 351 Fax: +44 (0)1274 730 606 Website: www.providentfinancial.comCompany number668987 196
Notes
Provident Financial plc Annual Report and Financial Statements 2014 Paper and print specifications
This report has been printed on Lumi Silk – an FSC®-certified paper containing 100% ECF pulp
and manufactured at a mill accredited with the ISO 14001 and EMAS environmental standards
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Designed and produced
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Printed
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View and download the online version here:
www.providentfinancial.com/ar2014
Provident Financial plc
No.1 Godwin Street
Bradford
BD1 2SU
United Kingdom
+44 (0)1274 351351
www.providentfinancial.com
Company number 668987
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