Providing credit
to those who
would otherwise be
financially excluded
Annual Report and Financial Statements 2015
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Provident Financial plc
Annual Report and Financial Statements 2015
Inside this report
Overview
Strategic
report
Governance
1 Our mission
2 At a glance
4
5
The markets we serve
Our social purpose and
investment case
6 Generating consistent returns
8 Chief Executive’s review
12 Our business model
14 Our strategy and performance
18 The non-standard credit market
26 Vanquis Bank
34 Provident home credit
40 Satsuma online lending
Introduction from the Chairman
87
88 Our directors and officers
90 Leadership
94 Effectiveness
97 Shareholder engagement
Directors’
remuneration
report
114 Directors’ remuneration report
115 Remuneration policy
121 Annual Report on Remuneration
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 2006 limits the liability of the directors
of Provident Financial plc so that their
liability is solely to Provident Financial plc.
glo guarantor loans
44
52 Moneybarn
57 Risk management and principal risks
66 Financial review
74 Corporate responsibility
99 Risk advisory committee
102 Audit committee and auditor
106 Nomination committee
108 Directors’ report
Financial
statements
134 Consolidated income statement
134 Consolidated statement
of comprehensive income
134 Earnings per share
134 Dividends per share
135 Balance sheets
136 Statements of changes
in shareholders’ equity
138 Statements of cash flows
139 Statement of accounting policies
145 Financial and capital
risk management
150 Notes to the financial statements
188 Independent auditor’s report
Shareholder
information
195 Information for shareholders
Our mission
Provident Financial plc
Annual Report and Financial Statements 2015
01
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.
02
Provident Financial plc
Annual Report and Financial Statements 2015
Overview
At a glance
The group has three
divisions, covering five
different areas of the
non-standard market.
k
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Non-standard credit cards
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Home credit
Online lending
Guarantor loans
Non-standard vehicle finance
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1 Before exceptional costs and, in respect of Moneybarn,
prior to the amortisation of acquisition intangibles.
2 Represents CCD as a whole.
3 Acquired in August 2014.
Provident Financial plc
Annual Report and Financial Statements 2015
03
Vanquis Bank
Est 2002
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.
Provident
Est 1880
Provident offers home credit loans, typically
of a few hundred pounds, through a network of
5,500 local agents who call each week at 0.9 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 interest 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
Est 2013 (Start up)
Satsuma is our online instalment loan product.
We give new customers a small-sum, short-term
loan and collect repayments by continuous payment
authority once a week, on a day agreed with the
customer. Just like our other businesses we adopt a
low and grow approach to lending. 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.
glo
Est 2014 (Start up)
glo is our guarantor loans product serving customers
who are unable to access mainstream credit from
banks and building societies with larger amounts of
affordable credit over longer durations. The loan is
guaranteed by a family member or friend with a sound
credit record who supports the customer if their
circumstances change.
1.4m
UK customers
1,386
Employees
£185.5m
UK profit before tax
£250–
£3,500
Range of credit limits
Read more on Vanquis Bank on pages 26 to 31
0.9m
Customers
£105.4m
Profit before tax1,2
2,160
Employees2
£100–
£2,000
Loan range
Read more on Provident on pages 34 to 37
49,000
Customers
£100–
£1,000
Loan range
Read more on Satsuma on pages 40 to 43
4,000
Customers
£1,000–
£7,000
Loan range
Read more on glo on pages 44 to 46
Moneybarn
Est 19923
Moneybarn is the market leader in the provision
of vehicle 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, take their
children to school and live their lives.
31,000
Customers
£21.3m
Profit before tax1
151
Employees
£4,000–
£25,000
Loan range
Read more on Moneybarn on pages 52 to 56
Overview 04
Provident Financial plc
Annual Report and Financial Statements 2015
Overview
The markets we serve
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, 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.
2.4m
3,758
Number of customers
Number of employees
5,500
Number of
self-employed agents
£2.0bn
Year-end receivables
£135.5m
Total tax contribution*
£3.1m
Community investment
* Comprises both direct and indirect tax contribution.
Our social purpose and investment case
Provident Financial plc
Annual Report and Financial Statements 2015
05
The investment case for Provident Financial
is very attractive:
> Leaders 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 which deliver attractive
growth and returns over the medium-term and exhibit low
volatility through the economic cycle.
> We have a significant competitive advantage in the areas
of technology, marketing, underwriting and collections.
> Tougher regulation and transition to the Financial Conduct
Authority (FCA) 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.
> We generate sufficient capital to support planned growth
and business development without compromising our
progressive dividend policy.
No business can operate
sustainably in today’s
world without a compelling
social purpose.
Provident 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 that customers can afford
the repayments. We have been doing this
successfully since 1880.
To assist with this social purpose we have
five core values which run throughout each
of our divisions:
Fair
We are fair and reasonable in our dealings
with stakeholders.
Responsible
We conduct our business dealings responsibly
and ensure that we have a positive impact on
the environment and communities we serve.
Accessible
We provide our customers with access to
products that meet their needs.
Straightforward
We are straightforward, open and honest
in all our dealings.
Progressive
We anticipate and respond to the challenges
of a changing world.
Overview 06
Provident Financial plc
Annual Report and Financial Statements 2015
Overview
Generating consistent returns
We have consistently delivered strong returns
and sustainable growth since the demerger of
our international business in 2007. Our success
can also be measured by our high levels of
customer satisfaction and the wider contribution
we make to society through our corporate
responsibility programme.
Adjusted profit before tax1 (£m)
Adjusted earnings per share1 (p)
£292.9m
25.0%
2015
2014
2013
2012
2011
292.9
162.6p
234.4
22.6%
196.1
178.4
157.2
2015
2014
2013
2012
2011
Statutory profit before tax (£m)
Basic earnings per share (p)
£273.6m
21.8%
Dividend per share (p)
120.1p
22.6%
Gearing (times)
2.2 times
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
273.6
151.8p
224.6
182.4
194.0
157.2
20.0%
2015
2014
2013
2012
2011
Dividend cover1 (times)
120.1
1.35 times
98.0
85.0
77.2
69.0
Return on assets2 (%)
2.2
2.4
16.1%
3.0
3.2
3.2
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
Customer numbers (’000)
Community investment (£m)
162.6
132.6
112.0
100.4
86.9
151.8
126.5
104.2
108.9
86.9
1.35
1.35
1.32
1.30
1.26
16.1
15.1
14.2
14.5
14.2
2.4m
Employee costs (£m)
£167.7m
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2,400
2,445
£3.1m
2015
2014
2013
2012
2011
3.1
2.4
2.0
1.9
1.6
Total tax contribution3 (£m)
£135.5m
2015
2014
2013
2012
2011
135.5
124.5
109.3
110.2
102.4
2,635
2,738
2,520
167.7
158.4
158.6
127.0
135.7
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 tax contributions.
Provident Financial plc
Annual Report and Financial Statements 2015
07
8 Chief Executive’s review
12 Our business model
14 Our strategy and performance
18 The non-standard credit market
26 Vanquis Bank
34 Provident home credit
40 Satsuma online lending
44 glo guarantor loans
52 Moneybarn
57 Risk management and principal risks
66 Financial review
74 Corporate responsibility
08
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Chief Executive’s review
What we do and why we are successful
2015 has been another excellent
year for the group. Our financial
performance has been very strong
and we have made further great
progress in developing the group
into a broader lending business
within the non-standard credit market,
providing much needed access for
those who would otherwise be
financially excluded.
Peter Crook
Chief Executive
93%
Home credit customer
satisfaction
22.6%
Increase in dividend
per share
88%
Vanquis Bank customer
satisfaction
41%
Total shareholder
return in 2015
Provident Financial plc
Annual Report and Financial Statements 2015
09
We are the leading non-
standard lender in the UK
Our mission is to remain 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.
The UK non-standard credit market
comprises around 12 million people.
Non-standard credit customers may have
relatively low or average incomes, a poor
credit history because of past problems,
a limited credit history, or no credit history
at all. For these reasons, they would not
normally be accepted by a mainstream
lender, or mainstream credit products
would not suit their particular needs.
PFG has a very long track record of
successfully serving non-standard
consumers. We are successful because
we have a sustainable business model
which ensures that we lend responsibly
and deliver the best possible outcomes
for our customers. There are four
fundamental attributes which differentiate
us from other businesses and other lending
models and enable us to deliver high levels
of customer satisfaction and strong returns
for our shareholders.
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
135 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:
We lend responsibly by offering simple
and transparent products with no hidden
charges. Our manageable weekly or monthly
payments ensure that our products
are affordable. We do this by using our
knowledge and expertise to deliver credit
products across all our businesses which
are tailor-made to meet the particular needs
of our customers.
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 Provident Financial.
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 the economic cycle.
These four attributes mean that we lend
responsibly to our customers, receive high
customer satisfaction levels of around 90%
and have been able to deliver strong growth
in both earnings and dividends. In summary,
we are very good at what we do and I am
proud of the service we give our customers
and the positive contribution we make to
society and all our stakeholders.
2015 was a very successful year
for the group
2015 has been an excellent year both in
terms of performance and the development
of the group. We have delivered adjusted
EPS growth of 22.6% which has enabled us
to increase the full-year dividend by 22.6%.
It is not only our strong performance which
is pleasing. I am delighted with the progress
each business has made during the year.
Vanquis Bank has once again been the star
performer, growing UK profits by 22.8%
to £185.5m. Continued investment in the
customer acquisition programme has
generated record new account bookings of
433,000, up from 430,000 in 2014. Vanquis
Bank now serves 1.4 million customers with a
receivables book of £1.25bn 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 88% remains
significantly higher than mainstream banks.
Michael Lenora, Managing Director of
Vanquis Bank, has decided to retire on
30 June 2016. The board wishes to thank
Michael for his leadership of the business
since 2007 and delivery of a sustained period
of growth and profitability. The board is
pleased that, having received the appropriate
regulatory approvals, Chris Sweeney joined
the group on 1 January 2016 as the new
Managing Director of Vanquis Bank. He was
previously the Group Executive, Cards and
Payment Solutions at Standard Bank operating
in 18 countries and served as Chairman of
Standard Bank’s offshore businesses. Chris
brings a wealth of experience in credit cards
and retail banking and is an excellent
appointment to lead Vanquis Bank through
its next stage of development. This will
include examining additional distribution
and product propositions.
Vanquis Bank remains the group’s most
significant driver of growth. Receivables are
firmly on track to reach our guidance of up
to £1.8bn from the existing business and
product proposition, an uplift of up to 40%
from today’s levels.
The Consumer Credit Division (CCD) has
made further good progress in executing
on its strategic plan to develop a broader
based lending business at the same time
as delivering profits of £105.4m, up 1.4% on
2014. The repositioning of home credit as
a smaller, better-quality, more cost-efficient
business focused on returns is complete and
good progress continues to be made in
developing CCD’s online direct repayment
loan product, Satsuma, which we expect to
produce a small contribution to CCD’s profits
in 2016. The guarantor loan pilot, glo, has
progressed well, and confirmed the market
opportunity to develop a business capable
of delivering the group’s target returns.
As a result, the decision has been made to
proceed from pilot to a full roll-out during
2016. Subject to regulatory approval, we also
plan to transfer the operation from CCD to
Vanquis Bank in due course in order to allow
CCD to focus on home credit and Satsuma
and to allow glo to benefit from the credit,
marketing and collections skills within
Vanquis Bank which are well-matched to
developing the guarantor loans opportunity.
Moneybarn, the UK’s leading non-standard
vehicle finance business has enjoyed strong
new business volumes in its first full year
following acquisition. Access to the group’s
funding and extension of the product
offering to lend up to retail value of the
vehicle has enabled the business to generate
new business volumes 69% higher than 2014.
The business now has customer numbers of
31,000 and a receivables book of £219.6m,
up from 19,000 and £131.2m on acquisition
in August 2014. The business is well on
track to reach its medium-term potential of
receivables of between £300m and £400m.
2015 profits of £21.3m were 42.0% higher
than 2014 pro forma full-year profits.
Strategic report 10
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Chief Executive’s review (continued)
Our growth potential
Vanquis Bank
Product
Credit cards
Established
2002
Provident
Home credit
1880
£522.2m
Satsuma
Online loans
Start-up in 2013
£12.1m
21.2%2
glo
Guarantor loans
Start-up in 2014
£10.8m
Moneybarn
Vehicle finance
19923
12.9%
£219.6m
2015 ROA1
2015
receivables
Medium-term
growth potential
15.8%
£1,252.0m
Up to 1.8 million customers
with an average balance of
£1,000.
High returns business with
large market share but
modest growth potential.
£300m + receivables.
£300m to £400m
receivables.
1 Profit before interest after tax as a percentage of average receivables. 2 Returns for CCD as a whole. 3 Acquired in August 2014.
A compelling investment proposition
PFG provides shareholders with a combination of strong returns, an
attractive dividend policy and visible growth.
We apply exacting standards in allocating capital to organic and acquisition
opportunities. We invest in businesses that:
1. Generate high returns in order to provide high returns to our shareholders.
High returns are available in the non-standard market to those businesses
with the right business model which focuses on delivering the highest possible
customer outcomes.
2. Are sustainable and maintain high levels of regulatory compliance at all
times. This has never been more important than now, under the tougher
regulatory regime of the Financial Conduct Authority (FCA).
3. Have good growth potential. Vanquis Bank, Moneybarn, Satsuma and glo
all have excellent growth opportunities in their respective parts of the non-
standard credit market. Whilst Provident, our home credit business, is mature,
it is a profitable, cash generative businesss which has the ability to deliver
modest growth.
4. Enjoy a strong market position. We want to have a top-3 market
position in all of our chosen markets so that we can develop the market
in a responsible manner.
5. Have good management and cultural fit. We recruit talented people
who share our passion of lending a hand where others do not, and seeking to
increase financial inclusion for customers in the non-standard credit market.
By applying these standards, we have established a strong and
complementary group of businesses which deliver high returns and offer
attractive growth potential. Our medium-term growth potential for each of
our businesses was established in the second quarter of 2015 and are set out
above. We view medium-term as a period of between three and five years,
although we will not pursue growth at the expense of reducing returns below
our minimum acceptable returns. Overall, the group’s medium-term potential
is to build group receivables up to £3bn, generating an ROA of up to 15%.
Vanquis Bank – Good progress towards
medium-term growth potential
Receivables (£m)
Medium-term growth potential
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2010
2011
2012
2013
2014
2015
Moneybarn – Good progress towards
medium-term growth potential
Receivables (£m)
Medium-term growth potential
500
400
300
200
100
0
2013
2014
2015
Provident Financial plc
Annual Report and Financial Statements 2015
11
Our financial model
Strong, profitable growth…
…with a progressive dividend
…whilst maintaining a
robust balance sheet
Adjusted earnings per share (p)
Dividends per share (p)
Gearing (times)
CAGR = 17.0%
CAGR = 14.9%
2.2
2015
2014
2013
2012
2011
162.6
132.6
2015
2014
2013
2012
2011
112.0
100.4
86.9
120.1
98.0
2015
2014
2013
2012
2011
85.0
77.2
69.0
2.2
2.4
3.0
3.2
3.2
Promotion to the FTSE 100
It was extremely pleasing to
see the group promoted to the
FTSE 100 on 21 December 2015.
The group’s total shareholder
return (TSR) since the demerger
of the international business in
2007 has been £31 per share or
annualised TSR growth of 19%. This
represents a fantastic achievement
from all of our employees who
do such a great job serving our
customers on a daily basis.
Looking forward to 2016
Vanquis Bank continues to deliver strong
growth and financial returns and remains
firmly on track to achieve the medium-term
potential of up to 1.8 million customers
with an expected average balance of
approximately £1,000.
CCD has delivered in full on its plans to
maintain profits whilst repositioning the
Provident home credit business and
funding the start-up of its Satsuma online
business. The repositioning of Provident as
a smaller, better-quality, more cost-efficient
business focused on returns is complete.
It is delivering strong returns and the business
is now generating year-on-year growth in
sales. Demand for online direct repayment
products is strong and the medium-term
growth opportunity is substantial. 2016 will
see Satsuma expand its product proposition
beyond its short-term weekly instalment
product and it is expected to make a small
contribution to CCD’s profits. The pilot of the
glo guarantor loans product has defined a
sustainable proposition that is matched to
an attractive market opportunity capable
of delivering the group’s target returns.
The business plan to roll out glo during 2016
is now in place.
Moneybarn has achieved a very significant
uplift in new business volumes, supported
by access to the group’s funding lines.
This has reinforced its primacy across the
broker network which, when combined
with product development opportunities,
leaves the business well-positioned to deliver
strong medium-term growth at the group’s
target returns.
The group’s funding and liquidity positions
are strong, allowing it to meet contractual
debt maturities and fund its internal growth
plans through to May 2018.
From 1 January 2016, the group’s tax charge
will reflect the bank corporation tax surcharge
of 8% on Vanquis Bank’s profits in excess
of £25m.
The group has made a good start to 2016.
Vanquis Bank and Moneybarn have continued
to trade strongly and the home credit
business has enjoyed a very satisfactory
collections performance.
Peter Crook
Chief Executive
Strategic report
12
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Our business model
b t a i n i n
O
s
d
n
u
g f
01
Secure longer-term,
lower rate funding
Managing credit risk
02
Develop tailored
products to meet
customers’ needs
How we operate
across our products
and services
08
Pay for funds
and generate
surplus capital
to deploy
s
d
n
u
f
g
n
i
n
i
a
t
b
O
07
Manage arrears
and customer
difficulties
06
Collect
repayments
due
i
sk
03
Attract target
customers
04
Assess
affordability
and credit
worthiness
T
a
kin
g cre
dit risk
05
Lend
responsibly
M
a
n
a
gin
g c
r
e
dit r
Provident Financial plc
Annual Report and Financial Statements 2015
13
01
02
08
07
06
01
02
08
07
06
01
02
08
07
06
01
02
08
07
06
01
02
08
07
06
03
04
05
03
04
05
03
04
05
03
04
05
03
04
05
01
02
08
07
06
01
02
08
07
06
01
02
08
07
06
03
04
05
03
04
05
03
04
05
How we create value
Secure longer-term,
lower rate funding
> Borrow long and lend short.
> Maintain diverse range of funding sources.
> Maintain borrowing facilities to provide
headroom for the following 12 months.
> Investment grade credit of BBB with
a stable outlook.
> Strong relationships with core banks.
Develop tailored
products to meet
customers’ needs
> Provide financial access for those who would be
otherwise financially excluded.
> Simple, transparent products.
> 135 years of serving non-standard customers.
> High levels of customer satisfaction.
> Specialist business model.
Attract target
customers
Typical customer:
> Mixed employment status.
> Low to average incomes.
> Limited indebtedness.
> Live in rented accommodation or social housing.
> Average age of between 25 and 50 years old.
Channels to market:
> Multi-channel approach – Business to
Consumer (B2C), Business to Business (B2B).
> Strong brand loyalty.
> Marketing expertise.
> Broker relationships.
Assess affordability
and credit worthiness
> Bespoke underwriting developed over
a number of years.
> Strong data analytics based on long history.
> Specialists in assessing non-standard
> Use of external bureau data to supplement
consumers.
in-house data.
> Leading-edge technology.
Lend responsibly
> Small-sum, short duration.
> ‘Low and grow’ approach to lending.
Starting customers on low amounts before
growing lending as customers demonstrate
they can manage repayments.
> High standards of regulation
and compliance.
> Affordable weekly/monthly repayments.
> No hidden charges.
Collect repayments
due
> Maintain regular and close contact
with customers.
> High-tech contact centres.
> Experienced and well-trained collections teams.
> Multiple methods of repayment.
> Compliant remuneration arrangements
for contact centre staff and commission
policies for home credit agents.
Manage arrears
and customer
difficulties
> Regular contact and ongoing dialogue
throughout the customer journey.
> Multiple forbearance methods.
> Sympathetic approach.
Pay for funds and
generate surplus
capital to deploy
> High ROA businesses generate surplus capital.
> Distribute 80% of earnings in dividends.
> 20% equity retained sufficient to fund future
growth in receivables.
> Maintain low level of gearing at 3.5 times or below.
See how the model applies to each of our businesses in the divisional
performance reviews.
Strategic report 14
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Our strategy and performance
The group has four key strategic
objectives which are measured
through a number of key
performance indicators (KPIs),
both financial and non-financial.
1
Growing high-return
businesses in
non-standard
markets
2
Generating
high shareholder
returns
3
Maintaining a secure
funding and capital
structure
4
Acting responsibly
and with integrity
in all we do
Our 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
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;
> Maximise returns within the Provident home credit business whilst
developing the Satsuma online loans business to generate sustainable
growth;
> Develop the glo guarantor loans business to be capable of delivering
the group’s target returns;
> Continue to 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, 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.
Dividend 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.
Community investment – The amount of
money invested in support of community
programmes, money advice programmes
and social research.
Total shareholder return – The change in
the group’s share price, together with any
dividend returns made to shareholders.
Provident Financial plc
Annual Report and Financial Statements 2015
15
Our progress in 2015
Adjusted profit before tax (£m)
185.5
105.4 21.3
292.9
151.0
103.9 5.8
234.4
113.7
102.5
196.1
71.3
122.9
178.4
44.2
123.6
157.2
2015
2014
2013
2012
2011
Vanquis Bank – UK
CCD
Moneybarn
Group
Group ROA (%)
Group ROE (%)
2015
2014
2013
2012
2011
16.1
15.1
14.2
14.5
14.2
2015
2014
2013
2012
2011
46
47
49
48
46
Group profit before tax up 25.0% to £292.9m
(2014: £234.4m):
Higher group ROA of 16.1% (2014: 15.1%),
primarily reflecting improved returns at CCD.
> Continued strong growth and favourable margins
at Vanquis Bank generated a 22.8% growth in UK
profit before tax to £185.5m (2014: £151.0m);
> CCD delivered a modest increase in profits to
£105.4m (2014: £103.9m) reflecting the impact
of improved margins and cost reductions
in home credit offsetting the impact of a
7.3% reduction in the receivables book and
continuing investment in Satsuma and glo; and
> Good performance from Moneybarn,
contributing a profit before tax of £21.3m in
its first full year since acquisition (2014: £5.8m
in the four months post-acquisition).
ROE of 46% (2014: 47%), marginally lower
than 2014 due to the full-year impact
of the £120m equity raised to fund the
Moneybarn acquisition.
Returns – Vanquis Bank – UK (%)
Returns – CCD (%)
Returns – Moneybarn (%)
82.2
69.1
2015
20141
12.9
12.9
24.3
24.6
2015
2014
2013
2012
2011
15.8
15.5
15.5
14.0
12.7
ROA
RAM
32.8
33.2
34.2
34.8
35.0
2015
2014
2013
2012
2011
21.2
18.1
15.1
16.3
16.0
ROA
RAM
58.9
59.6
60.1
Moderation in the RAM to 32.8% (2014: 33.2%)
reflects the ongoing impact of the reduction in
the revenue yield following the changes made to
the Repayment Option Plan (ROP) product in mid-
2013 and reduced interchange income following
European legislation reducing interchange fees.
Continued strong returns, delivering a modest
uplift in UK ROA of 15.8% (2014: 15.5%), with
the benefit of operational leverage more than
offsetting the reduction in the RAM.
Significant uplift in the RAM to 82.2% (2014: 69.1%)
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 21.2% (2014: 18.1%),
resulting from completion of the transition of
the home credit business to a smaller but leaner,
better-quality, more cost-efficient business
focused on returns.
ROA
RAM
Stable RAM and ROA of 24.3% (2014: 24.6%1)
and 12.9% (2014: 12.9%) with the business
investing in headcount to support the future
growth of the business.
1 Represents pro forma full-year results restated
to apply the group’s lower cost of funding to
pre-acquisition results.
Our focus for 2016
Vanquis Bank
CCD
Moneybarn
Continue to invest in the customer acquisition
programme, to progress the business towards its
medium-term guidance of up to 1.8m customers
with an average balance of £1,000.
Further develop channels to market, the product
proposition and potential other revenue sources.
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 in the third quarter of 2013 and European
legislation reducing interchange fees in 2015.
Roll out the glo guarantor loans product,
following a successful pilot in 2015.
Obtain the change of permission approval
from the FCA.
Continue to increase the efficiency of the
home credit business through the better
use of technology.
Continue to develop the product and marketing
proposition and governance and controls in
Satsuma to capture the growth opportunity
available in the online instalment loans market
and deliver a small contribution to CCD profits.
Maintain a stable RAM by adopting 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.
Seek to grow overall divisional profits.
Obtain full authorisation from the FCA.
Continue to capture the growth opportunity
in the non-standard vehicle finance market
by growing the customer base.
Invest in the cost base to support growth,
strengthen governance and controls and
develop the product proposition.
Continue to investigate and test product
extensions beyond the current model, including
lower value vehicles, commercial vehicles and
relationships with prime finance businesses.
Maintain at least stable returns whilst
growing profits.
Obtain full authorisation from the FCA.
Strategic report 16
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Our strategy and performance (continued)
2
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.
Our progress in 2015
Adjusted earnings per share (p)
Dividend per share (p)
Total shareholder return (%)
2015
2014
2013
2012
2011
162.6
2015
120.1
2015
40.9
132.6
112.0
100.4
86.9
2014
2013
2012
2011
98.0
85.0
77.2
69.0
2014
2013
2012
2011
25.4
15.1
57.0
51.9
Adjusted earnings per share up 22.6% to 162.6p
(2014: 132.6p), a lower rate than the 25.0%
growth in adjusted profit before tax as a result of
the impact of the 5.9 million placement of shares
for the acquisition of Moneybarn in August 2014,
partly offset by the reduction in the statutory
rate of UK corporation tax from 21% to 20% on
1 April 2015.
Dividend per share increased by 22.6% to
120.1p (2014: 98.0p), supported by the group’s
growth in earnings and strong capital generation
resulting in a dividend cover of 1.35 times
(2014: 1.35 times).
Strong annual total shareholder return
of 40.9% in 2015 (2014: 57.0%).
Our focus for 2016
> Deliver further earnings per share and total shareholder
> Maintain a minimum dividend cover of at least 1.25 times.
return growth.
Provident Financial plc
Annual Report and Financial Statements 2015
17
3
4
Maintaining a secure funding
and capital structure
Acting responsibly and with integrity
in all we do
> 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;
> 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;
> Maintain a maximum gearing ratio of 3.5 times
> Acting responsibly and sustainably in all our
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.
stakeholder relationships in order to:
– Create a working environment that is safe,
inclusive and meritocratic;
– Treat our suppliers fairly; and
– Support our communities.
Our progress in 2015
Gearing (times)
2015
2014
2013
2012
2011
2.2
2.4
3.0
3.2
3.2
Our progress in 2015
Customer satisfaction (%)
2015
2014
2013
2012
2011
88
84
88
89
84
93
93
93
92
91
Vanquis Bank
Provident home credit
Gearing reduced to 2.2 times (2014: 2.4 times) compared with a
maximum target of 3.5 times and a banking covenant of 5.0 times.
This reflects strong capital generation including the shrinkage
of the home credit receivables book following the repositioning
of the business.
Customer satisfaction of 93% for Provident home credit (2014: 93%),
88% for Vanquis Bank (2014: 84%) and 89% for Moneybarn in its first
full year under the group’s ownership.
Community investment (£m)
2015
2014
2013
2012
2011
3.1
2.4
2.0
1.9
1.6
Invested a total of £3.1m in various community programmes,
money advice programmes and social research (2014: £2.4m).
Our focus for 2016
Our focus for 2016
> Maintain capital and gearing at prudent levels;
> Continue to manage the flow of retail deposits in Vanquis Bank
to ensure an appropriate amount of headroom is maintained
on the group’s committed facilities;
> Review and consider issues into the retail bond and private
placement markets to support growth in Moneybarn,
Satsuma and glo; and
> Manage regulatory capital and liquidity in accordance with
PRA regulations.
> Maintain or improve customer satisfaction levels in
all businesses;
> Maintain an investment of 1% of group profit before tax in
the community through various community programmes,
money advice programmes and social research; and
> Continue to place positive customer outcomes at the forefront
of our product and service offering.
Strategic report 18
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
The non-standard credit market
Overview
The group specialises in serving the needs
of the approximately 12 million UK non‑standard
credit customers with a range of products from
credit cards and car finance, to home credit and
online unsecured and guarantor loans.
Non-standard credit customers typically have a poor credit history,
or no credit history at all, or may have had past problems with
credit, often due to periods of unemployment, family break-up,
ill‑health or the use of inappropriate mainstream credit offers.
The UK non-standard credit market is more diverse in the types of
credit offer than the prime market, reflecting the wider variety of
customer needs and situations, as well as business models aimed
at profitably serving the higher credit risk customer.
Firms wanting to serve this market sustainably require a tailored
approach to credit, usually focusing on lower amounts of credit for
shorter terms initially, higher levels of customer contact and the use
of a security or asset in some form linked to the provision of credit.
Firms also need to be more flexible in dealing with non‑standard
customers who are more likely to run into repayment issues and
require forbearance.
Business models in this sector therefore usually incur higher costs
than more standardised and less flexible prime credit offers,
resulting in the need to charge higher prices in order to generate
acceptable returns for the risk that shareholders and investors take.
The diagram below provides an overview of the types of product
offers common in the UK non‑standard credit market, showing
the typical loan sizes and terms of lending for each, and where the
group’s products sit in the market.
Typically, larger amounts are only viable over longer periods and
often in relation to a product or asset purchase in order to improve
the chances of repayment. The main exception is guarantor lending,
where the guarantor, typically a relative or friend of the borrower,
agrees to repay the loan should the borrower default.
UK non-standard credit market and PFG businesses
£
150,000
75,000
25,000
5,000
2,500
1,000
500
350
250
150
e
z
i
s
n
a
o
l
l
a
c
i
p
y
T
Cash-based
Asset-based
Rent to own
Logbook/Bill of sale
Short-term unsecured loan
Mail order credit
Home credit cash loan
Payday loan
Unauthorised
overdraft
Mortgage
Car finance
Unsecured /guarantor loan
Secured
2nd charge
Credit card
Authorised
overdraft
Pawn/Sale &
buy back
Typical contractual term of credit
<1
month
1–3
months
6
months
1
year
18
months
2
years
3
years
4
years
15
years
25
years
None/
revolving
History indicates potential
Uncertainty remains as to the future size and shape of the UK non-standard credit
market but this provides the group with significant opportunity, particularly with
Satsuma and glo.
Pre-2000
Expansion of access
to credit
Large, greater than £12bn
annual non-standard
unsecured instalment
market develops, served by
mainstream and specialist
branch and direct/
phone models.
Low headline prices
with significant add‑ons
including PPI.
Consumers typically
borrowing a few thousand
pounds over a few years,
often through brokers to
consolidate (eg credit/store
cards, overdrafts and mail
order credit), to buy cars, to
take holidays and to improve
their homes.
2000-2007
Underlying
issues emerge
Unsecured credit withdrawn
progressively as issues
arise with mainstream and
specialist models (eg high loss
rates, branch infrastructure
costs, accounting for
arrears, concern over PPI
and charges).
For those not renting, secured
lending (often through
brokers) increases rapidly
to fill the gap on the back of
rapid house price inflation
and ‘light touch’ regulation.
For renters, strong growth
in overdraft availability and
bank appetite encouraged by
the government helps to fill
the gap.
2007-2012
Post credit crunch
short-term fix
Global credit crunch rapidly
curtails secured lending
and tempers bank overdraft
risk appetite as large PPI
fines and redress begin,
and regulation tightens.
Consumers left with few
options to fill genuine
underlying ongoing credit
needs that remain, beyond
the excesses fuelled by
the house price and secured
finance bubble.
New model of payday lending
emerges, especially online,
to offer a short‑term fix for
consumers without access
to increased help from friends
and family.
Provident Financial plc
Annual Report and Financial Statements 2015
19
2012 onwards
Regulated future
Regulators take action to
protect consumers and
curtail payday lending which is
inappropriate for longer-term
needs and not sustainable.
New models of online
instalment lending
begin to emerge with
more transparent
pricing and sustainable
repayment schedules.
Limits to friends and family
capacity encourages growth
of guarantor lending in
the absence of sufficient
unsecured supply.
Potential for the market to
grow back towards pre-
credit crisis levels of c.£10bn
as supply returns, which
presents an attractive
opportunity for Satsuma,
glo and other longer-term
unsecured loan products.
14
12
10
8
6
4
2
0
)
n
b
£
(
s
e
c
n
a
v
d
a
s
s
o
r
g
d
e
r
u
c
e
s
n
u
d
e
t
a
m
i
t
s
E
Traditional sub-prime unsecured instalment loans
New style online non-standard instalment loans
Payday loans
We are addressing this
potential opportunity
Other forms of
unsecured lending
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: PFG analysis based on Datamonitor, OFT, FCA, CMA, BBA, FLA, statutory filings, company announcements and press (excludes motor finance secured on the vehicle).
Strategic report
20
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
The non‑standard credit market (continued)
‘Low and grow’ credit cards
The non‑standard credit card market is often referred to as ‘low and
grow’, reflecting the nature of the product, where the customer’s
credit limit starts low, and grows through the offering of credit limit
increases as customers manage their account well.
Non-standard customers’ needs are served by specialists such as
Vanquis Bank, as well as other providers who offer both prime and
non‑standard cards such as Capital One, NewDay and Barclaycard.
Low and grow customers want and are given lower initial credit lines that grow more slowly to lower maximum
credit lines in order to maintain an affordable balance and customer control
Current credit limit on main card (%)
Feelings about current credit limit on
low and grow card (%)
30
20
10
0
0
5
2
£
<
0
0
5
£
–
0
5
2
£
0
5
7
£
–
0
0
5
£
All card types
,
,
0
0
0
1
£
–
0
5
7
£
0
0
5
2
£
–
0
0
0
1
£
Low and grow cards
0
0
0
5
£
–
0
0
5
2
£
60
50
40
30
20
10
0
,
0
0
5
7
£
–
0
0
0
5
£
,
0
0
0
0
1
£
–
0
0
5
7
£
,
0
0
0
5
1
£
–
0
0
0
0
1
£
,
0
0
0
0
2
£
–
0
0
0
5
1
£
,
0
0
0
0
2
£
>
w
o
l
o
o
t
h
c
u
M
w
o
l
o
o
t
e
l
t
t
i
l
A
t
h
g
i
r
t
u
o
b
A
i
h
g
h
o
o
t
e
l
t
t
i
l
A
i
h
g
h
o
o
t
h
c
u
M
68% of low and grow customers felt that it
was important to use a credit card with a
low credit limit to avoid any risk of getting
into debt.
69% of low and grow customers felt that
it was important to be able to access
increases in the credit limit to be able
to build up a reasonable limit.
Initial credit limit on low and grow card (%)
Number of times credit limit increased on
low and grow card (%)
Feelings about pace of credit limit change on
low and grow card (%)
25
20
15
10
5
0
0
0
1
£
<
0
5
1
£
–
0
0
1
£
0
0
2
£
–
0
5
1
£
0
5
2
£
–
0
0
2
£
0
0
5
£
–
0
5
2
£
0
5
7
£
–
0
0
5
£
0
0
0
1
£
>
,
,
0
0
0
1
£
–
0
5
7
£
30
25
20
15
10
5
0
0
1
2
3
4
e
r
o
m
r
o
5
60
50
40
30
20
10
0
d
e
s
a
e
r
c
n
I
y
l
k
c
i
u
q
o
o
t
e
h
t
t
u
o
b
a
d
e
e
p
s
t
h
g
i
r
t
a
d
e
s
a
e
r
c
n
I
d
e
s
a
e
r
c
n
I
y
l
w
o
l
s
o
o
t
Source: FCA credit card market study: interim report, November 2015 (39,837 responses, of which 27,893 had a credit card).
Note: Low and grow is defined by the FCA as ‘cards designed specifically for people with no/poor credit history’.
Vanquis Bank is the only specialist low and grow credit card issuer
in the UK market, having entered the market relatively recently
in 2003. The business operates across a wide spectrum within
the non-standard credit card market with products ranging
from 29.9% APR to 59.9% APR, with most products at 39.9% APR.
Competitors do not tend to operate beyond 35.9% APR (see chart
opposite). The Vanquis Bank credit card offers customers the same
accessibility and security as any other credit card proposition,
although it differs from other providers in that there are no balance
transfer schemes, teaser introductory rates or reward or cash
back schemes.
This simple product construct resonates strongly with Vanquis Bank’s
market segment, who tend to value simplicity and transparency over
complex financial products. This is supported by a strong customer
service proposition, delivered by Vanquis Bank’s own customer
service teams, located in Chatham and Bradford.
The other main competitors all have prime or near prime credit card
businesses alongside their non‑standard offer and many have been
established in the market much longer than Vanquis Bank:
> Barclaycard was the first to launch a UK credit card in the 1960s
and has a substantial prime and near prime credit card business
in addition to its non‑standard Initial card (introduced in 2002)
aimed at those entering and re-entering the non-prime credit
card market.
> Capital One entered the UK credit card market in the 1990s as a
card specialist with no bank operations, serving a combination of
prime borrowers and non-standard credit card holders in roughly
equal proportions. It offers a range of credit cards under its own
brand and partner brands for its low and grow propositions.
> NewDay entered the market just before Vanquis Bank with its
Aqua low and grow card, but has since built a significant and more
varied portfolio of more prime credit and store card customers
mainly through acquisition.
These competitors tend to focus their customer acquisition
programmes through online channels, primarily online aggregators
and affiliates, whilst Vanquis Bank has a broader range of customer
origination channels including online, direct mail and face‑to‑face.
Provident Financial plc
Annual Report and Financial Statements 2015
21
Credit cards in the
non-standard sector
Vanquis credit cards
59.9%
49.9%
39.9%
Black Diamond
Origin
Newday
Vanquis Classic Neo
Original
Argos
Newday
32.9–35.9%
Newday
Capital One
Newday
Barclays
Capital One
Granite
Capital One
28.9–29.8%
Aquis
Capital One
Tesco
Newday
Low and grow customers have fewer cards focused on more temporary periods of lower spending
Number of credit cards held by segment (%)
Length of time had card (%)
Average monthly transaction spend on
credit cards by segment (%)
60
40
20
0
30
20
10
0
d
r
a
c
1
s
d
r
a
c
2
s
d
r
a
c
3
e
r
o
m
r
o
s
d
r
a
c
4
h
t
n
o
m
1
<
s
h
t
n
o
m
3
–
1
s
h
t
n
o
m
6
–
3
s
h
t
n
o
m
2
1
–
6
s
r
a
e
y
2
–
1
s
r
a
e
y
3
–
2
s
r
a
e
y
5
–
3
s
r
a
e
y
0
1
–
5
s
r
a
e
y
–
0
1
>
30
20
10
0
e
n
o
N
0
5
£
<
0
0
1
£
–
0
5
£
0
5
1
£
–
0
0
1
£
0
5
2
£
–
0
5
1
£
0
0
5
£
–
0
5
2
£
Rewards cards
Balance transfer cards
Low and grow cards
All card types
Low and grow cards
Rewards cards
Balance transfer cards
Source: FCA credit card market study: interim report, November 2015 (39,837 responses, of which 27,893 had a credit card).
Note: Low and grow is defined by the FCA as ‘cards designed specifically for people with no/poor credit history’.
,
,
,
0
0
0
2
£
>
0
0
0
1
£
–
0
0
5
£
0
0
0
2
£
–
0
0
0
1
£
Low and grow cards
Vanquis Bank has been able to consistently book around 400,000
new card customers each year within this competitive environment
in the UK. Industry data from Experian indicates that in 2015, Vanquis
Bank recruited more new customers in the low and grow market
segment than any other competitor, and issued 37% of all new low
and grow accounts.
Low and grow customers want cards to enter or re-enter the market often to rebuild credit ratings
after changes in personal and/or financial circumstances
Situation when taking main credit card (%)
Most important reason for taking main credit card (%)
40
30
20
10
0
First credit card
No credit cards but had
card previously
40
30
20
10
0
Change in personal
circumstances
Change in financial
circumstances
Build or improve
credit history
85% of low and grow customers felt that
it was important to improve their credit
rating when taking out their card.
All card types
Low and grow cards
All card types
Low and grow cards
Source: FCA credit card market study: interim report, November 2015 (39,837 responses, of which 27,893 had a credit card).
Note: Low and grow is defined by the FCA as ‘cards designed specifically for people with no/poor credit history’.
Attrition tends to average around 20% to 25% of existing card customers
each year, less than 5% of whom leave voluntarily, with the remaining
20% being involuntarily, typically through managed repayment or
write off. On average, customers typically stay with Vanquis Bank
for four years. These dynamics underpin our current guidance for
Vanquis Bank customers of up to 1.8 million in the medium term, at
which point inflows of new customers each year will balance outflows.
Strategic report
22
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
The non‑standard credit market (continued)
Regulatory change
From 1 April 2014, the Financial Conduct Authority (FCA) replaced the Office of Fair Trading (OFT) as the regulator of consumer credit in the UK.
All consumer credit firms were required to submit applications for authorisation to the FCA prior to set deadlines. CCD and Moneybarn have
obtained interim permissions under the new regime and submitted their applications for full authorisation in May 2015. Vanquis Bank is already
an authorised firm but submitted its application for a variation of permissions in December 2014 and continues to operate under an interim
Consumer Credit permission awaiting formal approval of its application. Whilst the outcome of the regulator’s process of reviewing applications
carries some inherent uncertainty, the group businesses continue to have a constructive dialogue with the FCA, responding to questions and
information requests relevant to obtaining the necessary authorisations and change of permissions.
What does the new regulatory regime require?
Full formal governance structures for each authorised
business, including divisional boards and committees
with non‑executive directors.
FCA-approved persons across key management functions
in each division.
Robust risk management frameworks and processes, centred
around conduct risk.
Explicit ‘three lines of defence’ model (business execution, internal
quality control/challenge and independent internal audit).
Policies and procedures to specify how the business will comply
with all relevant aspects of the FCA handbook and sourcebooks:
CONC, SYSC, PRIN, GEN, DISP and SUP.
Thorough, verified assessments for all lending decisions to ensure
affordability, responsibility and sustainability as well as suitability
of the product.
Training, monitoring, control and auditing of compliance with
policies and procedures to provide documentary evidence
to demonstrate adherence.
How the group will look under the FCA
Group functions (legal, finance,
treasury, tax, audit, risk, pensions,
investor relations)
PFG
PRA consolidated supervision
Capital adequacy, liquidity
and large exposures
Consumer Credit Division
Moneybarn
FCA authorised
FCA authorised
Provident home credit
Satsuma
High-cost, short-term credit
glo
Vanquis Bank
PRA regulated
Capital adequacy, liquidity
and large exposures
FCA authorised
Non‑executives
Approved persons
Implications of regulatory change
Different order of magnitude of financial and operational costs of
regulatory compliance, raising the minimum efficient/possible scale.
Consumer credit firms will be subject to a ‘change of control’ process
in any proposed transactions.
Many consumer credit businesses are likely to decide to exit, or fail
to secure full FCA authorisation.
Boundaries and interpretations of new rules will continue to be tested,
along with attempts to supply without any intention to comply.
Fundamental issues with certain sectors, product forms and business
models likely to result in restructuring of supply.
The speed and impact of regulatory interventions is likely to be
dramatically higher than past experience.
Provident Financial plc
Annual Report and Financial Statements 2015
23
Moneybarn case study
page 50
The perception of the
non-standard lending market
is very different to how
PfG does business and the
values That sit aT the heart
of everythinG we do
We start with putting the particular needs of our customers at the
centre of what we do. We do this by ensuring that our products share
the same responsible lending characteristics.
Here are just a few stories of how we care for our customers and
generate sustainable returns…
Vulnerable customer
case study
page 60
Provident case study
page 32
Vanquis Bank case study
page 24
Satsuma case study
page 38
24
25
I needed a credit card to help with unexpected bills.
Unlike other credit card companies I’d looked at,
Vanquis Bank were able to look at my circumstances
and give me a card with a sensible credit limit. My credit
card gives me flexibility, I know it’s there when I need it
and I can pay it back in regular, manageable instalments.
Joanne
Read more about Vanquis Bank from page 26
Strategic report 26
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review
Vanquis Bank
Non-standard credit cards
Vanquis Bank is the leading supplier of credit cards in the
non‑standard market and brings the benefit of credit cards
to people who can find themselves excluded by mainstream
credit card providers.
£185.5m
UK profit before tax
1,386
UK employees
£1.3bn
UK year-end receivables
1.4m
UK customers
How our model applies to Vanquis Bank
Provident Financial plc
Annual Report and Financial Statements 2015
27
01
02
08
07
06
03
04
05
Read more about the group business model
on pages 12 and 13
How we create value
5. Lend responsibly
1. Secure longer-term, lower
rate funding
> Stand-alone retail deposits funding.
> Intercompany loan also
provided by PFG.
2. Develop tailored products to meet
customers’ needs
> Simple credit card offering
with no teaser rates or
rewards programmes.
> Provides utility for modern day life,
such as shopping on the internet.
> Allows customers with thin
or impaired credit records
to rebuild their credit score.
> Initial credit line of between
£250 and £500.
> ‘Low and grow’ approach to
extending credit.
> Maximum credit line of £3,500.
> Average life of a card account
of around four years.
> Representative APR of 39.9%.
6. Collect repayments due
> Best in class collections centre
in Chatham.
> Experienced contact
centre staff with compliant
remuneration arrangements.
> Leading edge technology and
dialler strategies.
> High levels of customer satisfaction.
> E-Vanquis for electronic payments.
7. Manage arrears and
customer difficulties
> Immediate contact when
payments are missed.
> Multiple forbearance methods
for customers in difficulty.
> Optional ROP product freezes
account for up to two years when
customers get into difficulty.
> Low levels of complaints
overturned by FOS.
8. Pay for funds and generate
surplus capital to deploy
> High ROA business.
> Strong capital generation funds
growth and allows surplus capital
to be paid in dividends to PFG.
3. Attract target customers
Typical customer:
> Full-time employed;
> Average income of between
£20,000 and £35,000;
> Limited indebtedness;
> Lives in rented accommodation;
and
> Average age of between 35 and
45 years old.
Channels to market:
> Multiple brands – Vanquis Bank,
Aquis, Black Diamond, Granite,
Neo, Original, Origin;
> Strong track record of developing
channels to market; and
> Customers recruited through the
internet, direct mail, face-to-face
and partnership arrangements.
4. Assess affordability and
credit worthiness
> Bespoke underwriting systems.
> Use of external bureau data.
> Welcome call with all
new customers.
> 13 years of experience
of lending to non‑standard
credit card customers.
Strategic report 28
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Vanquis Bank
Non-standard credit cards
> We are Visa-branded;
What is Vanquis Bank?
In many ways Vanquis Bank looks and operates like any other
credit card provider:
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.
> 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 the same major merchants used by prime
credit card customers, 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 13 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.
Chris Sweeney
Managing Director
Vanquis Bank
We have 13 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.
Provident Financial plc
Annual Report and Financial Statements 2015
29
2015 in focus
2015 has been another excellent year for
Vanquis Bank, delivering strong growth
in customers, receivables and profits.
With 1.4 million customers and a receivables
book of £1.25bn at the end of 2015, we
are making excellent progress towards
our medium-term guidance of serving up
to 1.8 million customers with an average
balance of £1,000.
We will continue to develop the non-standard
credit card market in the UK and drive further
growth through our core channels to market
of the internet and direct mail. However, we
recognise that we have a large customer
base but only serve them with one product
– a credit card. As a result, during the second
half of 2015 we have been developing our
strategy to supplement our core proposition.
1. New business initiatives
There are a number of areas where we are
looking to develop, including the following:
(i) Partnerships – We are looking to expand
our existing capability in the partnerships
market, building on existing successful
relationships and adding new partners.
These could be in the form of decline
arrangements with prime banks whereby
declined customers who meet Vanquis Bank
criteria are offered a Vanquis bank credit
card, or through a partner branded credit
card arrangement which allows access to all
Visa merchants or through a private label
credit card restricted to partner stores
or website.
(ii) Customer product marketing –
Customer research shows us that there
is an appetite amongst our customers for
insurance products which have the same
characteristics as our credit card offering –
clarity, simplicity and higher service levels.
We are therefore, considering promoting
home contents, travel, car, gadget and pet
insurances to our customers, all of which are
very relevant to them. The insurance would
be provided through a third party who meets
our high standards of service, but clearly this
could be an incremental income source for
the business.
(iii) Fresh start – Vanquis Bank has
proven collections capability and has
also been successful in packaging and
selling delinquent debt to third parties.
We are trialling purchasing small tranches
of debt and leveraging our collections
expertise, customer contact data and debt
rehabilitation offerings in order to improve
recoveries and help customers get back
on-track.
(iv) Face-to-face – We already successfully
use the face-to-face channel in high streets
across the UK to attract new customers, but
there are many cities and towns where we
do not have a presence and are areas for
further growth. In addition, our face-to-face
activities are currently out-sourced to a third
party and so we are looking at managing
some of the process in-house to gain greater
efficiency. It is important to note, that whilst
a new customer recruited through the
face-to-face channel will have met a Vanquis
Bank representative on the high street, they
will still go through the same underwriting,
affordability and welcome call process as
all our other channels.
(v) Other financial services – We are in the
very early stages of investigating the potential
of offering other financial services, including
loans, to our existing customer base.
Clearly it is unlikely that all of the above areas
will lead to incremental growth. However, we
have a number of exciting opportunities to
augment our existing growth opportunity
in non‑standard credit cards.
2. New leadership
Michael Lenora, who has led the business
very effectively since 2007, has decided to
retire on 30 June 2016. He has contributed
hugely to the success of Vanquis Bank and
he leaves the business with everyone’s
sincere thanks and good wishes for a happy
retirement. He leaves behind an excellent
business and a very strong management
team. It is great news that Chris Sweeney has
joined the firm as Michael’s successor from
the start of January 2016. He has a wealth of
experience in credit cards and retail banking,
most latterly with Standard Bank, and is the
right person to lead Vanquis Bank in its next
stage of development.
Strategic report
30
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Vanquis Bank
N
e
w
a
c
c
o
u
n
t
s
Profit/(loss) before tax:
– UK
– Poland
Total Vanquis Bank
UK
Customer numbers (’000)
Year-end receivables
Average receivables
Revenue
Impairment
Revenue less impairment
Risk-adjusted margin1
Costs
Interest
Profit before tax
Return on assets2
Vanquis Bank customers (’000)
s
r
e
m
o
t
s
u
C
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2010
2011
2012
2013
2014
2015
New accounts
Customers
Vanquis Bank receivables (£m)
1,500
1,250
1,000
l
s
e
b
a
v
i
e
c
e
R
750
500
250
0
2010
2011
2012
2013
2014
2015
800
700
600
500
400
300
200
100
0
500
400
300
200
100
0
Receivables growth
Receivables
Growth excluding boost from
enhanced CLI scorecards
Average balance (£)
1,000
800
600
400
200
0
2010
2011
2012
2013
2014
2015
l
R
e
c
e
i
v
a
b
e
s
g
r
o
w
t
h
3. Financial performance
Vanquis Bank generated a profit before tax of £183.7m in 2015 (2014: £140.4m) analysed
as follows:
Year ended 31 December
2015
£m
185.5
(1.8)
183.7
2014
£m
151.0
(10.6)
140.4
Year ended 31 December
2015
£m
1,421
1,252.0
1,157.1
538.6
(158.9)
379.7
32.8%
(151.1)
(43.1)
185.5
15.8%
2014
£m
1,293
1,093.9
967.2
465.6
(144.9)
320.7
33.2%
(130.0)
(39.7)
151.0
15.5%
Change
%
22.8
83.0
30.8
Change
%
9.9
14.5
19.6
15.7
(9.7)
18.4
(16.2)
(8.6)
22.8
1 Revenue less impairment as a percentage of average receivables.
2 Profit before interest after tax as a percentage of average receivables.
Vanquis Bank has delivered another excellent
performance in 2015, reporting UK profits
22.8% higher than 2014. Sound credit
quality and favourable delinquency assisted
by an improving UK employment market
have enabled the UK business to deliver an
improvement in return on assets from 15.5%
in 2014 to 15.8% in 2015.
Demand for non-standard credit cards
continues to be strong and, whilst the
marketing activity of competitors in both
the direct mail and internet channels
has continued, further investment in
the customer acquisition programme
has allowed the business to deliver
record new account bookings of 433,000
(2014: 430,000). This reflects a stable
acceptance rate of around 25% against
unchanged underwriting standards with the
business only booking new business that is
expected to meet its minimum threshold
returns. Customer numbers ended 2015
at 1,421,000, up 9.9% on last year, which
is stated after the cancellation of 46,000
dormant accounts during June and July to
eliminate the contingent risk associated with
undrawn credit lines. The underlying growth
is therefore around 13.5%.
The credit line increase (CLI) programme to
customers who have established a sound
payment history is the most important driver
of credit issued and, when combined with
growth in customer numbers, generated
a 19.6% increase in average receivables.
Returns from the low and grow approach to
extending credit remain consistently strong
and are underpinned by average credit line
utilisation of around 70% which delivers a
strong stream of revenue whilst maintaining
a relatively low level of contingent risk from
undrawn credit lines.
Year‑end receivables grew by 14.5% in 2015
with the business adding £158m of receivables
compared with growth of £233m in 2014 and
£220m in 2013. 2014 receivables growth was
boosted by the introduction of enhanced
CLI scorecards following the decision to
augment the sourcing of credit bureau data.
This boosted receivables growth by around
£30m in 2014, a proportion of which was at the
expense of 2015, and therefore the reduction
in receivables growth is less pronounced
than the headline reduction. Overall, Vanquis
Bank’s receivables profile reflects consistent
new account bookings of between 411,000
and 433,000 over the last three years and
the current maximum credit line of £3,500.
Provident Financial plc
Annual Report and Financial Statements 2015
31
The average customer balance increased to
£881 in 2015 (2014: £846) as the proportion
of new customers in the total population
reduces. It remains well on-track towards the
medium-term guidance of £1,000.
The risk‑adjusted margin for 2015 was 32.8%,
a modest reduction from 33.2% in 2014.
The reduction in the risk-adjusted margin
comprises a 0.6% decline in the revenue yield
derived from the Repayment Option Plan
(ROP) product following the changes to the
sales process and product features in 2013
and interchange income, partly offset by a
0.2% benefit from improved delinquency.
Interchange income is being adversely
impacted by the agreement between Visa
and the European Commission to implement
a phased reduction in the interchange
fees charged by credit card companies
to retailers. This programme was fully
implemented from December 2015 when
domestic transactions were subject to
lower fees. The impact on Vanquis Bank
was a reduction in income of approximately
£3m in 2015 which is estimated to
increase to around £11m in 2016, based
on current volumes, as the reduced fees
on domestic transactions fully take effect.
Interchange revenue is a less significant
source of income for Vanquis Bank than for
mainstream credit card providers.
Although the UK employment market has
continued to improve, Vanquis Bank has,
and will continue to, apply consistently tight
credit standards. This explains the further
reduction in the rate of delinquency to a
new all-time low for the business and the
corresponding 1.2% year‑on‑year reduction
in the rate of impairment. 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 around 1.0%.
Taken together, these explain the net benefit
of 0.2% to the risk‑adjusted margin from
improved delinquency over the last year.
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
around 32% during 2016 and remain above
the target of 30% thereafter.
Costs increased by 16.2%, below the
19.6% growth in average receivables as
the business continues to benefit from
operational gearing. The cost base in 2015
includes a further uplift of £4m in the spend
on direct mail and marketing activities that
has supported the increase in new account
bookings in 2015 and additional expenditure
of approximately £3m on the risk, legal and
compliance functions.
Interest costs increased by 8.6% during 2015,
significantly lower than the growth in average
receivables. This reflects the reduction in
Vanquis Bank’s blended funding rate, after
taking account of the cost of holding a liquid
assets buffer, from 5.6% in 2014 to 5.3% in
2015 due to the progressive benefit from
taking retail deposits.
Vanquis Bank remains firmly on track to
achieve the medium-term potential of up
to 1.8 million customers with an expected
average balance of approximately £1,000,
as communicated at the start of 2015.
Poland
Following the decision to withdraw from the
Polish pilot operation in February 2015, the
receivables book was sold to a third party.
The economic interest passed from Vanquis
Bank to the purchaser on 1 April 2015 with
legal completion and the payment of final
consideration occurring in August 2015.
The residual loss of £1.8m in 2015 reflects the
trading losses in the first quarter of the year
(2014: loss of £10.6m).
Looking ahead
We expect 2016 to be another year of strong growth. We will continue to invest in growing
the core credit card customer base and receivables in a sustainable and responsible
manner. In addition, we will invest in new business areas to augment future growth
although these are too early in their development to have a material impact on earnings in
2016. We remain focused on delivering good customer outcomes as well as 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 has shown a strong
recovery over recent years, we will maintain the tight underwriting that served us so well
during the recent recession.
Looking beyond 2016, we expect the demand for non-standard credit cards in the UK
to remain strong. Our medium‑term guidance for the credit card business remains
unchanged serving up to 1.8 million customers with an average balance of approximately
£1,000. However, as we have previously stated, we do not view these targets as the ‘end
game’ and we are continually looking at ways to enhance the potential for the business
through developing our channels to market, our product proposition and new business
areas. The rate of progress towards our targets will be dictated by future economic
conditions, the potential emergence of increased competition and, very importantly,
maintaining a minimum risk‑adjusted margin of 30%.
We are delighted to be taking on the baton of developing the glo guarantor loans product
from CCD, subject to regulatory approval. Our Commercial Director, Michael Hutko, will be
responsible for running this part of the business in addition to his other responsibilities
in the credit card business. We expect 2016 to be a year of modest investment, as we
embed credit, marketing and collections into our operations, before reaching a break even
position in 2017.
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.
Supporting customers to repair or build their credit history is central to our proposition.
> We are testing a suite of new business strands to augment growth in addition to our core
product proposition. We will ensure that we maintain the same ethos of clarity, simplicity
and high levels of customer service in anything we do.
> We are excited about the prospects of glo, the group’s guarantor loans product,
following the successful trial in CCD. The guarantor loans market is an attractive market
and we are confident that by utilising our credit, marketing and collections skills we can
build a successful business which will deliver the group’s target returns.
> 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 the major contributor to the future growth of the group’s dividends.
Strategic report 32
33
I got the keys to my new flat in December. The flat
needed a lot of renovations so I wasn’t able to move
in straight away with my young daughter.
As a single dad and with Christmas coming up, there
were a lot of expenses all at once. I’ve always had a
good relationship with my Provident agent and he was
happy to help me. My loan from Provident helped me to
complete the improvements I needed to move in before
Christmas. Without Provident, Christmas would certainly
have been tougher and I know that my repayments are
manageable and that my agent is there to support me.
Scott
Read more about Provident from page 34
Strategic report 34
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional performance – Consumer Credit Division
Provident home credit
Provident is the largest home credit business in the UK
and Ireland and is still ‘lending a hand’ to its customers
after 135 years.
£105.4m
Profit before tax¹
2,160
UK employees¹
£522.2m
Year-end receivables
0.9m
Customers
£100–£2,000
Loan range
1 For CCD as a whole.
How our model applies to Provident home credit
Provident Financial plc
Annual Report and Financial Statements 2015
35
01
02
08
07
06
03
04
05
Read more about the group business model on
pages 12 and 13
How we create value
1. Secure longer-term, lower
rate funding
> Intercompany loan provided
by PFG.
> Guarantor to group facilities.
2. Develop tailored products to meet
customers’ needs
> Simple cash loans delivered by a
self‑employed agent in the home.
> Enables the customer to manage
the household budget.
> Affordable weekly payments.
> All‑in fixed charge – no late fees
or additional interest.
> 135 years of serving
non‑standard customers.
> High levels of customer satisfaction.
3. Attract target customers
Typical customer:
> Part‑time/casual employment;
> Low incomes – £10,000 to £15,000
per annum;
> Limited indebtedness;
> Typically live in rented
accommodation or social housing;
and
> Often female, middle‑aged.
Channels to market:
> Multi‑channel – recommendation,
direct mail, internet or through
self‑employed agents;
> Strong brand with loyal customer
base; and
> Builds on existing
customer relationships.
4. Assess affordability and
credit worthiness
> Expertise – 135 years of
experience of lending home credit
to non‑standard customers.
> Central underwriting generates
a ‘no’ or ‘maybe’ decision.
> Affordability and lending
decision made in the home
by a self‑employed agent.
> Agents are typically female,
have an average of seven
years’ experience, and live
in the communities they serve.
5. Lend responsibly
> Small‑sum credit with initial
loan of £150.
> Low and grow approach to
extending credit.
> Agents only paid commission
on what they collect therefore
no incentive to over‑lend.
> Representative APR of 399.7%.
6. Collect repayments due
> Collections typically made weekly
by the agent in cash from the
customer’s home.
7. Manage arrears and
customer difficulties
> Weekly face‑to‑face visit from
the agent allows discussion
of the customer’s situation.
> Agents can agree reduced
payments or a temporary
payment holiday.
> No additional fees or interest
from late payment.
8. Pay for funds and generate
surplus capital to deploy
> High ROA business.
> Strong capital generation funds
growth and allows surplus capital
to be paid in dividends to PFG.
Strategic report 36
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Provident home credit
Why home credit works
We are the largest home credit business in the UK and Ireland.
Every week, 5,500 local agents visit the majority of our 0.9 million
customers, to issue loans and collect repayments. Even after 135
years, the business continues to fill a vital need for customers,
providing access to credit for those who might otherwise be
financially excluded and lending a helping hand when others don’t.
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 it also helps them maintain
good payment discipline.
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 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
affordability 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.
2015 in focus
In September 2013, in the face of inflationary pressures on
customers’ disposable incomes and structural changes in the market
towards accessing credit online, we outlined a new strategy and
timetable for the transition of Provident to a leaner, better‑quality,
more cost‑efficient business focused on returns. By successfully
implementing these changes, we indicated that 2013 would be the
baseline year for profits, 2014 would be a year of further change
before completion of the transformation programme in 2015. It is
very pleasing to report that we have successfully delivered on all of
these commitments and we now have a solid foundation to develop
the business in 2016 and beyond.
Provident home credit
Provident is the group’s longest-running
business, stretching back to the company’s
foundation in 1880. It offers home credit
loans, typically of a few hundred pounds,
through a network of agents who call each
week at customers’ homes in the UK and
Ireland. 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.
Mark Stevens
Managing Director
Consumer
Credit Division
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.
Provident Financial plc
Annual Report and Financial Statements 2015
37
Our strategy involved five key areas for
change, on which we have made excellent
progress over the last two years:
1. ‘One Best Way’
Historically, there had been differing working
practices spanning the 240 branches across
the UK and Ireland. The absence of sharing
best practice resulted in significant variations
in branch and manager performance.
Whilst there are still ways in which we
can improve, we have made further great
progress during 2015 in standardising our
ways of working, particularly in arrears
management, compliance and performance
management assisted by the deployment of
technology and investing in developing our
best people, all of which is described further
below. This has undoubtedly contributed to
the improved performance of the business.
2. Technology and 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 is now complete.
Following the roll‑out of the collections
app to agents and tablet devices to
field managers in 2014, we successfully
deployed the lending app to all agents in
2015. The successful implementation of
technology in the field has multiple benefits
in eliminating paper, better enforcing
and evidencing compliance as well as
improving collections performance, arrears
management and saving a significant amount
of agent and back office time, allowing
agents and managers to spend more time
with customers.
3. Collections focus
In order to improve collections performance,
underwriting was significantly 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 CCD’s ratio of impairment
to revenue reducing significantly from 38.7%
in 2013 to 30.0% in 2014. 2015 has seen
the ratio further reduce to 20.6% as the
improved quality of the receivables book
has come through. Over the same two‑year
period CCD’s receivables book has reduced
by 26.3%, reflecting the impact of the
tighter credit standards. We expect that the
receivables book and credit quality has now
reached a new base level and do not expect
any further significant movements from the
actions taken to reposition the business
since 2013.
4. Much lower costs
To ensure that profit levels in the business
were at least maintained following the
managed 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, since
the middle of 2013 we have implemented
four 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.
Phase 4 – 500 field manager and field
administration employees left in June 2015.
Employee numbers in Provident have
reduced from 2,897 to 2,160 since June 2013
which has been possible by the successful
completion of the programme to deploy
technology throughout the field operation.
The headcount reductions, together with
other savings and volume reductions, have
reduced the CCD cost base by around £8m
over the last two years and has allowed CCD
to invest in developing Satsuma, glo and the
regulatory agenda whilst delivering a modest
increase in profits.
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 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 benefit the business in the future.
Strategic report 38
39
When my car broke down in the middle of the month,
I needed to be back on the road quickly for work.
I had previously had help from family when I was out
of work last year so I didn’t want to ask them for help
again. I applied for a Satsuma loan to cover the cost of
repairs. The loan was straightforward to arrange and
I particularly liked that I could spread the repayments
over a six-month period. I spoke to a customer service
advisor on a couple of occasions and they were always
very friendly and helpful. I was able to carry on working
and knew the total repayments in advance. I would
definitely use Satsuma again.
Samantha
Read more about Satsuma from page 40
Strategic report 40
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Consumer Credit Division
Satsuma online lending
Satsuma provides a unique customer proposition in the
short-term, small-sum online loans market, building on the
group’s experience and skills in serving home credit and
non-standard credit card customers.
£12.1m
Year-end receivables
49,000
Customers
£100–£1,000
Loan range
How our model applies to Satsuma
Provident Financial plc
Annual Report and Financial Statements 2015
41
01
02
08
07
06
03
04
05
Read more about the group business model
on pages 12 and 13
How we create value
5. Lend responsibly
1. Secure longer-term, lower
rate funding
> Intercompany loan provided
by PFG.
> Guarantor to group bank facilities.
2. Develop tailored products to meet
customers’ needs
> Simple short-term loans
delivered remotely.
> Allows customers fast access
to finance.
> Manageable weekly payments.
> No additional, hidden fees.
> Suited to customers who prefer
to transact online, without the need
of an agent relationship.
> High levels of customer satisfaction.
> Low and grow approach
to extending credit.
> Loans of between £200 and
£1,000 repayable between
13 and 52 weeks.
> Typical initial loan of £200.
> Alternative to payday lending
with no additional interest
or late fees and manageable
weekly repayments rather
than ‘bullet’ repayment.
> Representative APR of 1,575%.
6. Collect repayments due
> Repayment taken via Continuous
Payment Authority (CPA) from
the customer’s bank account.
> Compliant CPA policy with
customer contacted after two
failed attempts.
3. Attract target customers
> Leveraging best-in-class collections
provided by Vanquis Bank
in Chatham.
> Experienced UK-based contact
centre team.
> Dedicated self-serve area on
website being developed to
allow electronic payments.
7. Manage arrears and
customer difficulties
> Immediate contact made when
payments are missed.
> Multiple forbearance methods
available with no additional fees
or charges.
8. Pay for funds and generate
surplus capital to deploy
> Progress to date confirms
the ability to meet the group’s
target returns.
Typical customer:
> Full or part-time employment;
> Low to average incomes of between
£10,000 and £15,000;
> Limited indebtedness;
> Mainly lives in rented
accommodation; and
> Typical average age of between
25 and 35 years old.
Channels to market:
> High levels of brand awareness
through initial TV advertising;
> Focus now on digital and
social media;
> Developing B2B relationships.
> Will begin to make use of Vanquis
Bank declines; and
> Building on existing
customer relationships.
4. Assess affordability and
credit worthiness
> Use of external credit bureau data.
> Bespoke credit scoring using
a range of data sources.
> Perform validated affordability
assessments using payslips and
external data.
Strategic report 42
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Satsuma
Satsuma iS based
closely on the proven
home credit customer-
centric proposition.
What is Satsuma?
2015 in focus
Satsuma provides short-term loans online to
help customers manage their everyday lives.
It addresses those applicants of sufficient
credit quality whose preference is to access
small-sum credit online and make weekly
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.
In its second year of operation Satsuma has
continued to make further good progress in
developing its product proposition, channels
to market, underwriting, collections and back
office processes. The business ended 2015
with 49,000 customers (2014: 21,000) and
a receivables book of £12.1m (2014: £5.0m).
The level of investment in 2015 was
approximately £5m higher than 2014.
We expect the business to generate a small
contribution to CCD’s profits in 2016.
Customer demand in the unsecured loans
market, in which payday lending was most
recently the most significant participant, is
strong. The gross advances in this market
were in excess of £10bn prior to the credit
crunch but had reduced significantly until
recent years when payday lending started
to fulfil some of the demand. With the
backdrop of clearer, tighter regulation
around payday lending implemented from
1 July 2014, including the introduction of
a rate cap from 2 January 2015, there is
an ongoing and significant shift in supply
from payday loans to more affordable and
responsible instalment lending products.
Tighter regulation has meant that a number
of smaller payday loan companies have
already exited the market and larger
operators are revising their business
models and curtailing their payday lending
activities. As a result, there is an attractive
opportunity to develop Satsuma as a
sustainable business with a leading market
position capable of delivering the group’s
target returns.
The product proposition of Satsuma is
based closely on the proven home credit
customer-centric proposition. The full cost
of a loan is agreed upfront and is then repaid
in fixed and manageable weekly payments
collected by Continuous Payment Authority
(CPA), on a day agreed with the customer
upfront. This means that customers have
peace of mind that they’ll never incur any
additional fees or charges whatsoever.
Customers can have regular contact with
a telephone representative and there are a
number of forbearance procedures in place
for those customers who get into financial
difficulty. In addition, Satsuma is utilising the
highly effective distribution, underwriting
and collections capabilities of both CCD
and Vanquis Bank.
1. Product proposition
Our product proposition has remained
unchanged in 2015, focusing on loans
of between £100 and £1,000 repayable
weekly over a period of between 13 weeks
and 52 weeks. This reflects our decision
to focus on smaller-sum, shorter-term
lending whilst we develop the customer
journey, underwriting and our collections
processes. Weekly lending aligns with the
Provident home credit business. Typically our
customers are on low incomes and manage
their household budget on a weekly basis
and weekly repayments also allows us to get
a quicker read on credit quality as four weekly
payment cycles have occurred by the time
one cycle of a monthly product has taken
place. This is particularly important in the
early stages of the business’s development.
We intend to further develop our product
proposition as we continue to develop our
underwriting and customer journey. The first
stage of this is likely to be the introduction
of a monthly product in 2016 for those
customers who are paid monthly and
manage their budget on a monthly basis.
Beyond this, there continues to be a lack of
supply for larger sum lending (£1,000+) over a
year in duration for better-quality customers.
This is an area that we will explore as well
as ‘line of credit’ products which will allow
better-quality customers to have a revolving
balance against a set credit limit at a
lower APR.
2. Channels to market
Our initial focus with Satsuma through 2014
and the early part of 2015 was to build strong
brand recognition through memorable front-
of-mind TV advertising. We have introduced
four separate TV advertisements over the
last two years and we have seen our brand
recognition improve from 30% to 50% of
non-standard consumers over that period.
This currently places us number three in the
market and awareness continues to grow.
During 2015, we have tested multiple B2C
channels and now that we have built a strong
brand, we are turning our attention to a
more targeted, lower cost approach in the
Working closely with
our customerS is a
fundamental part
of our propoSition
and one which
diStinguisheS us from
the majority of other
lenders in the market.
Provident Financial plc
Annual Report and Financial Statements 2015
43
B2C channel, focusing on digital marketing
including better use of social media and
search engine optimisation. We have recently
introduced a new website, including an
improved application form, to supplement
this. We will also be placing greater emphasis
on developing the B2B channel, where
we have recently seen some encouraging
success, including leveraging our existing
group relationships.
Overall, 2015 loan volumes were
approximately 150% higher than 2014.
Demand for Satsuma’s weekly product
proposition is strong and we have now
provided over 150,000 loans and lent nearly
£50m to customers in the two years since
we started Satsuma. One of our main areas
of focus in 2016, will be on re-serving good
quality customers who have either repaid
their loan or wish to take out a concurrent
loan, subject to affordability. We will be
introducing a secure customer log-in
capability and a mobile app during 2016
which will allow customers to view their
account, apply for new or further credit and
to make repayments if a CPA does not work
for any reason. It will also allow us to provide
marketing messages to existing customers
and will be a much more effective and lower
cost option than direct mailing. In addition,
we will also more effectively target those
customers declined by Vanquis Bank for an
open-ended revolving credit facility but who
may be better suited to a shorter small-sum,
fixed-term online loan.
3. Underwriting
Following the introduction of a new decision
engine and scorecard in November 2014,
Satsuma has continued to refine and
develop its underwriting during 2015,
typical for a nascent business, whilst
adopting a measured approach to growing
customer numbers.
The evolution of underwriting resulted
in a significant tightening of credit from
October which reduced the conversion
rate to around 10% from closer to 20%
in the middle of the year. These changes
necessarily impacted growth in the fourth
quarter trading period. Most importantly, the
expected step-change in credit quality has
materialised and the business is also seeing
a good flow of further lending to established
customers which is fundamental to future
profitability. Our conversion rates are now
improving again as we continue to broaden
our channels to market, marketing approach,
and the customer experience.
Consistent with 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.
4. Collections
We have successfully embedded our
collections operation into the highly effective
and scalable collections capability of
Vanquis Bank’s contact centre in Chatham.
Their representatives are engaged at an early
stage to optimise collections performance
and work closely with our customers.
In addition, we continue to introduce
different 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. Our collections
performance has fluctuated in line with the
changes made to underwriting during the
year to test different scorecard cut-offs but
is now tracking in line with our plans.
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 proposition and one which
distinguishes us from the majority of other
lenders in this market. We are very pleased
with the progress made in 2015 and, together
with the refinements made to underwriting,
we are confident that we will continue to
see improvements in the quality of the
receivables book in 2016.
5. Back office processes
One of our key goals in 2015 has been
to further develop the IT infrastructure,
analytics, management team, and
governance and control processes to
support the medium-term growth of the
business as well as underpinning high
customer service levels and positive
customer outcomes. There is much more
to do in these areas but it is very pleasing
that through our continued investment,
98% of our customers rate our service as
good or excellent on Feefo (January 2016).
2016 will see us further develop our IT and
back-office processes and develop our
analytics capability to improve our decision
making and enable us to be more agile than
the competition.
Luke Enock joined the business in August
2015 as Director of Online to lead the next
phase of Satsuma’s development. Luke was
previously with Barclays and has extensive
experience in financial services, particularly
in analytics. He is already making a very
positive impact on the business.
Strategic report 44
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Consumer Credit Division
glo guarantor loans
glo’s guarantor loan product is distinct from any of the
group’s other services, providing non-standard consumers
with affordable longer, larger loans. The loan is guaranteed
by a family member or friend with a sound credit record
who supports the customer if their circumstances change.
£10.8m
Year-end receivables
4,000
Customers
£1,000–£7,000
Loan range
How our model applies to glo guarantor loans
Provident Financial plc
Annual Report and Financial Statements 2015
45
01
02
08
07
06
03
04
05
Read more about the group business model
on pages 12 and 13.
How we create value
1. Secure longer-term, lower
rate funding
> Intercompany loan provided
by PFG.
> Guarantor to group bank facilities.
2. Develop tailored products to meet
customers’ needs
> Provides access to larger-value,
longer duration credit.
> Presence of a guarantor provides
access to lower cost credit than
would otherwise be available.
> Manageable monthly payments.
> Allows customers with a thin or
impaired credit history to build
their credit profile.
> Often used for debt consolidation,
car finance and larger
value purchases.
3. Attract target customers
Typical customer:
> Full-time employed;
> Average incomes of between
£15,000 and £25,000;
> Limited indebtedness;
> Often lives in rented
accommodation; and
> Typical average age of between
25 and 35 years old.
Channels to market:
> Initial focus on B2C with
TV advertising;
4. Assess affordability and
credit worthiness
> Bespoke credit scoring using
a range of data sources.
> Affordability assessment
performed on both the
borrower and the guarantor.
> Use of external credit bureau data.
5. Lend responsibly
> Typical initial loan of £2,500.
> Loans offered from £1,000
to £7,000.
> Average term of four years.
> Representative APR of 49.5%.
6. Collect repayments due
> Repayment through monthly
direct debit from the customer’s
bank account.
> Leveraging best-in-class collections
provided by Vanquis Bank
in Chatham.
> Experienced UK-based contact
centre team.
7. Manage arrears and
customer difficulties
> Immediate contact made when
payments are missed and
guarantor informed.
> Multiple forbearance methods
available with no additional fees.
> Every effort is made to collect from
the borrower before the guarantor
is required to make repayment.
> Developing B2B channel with
brokers, leveraging on Moneybarn’s
broker relationships; and
> Other channels to market to be
developed under Vanquis Bank’s
ownership in due course.
8. Pay for funds and generate
surplus capital to deploy
> Progress to date confirms the
ability to meet the group’s
target returns.
Strategic report 46
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – glo
glo offers
competitive pricing
and a very customer-
centric approach
to forbearance.
What is glo?
2015 in focus
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,
Amigo, but it is a market that has seen
considerable growth over recent years and,
as a whole, remains underserved.
glo, short for The Guarantor Loan Option, is
additional and complementary to the home
credit and Satsuma propositions, comprising
larger, longer loans of between £1,000 and
£7,000 repayable over a period of between
one and five years. glo loans are designed
to meet the need for more significant
purchases, for example: buying a car,
simplifying finances, or home improvements.
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.
glo 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. This includes robust affordability
checks on both the borrower and the
guarantor. There are no set-up fees or early
repayment fees and repayments are made
monthly by direct debit. Interest is calculated
daily and applied to the account monthly.
The focus of the glo pilot in 2015 has been
on developing the customer journey and
demonstrating that there is sufficient
demand for guarantor loans in order for us
to build a business capable of delivering the
group’s target returns.
Having initially launched glo with a B2C focus,
supported by TV advertising, we switched to
a more B2B focus during the second half of
2015. This included leveraging our existing
strong broker relationships in Moneybarn
as well as developing new relationships.
The pilot has successfully demonstrated
that there is strong demand for longer,
larger loans in this under-served area of
the non-standard credit market.
More crucially, CCD has researched the
market very thoroughly to develop an
effective and sustainable customer journey
to ensure that customers receive the same
high level of personal service that the group
deploys in all of its offerings. As a result, we
now have a high degree of confidence that
glo’s guarantor loans proposition is matched
to an attractive market opportunity capable
of delivering the group’s target returns.
As a result, a decision was made in the third
quarter of 2015 that glo will proceed from
pilot to a full roll-out during 2016.
Subject to regulatory approval, the operation
will also be transferred from CCD to Vanquis
Bank in due course in order to allow CCD
to focus on home credit and Satsuma
and to allow glo to benefit from the credit,
marketing and collections skills within
Vanquis Bank. Michael Hutko, Vanquis Bank’s
Commercial Director, will be responsible for
running the business in addition to his other
responsibilities in the credit card business.
2016 is expected to be a year of modest
investment, as we embed credit, marketing
and collections into our operations, before
reaching a break even position in 2017.
At the end of 2015, glo had 4,000 customers
and a receivables book of £10.8m.
Divisional review – Consumer Credit Division
Provident Financial plc
Annual Report and Financial Statements 2015
47
Financial performance
CCD generated a profit before tax and exceptional costs of £105.4m in 2015
(2014: £103.9m) as set out below:
Year ended 31 December
Customer numbers (‘000)
Year-end receivables
Average receivables
Revenue
Impairment
Revenue less impairment
Revenue yield1
Impairment % revenue2
Risk-adjusted margin3
Costs
Interest
Adjusted profit before tax4
Return on assets5
2015
£m
948
545.1
499.5
517.4
(106.6)
410.8
103.6%
20.6%
82.2%
(278.3)
(27.1)
105.4
21.2%
2014
£m
1,071
588.1
598.5
591.1
(177.5)
413.6
98.8%
30.0%
69.1%
(275.8)
(33.9)
103.9
18.1%
Change
%
(11.5)
(7.3)
(16.5)
(12.5)
39.9
(0.7)
(0.9)
20.1
1.4
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 Adjusted profit before tax is stated before an exceptional cost of £11.8m (2014: £3.4m) in respect of
a business restructuring.
5 Adjusted profit before interest after tax as a percentage of average receivables.
Home credit
Online lending
Guarantor loans
Read more on Provident
on pages 34 to 37
Read more on Satsuma
on pages 40 to 43
Read more on glo
on pages 44 to 46
CCD is making good progress in executing on
its strategic plan to develop a broader based
lending business. The repositioning of the
Provident home credit business as a smaller,
better-quality, more cost-efficient business
is complete and delivering strong returns.
This success has supported CCD’s continued
investment in developing the Satsuma online
loans proposition and the glo guarantor
loans pilot whilst delivering a 1.4% increase
in profits. The strategic development of
CCD over the last two years has resulted in
a significant increase in its return on assets
from 15.1% in 2013 to 21.2% in 2015.
It is very encouraging to report that credit
issued in the home credit business through
the fourth quarter of the year was ahead of
the fourth quarter of 2014, notwithstanding
the planned contraction in the customer
base. This has been achieved through a
marked improvement in the quality of the
book and improved demand supported by
the favourable development of household
incomes and the cost of living for home credit
customers during 2015.
Overall customer numbers in CCD have
shown a year-on-year reduction of 11.5% to
948,000 (2014: 1,071,000). Over half of the
reduction relates to the sale of delinquent
low value customer balances to third-party
debt purchasers. As a result, the underlying
reduction of around 5% reflects the tighter
credit standards introduced as part of the
repositioning of the business in September
2013, which has continued to curtail the
recruitment of more marginal customers,
improve overall credit quality and shorten
the duration of the book.
With the repositioning of the home credit
business complete, the rate of shrinkage in
the CCD receivables book is moderating and
showed a year-on-year decrease of 7.3%
at December compared with 18.0% at June
2015 and 20.5% at December 2014.
The revenue yield remained robust at
103.6%, up from 98.8% in 2014, due to a
modest shift in mix towards shorter-term,
higher-yielding lending.
The implementation of standardised arrears
and collections processes together with a
continued marked improvement in credit
quality have combined to produce a further
significant improvement in arrears, with the
ratio of impairment to revenue reducing
from 30.0% at December 2014 to 20.6%
at December 2015.
Strategic report 48
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Consumer Credit Division
2015 has been another
very good year of
progress against
our strategy.
Overall, CCD costs for the year were £2.5m
higher than in 2014. This comprised a £10.3m
year-on-year increase in costs in the first
half of the year, including a step-up in the
investment in Satsuma of approximately £5m
and an increase of some £3m in regulatory
and compliance overheads, and a £7.8m
reduction in the second half which benefited
from the mid-year cost reductions referred
to above.
Interest costs were 20.1% lower than 2014
compared with a reduction of 16.5% in
average receivables. This reflects a reduction
in CCD’s funding rate from 7.1% in 2014 to
6.8% in 2015 due to a lower margin on the
group’s syndicated bank facility following
the extension in January 2015 and the lower
interest rate on the March 2015 retail bond.
The increase in revenue yield and reduction
in impairment has produced a significant
strengthening in the risk-adjusted margin
to 82.2% at December 2015, up from 69.1%
at December 2014.
The programme to deploy technology
throughout the field operation to support
an improvement in productivity and
implement market-leading compliance was
completed well ahead of schedule in 2015.
In particular, all UK agents are now using
both the collections and lending apps which
resulted in a mid-year headcount reduction
of 500 comprising field managers and the
remaining field administration workforce.
The headcount reductions secured
annualised savings of approximately £14m
with no impact on customer service levels.
An exceptional restructuring cost of £11.8m
has been incurred in 2015 in respect of
associated redundancy costs (2014: £3.4m).
CCD customer numbers and receivables
Year-on-year change %
Customers
Receivables
(0)
(5)
(10)
(15)
(20)
(25)
(30)
Jun 13
Sep 13
Dec 13
Mar 14
Jun 14
Sep 14
Dec 14
Mar 15
Jun 15
Sep 15
Dec 15
Note
Change in customer numbers at December 2015 excludes the impact of 70,000 low-value delinquent balances
sold to third-party purchasers.
Provident Financial plc
Annual Report and Financial Statements 2015
49
all of our actions
in ccd are driven
by the ethos of
lending responsibly
and providing our
customers with
the right products
and services.
CCD – Looking ahead
2015 has been another very good year of progress against our strategy. CCD has
undergone a huge amount of change over the last two years 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 ourselves in September 2013 when we repositioned the business – we
have delivered modest year-on-year profits growth in 2014 and 2015 and have significantly
increased the return on assets over that period.
In our Provident home credit business, the transition to a smaller better-quality, more
cost-efficient business is now complete. 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. The business is capable of delivering
modest year-on-year growth.
In Satsuma, 2015 has been another year of investment both in developing our
underwriting and the customer journey. We have continued to utilise our core skills in
both CCD and Vanquis Bank to lend responsibly and put us in a solid position to build a
sustainable business. The investment we have made over the last two years means that
we are now well-placed to make a small profit contribution to CCD’s profits in 2016. We are
confident that we will cement a top-three market position, and together with glo, build a
combined receivables book in excess of £300m in the medium term and deliver returns
consistent with those currently being achieved by CCD.
The transfer of glo to Vanquis Bank during 2016 will allow management to focus on
delivering the market opportunity in Satsuma and continue to improve performance in
Provident. 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 fundamental to the
group’s high dividend payout ratio.
Strategic report 50
51
I had been trying to get a loan from the bank when
I started having trouble with my old car but I wasn’t
having much luck. I knew it was time to replace my car
for work, holidays and family life. I found the car I wanted
at a garage and Moneybarn were really straightforward
as I had a job and a regular income. I completed the
paperwork and my new car was ready to collect after
three days. I chose Moneybarn due to their good
customer service. I could speak to them directly over
the phone and they were very helpful with everything
I needed.
Angelo
Read more about Moneybarn from page 52
Strategic report 52
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review
Moneybarn
Non-standard vehicle finance
Moneybarn is the leading provider of non-standard vehicle
finance in the UK. By assessing every customer’s personal
history, needs and situation, the business is able to make
responsible lending decisions and help its customers get
to work.
£21.3m
Profit before tax
151
Employees
£219.6m
Year-end receivables
31,000
Customers
£9,000
Average loan size
How our model applies to Moneybarn
Provident Financial plc
Annual Report and Financial Statements 2015
53
How we create value
5. Lend responsibly
01
02
08
07
06
03
04
05
Read more about the group business model
on pages 12 and 13
> Loans range from £4,000–£25,000.
Average loan of c.£9,000.
> Average term of between four
and five years.
> Representative APR of 33.9%.
6. Collect repayments due
> Repayment taken through a
monthly direct debit payment
from the customer’s bank account.
> Experienced UK-based contact
centre team.
7. Manage arrears and
customer difficulties
> Immediate contact made
when payments are missed.
> Multiple forbearance
methods available.
> Car re-possessed when it is in
the best interests of the customer
and Moneybarn to realise its value.
8. Pay for funds and generate
surplus capital to deploy
> High ROA business.
> Despite strong growth, the
business is already generating
sufficient capital to fund its own
rapid growth.
1. Secure longer-term, lower
rate funding
> Intercompany loan provided
by PFG.
> Guarantor to group bank facilities.
2. Develop tailored products to meet
customers’ needs
> A remotely underwritten
conditional sales agreement to
buy a second-hand car or van.
> Allows customer to get to work
(not a discretionary purchase).
> Security of vehicle provides access
to lower cost funding than would
otherwise be available.
> Manageable monthly payments.
> High levels of customer satisfaction.
3. Attract target customers
Typical customer:
> Full-time employed;
> Average incomes of between
£20,000 and £30,000;
> Limited indebtedness;
> Typically lives in own/rented
accommodation; and
> Average age of between 35
and 45 years old.
Channels to market:
> Primarily B2B through strong
broker and dealer relationships;
and
> Cross selling to Vanquis
Bank customers through
email campaigns.
4. Assess affordability and
credit worthiness
> Bespoke credit scoring using
a range of data sources.
> Use of external credit bureau data.
> Perform vehicle valuation check
using Glass’s guide.
> Leading class IT provides
an underwriting decision
in four seconds.
Strategic report 54
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional review – Moneybarn
Non-standard vehicle finance
Moneybarn is the leading provider of non-standard
vehicle finance in the UK. The non-standard
vehicle finance market shrank considerably as
a result of the credit crunch, as mainstream
and specialist participants reduced their lending,
collapsed or exited the market. It has recovered
in recent years but remains around half of the
size it was in 2007 which represents an excellent
growth opportunity for the business.
Peter Minter
Managing Director
Moneybarn
What is Moneybarn?
Moneybarn helps those who may have had problems with credit
in the past but who are now over those problems, get to work, take
their children to school and live their lives. We offer secured second-
hand car loans in a responsible manner through conditional sales
contracts. Our contracts are typically for between four and five years
with instalments paid monthly. The average value of a loan is around
£9,000. 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.
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 around
40, are employed or self-employed and have an income level around
the national average of £25,000.
The primary source of 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. We also
source leads through independent car dealers and a very small
number from our own website www.moneybarn.com.
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 who 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 have a highly scalable IT platform that supports the end-to-
end customer journey. We were the first non-standard 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.
Finally and very importantly, we have a strong cultural appetite for
compliance and meeting our regulatory obligations. Paramount to
this is treating customers fairly. Like the rest of the group, we enjoy
high levels of customer satisfaction.
We help those Who
may have had problems
with credit in the past
but who are now over
those problems, get
to work, take their
children to school
and live their lives.
Provident Financial plc
Annual Report and Financial Statements 2015
55
2015 in focus
2015 was the first full year of Moneybarn
operating under Provident Financial’s
ownership since its acquisition in August
2014. The business has performed very well,
growing new business volumes strongly, at
the same time as making significant progress
in developing the product proposition and
investing in IT infrastructure and people.
1. Development of the product
proposition
Prior to acquisition, Moneybarn only lent
up to the trade value of the vehicle and had
a minimum lend of £5,000. The product
offering was extended in September 2014
to lend up to the retail value of the vehicle
and the minimum lend was reduced from
£5,000 to £4,000 in early 2015. Both of these
measures better aligned Moneybarn with the
competition and has reinforced its primacy
with the broker network as brokers can now
satisfy a greater proportion of their volumes
through Moneybarn. Together with access to
the group’s funding lines, this has allowed a
significant pick-up in new volumes in 2015.
In the second half of 2015, Moneybarn
commenced marketing its car finance
proposition to Vanquis Bank customers.
Initial email campaigns have demonstrated
that an opportunity for incremental sales is
present. The full benefit from the cross-sell
opportunity will take some time to develop
as awareness continues to build and Vanquis
Bank customers look to replace their
existing vehicles.
During the second half of the year,
Moneybarn began a trial to test the
appeal of financing used light commercial
vehicles (LCVs) through its broker network.
LCVs or ‘white vans’ are typically needed
by self-employed plumbers, builders and
electricians who may have a thin credit
history and therefore represent a good fit for
a Moneybarn loan. The used LCV market is
around 15% of the size of the used car market
and represents an excellent incremental new
customer source. The initial results of the trial
are encouraging and this line of business will
be developed through 2016.
Moneybarn is continuing to explore other
opportunities to develop and extend the
product offering, including different price
points and product propositions.
2. Investment in IT and people
During 2015, Moneybarn has continued
to invest in the resources necessary
to support future growth, meet higher
regulatory standards under the FCA and
bring governance processes into line with the
rest of the group. As a result, headcount has
increased from 90 to 151 since acquisition
in August 2014 with significant increases
in customer service, the new business
team and IT. In order to accommodate the
increased headcount, we have expanded
our office facilities in Petersfield by utilising
some existing spare capacity in our
current building.
We have continued to invest in our IT
infrastructure during 2015. In particular,
we implemented an enhanced version of our
new business software to ensure our service
levels to brokers’ remains best in class.
We have also invested in server capacity and
resilience to meet the higher standards of the
group and enable us to recover our systems
rapidly in the event of a business continuity
event. More recently, we have installed a new
phone system in order to meet increased
capacity, improve efficiency and continue
to maintain high levels of customer service.
Strategic report 56
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Divisional performance – Moneybarn
3. Financial performance
Moneybarn generated a profit before tax,
amortisation of acquisition intangibles
and exceptional costs of £21.3m in 2015
(2014: £5.8m in the four months post-
acquisition; £15.0m for the 2014 full year
on a pro forma basis restated to apply
the group’s lower cost of funding to pre-
acquisition results).
Moneybarn has performed very well during
its first full year of ownership, delivering an
increase in adjusted profits of 42.0% against
pro forma 2014 profits. Strong growth in
the receivables book together with stable
delinquency have enabled the business to
invest in headcount to support growth whilst
delivering a stable return on assets of 12.9%
(2014: 12.9%).
New business volumes in 2015 have been
strong as the business continues to benefit
from the group’s funding since acquisition in
August 2014. The extension of the product
offering to lend up to retail value and the
reduction in the minimum lend from £5,000
to £4,000 has reinforced primacy amongst
Moneybarn’s broker network. Accordingly,
new business volumes in 2015 were 69%
higher than 2014. Fourth quarter growth
was 28% higher than the comparative period
in 2014 which was the first quarter under
the group’s ownership. Customer numbers
ended December at 31,000 (2014: 22,000).
The strong growth in new business volumes
has resulted in receivables growth of
44.8% to £219.6m at December 2015.
Average new loan sizes have remained
broadly comparable to last year at
around £9,000.
Default rates through 2015 have remained
broadly stable and have enabled the
business to generate a risk-adjusted margin
of 24.3% at December 2015, little changed
from 24.6% at December 2014.
2015 cost growth of 40.5%, was similar
to average receivables growth of 41.2%.
This reflects the continued investment in
the resources necessary to support future
growth, meet higher regulatory standards
under the FCA and bring governance
processes into line with the rest of the group.
Interest costs have shown growth of
31.9% during 2015 compared with average
receivables growth of 41.2%. The lower
rate of growth in interest costs reflects the
retention of profits since acquisition as the
capital base is increased towards the group’s
target gearing ratio of 3.5 times.
Year ended 31 December
Four months
ended
31 December
2015
£m
31
219.6
190.8
55.3
(8.9)
46.4
24.3%
(15.6)
(9.5)
21.3
12.9%
Pro forma1
2014
£m
Change
%
Post-acquisition
2014
£m
22
151.7
135.1
38.0
(4.7)
33.3
24.6%
(11.1)
(7.2)
15.0
12.9%
40.9
44.8
41.2
45.5
(89.4)
39.3
(40.5)
(31.9)
42.0
22
151.7
143.4
13.8
(1.2)
12.6
(4.2)
(2.6)
5.8
Customer numbers (‘000)
Year-end receivables
Average receivables
Revenue
Impairment
Revenue less impairment
Risk-adjusted margin2
Costs
Interest
Adjusted profit before tax3
Return on assets4
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 Adjusted profit before tax is stated before the amortisation of acquisition intangibles of £7.5m (2014: £2.5m) and
an exceptional cost of £nil (2014: £3.9m) in respect of acquisition-related expenses.
4 Adjusted profit before interest after tax as a percentage of average receivables.
Moneybarn – Quarterly growth in
new business volumes (%)
Looking ahead
120
100
80
60
40
20
0
Sep 14
Dec 14
Mar 15
Jun 15
Sep 15
Dec 15
2015 has been an excellent year for
Moneybarn. The exciting opportunities
that have arisen from becoming part
of the Provident Financial group have
enabled us to help more non-standard
credit market consumers get access
to the vehicle they need for everyday
life. The increased volume of new
business written during 2015 is very
encouraging and leaves us well placed
as we enter 2016.
At the group’s Investor and Analyst
Event in April 2015, we announced the
medium-term potential for Moneybarn
as generating receivables of between
£300m and £400m in the medium term.
Our receivables at the end of 2015 of
nearly £220m show we are well on track.
However, we do not view this as an end
position, and our strong performance in
2015, together with further opportunities
to extend our product proposition in 2016
and beyond, leave us very well placed
against this potential.
We are delighted with how Moneybarn
has performed since becoming part of
the group. Our highly scalable platform,
strong broker relationships and quality
and enthusiasm of our management team
and employees gives us confidence that
we will continue to be a very important
contributor to the future growth in the
group’s earnings.
Strategic report
Risk management and principal risks
Provident Financial plc
Annual Report and Financial Statements 2015
57
Risk management
Our risk management framework is firmly embedded
within our management and governance processes,
and incorporates the internal controls processes
set out on page 58. The framework has been
in operation throughout 2015 and continues to
operate up to the date of approval of this annual
report. It 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.
Further insight into the group’s principal
risks, and the management of these is
on pages 62 to 65.
The group 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.
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 the 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 is satisfied that the company’s risk management and
internal control systems are effective and were effective throughout
2015 and up to 23 February 2016. The board does this through the
audit committee, which: (i) reviews the work of the group internal audit
function and the opinion issued on risk and control effectiveness; and
(ii) actively monitors the risk management and internal control systems
on an ongoing basis.
This annual review and ongoing monitoring confirms that the risk
management framework 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,
are in accordance with the FRC’s Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting (‘the
FRC’s Guidance’) and the FCA’s Disclosure and Transparency Rules.
Strategic report 58
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Risk management and principal risks (continued)
Internal control
Monthly management accounts
Monthly management accounts are prepared comparing actual
trading results by division to the board approved 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. 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 policies
The board
The 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 and are due to
be reviewed and updated in 2016.
Internal audit
Regularly 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.
Three lines of defence model
First line
Second line
Third line
Reviews the risk management
framework annually to ensure
that it remains fit for purpose
and complies with relevant
laws and regulations including
the Code.
Risk advisory committee
Chaired by a non-executive
director of the board, it is
responsible for ensuring that
there is an appropriate risk
management framework
embedded across the group.
Risk advisory group
Formally reviews the divisional
risk registers four times a
year, and reports to the risk
advisory committee.
Divisional boards
The 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.
Biannual budget process
In 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 forum including
treasury committee
A 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.
Whistleblowing
Whistleblowing 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 2015, 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 2015, 11 complaints were received,
which is an increase from previous periods
and is the result of an awareness campaign
carried out in 2015 following updates to the
whistleblowing policy and the third-party
provider marketing material. All complaints
made via the external helpline were thoroughly
investigated and dealt with in accordance
with the appropriate internal procedures.
As the Republic of Ireland (ROI) introduced
new whistleblowing legislation in 2014, the
group took this as an opportunity to review
and update its whistleblowing procedures
for both the UK and ROI and to ensure that
employees are aware of the availability of the
external helpline.
Provident Financial plc
Annual Report and Financial Statements 2015
59
Viability statement
In accordance with the 2014 FRC Corporate Governance Code, the
directors confirm that they have a reasonable expectation that the
group will continue to operate and meet its liabilities, as they fall
due, for the next three years. The directors’ assessment has been
made with reference to the group’s current position and prospects
outlined within the strategic report, the group’s strategy (see pages
14 to 17), the board’s risk appetite and the group’s principal risks
and how these are managed (see pages 62 to 65).
The group established its current strategy after the demerger of its
international business in 2007. The strategy is built on a compelling
investment proposition that focuses on delivering to shareholders
a combination of strong returns, an attractive dividend and visible
growth (see page 10).
conditions, new strategies, products, the acceptable performance
of the group’s divisions, the ability to refinance debt as it falls due
and the development of the regulatory environment.
The plan is stress tested in a robust downside scenario as part
of the board’s review of the group’s Internal Capital Adequacy
Assessment Process (ICAAP). Stress testing covers both significant
financial and regulatory downsides. The financial stress test uses
the 2008/09 financial crisis as its basis, and, therefore, reflect a
number of the principal risks of the business through reducing new
funds raised, lowering the deployment of capital and increasing
impairment. The regulatory stress tests are based on fundamental
changes in the business model as a result of regulatory intervention
to control prices or outlaw products.
The strategy and associated principal risks underpin the group’s
three year plan and stress/scenario testing, which the directors
review at least annually.
The three-year plan is built on a divisional basis using a bottom
up model, as part of a five-year budget. The first three years of
the budget plan command the greatest focus, with the later years
produced robustly, but at a higher level. The first three years of the
budget plan therefore forms the basis of this statement. The three-
year plan makes certain assumptions about future economic
The review of the three-year plan is underpinned by the regular
board briefings provided by the divisional managing directors and
the discussion of any new strategies undertaken by the board in
its normal course of business. These reviews consider both the
market opportunity and the associated risks, principally conduct
and credit risk. These risks are considered within the board’s
risk appetite framework.
The directors also considered it appropriate to prepare the financial
statements on the going concern basis, as set out on page 73.
Risk in action
Vulnerable consumers
In February 2015 the FCA published an occasional paper on the
subject of vulnerable consumers, laying out new guidance on
the identification and treatment of anyone “who, due to their
personal circumstances, is especially susceptible to detriment,
particularly when a firm is not acting with appropriate levels of
care.” Launching the paper, the FCA stressed the importance of the
issue and the two key challenges which it considered firms faced:
(i) securing board, as well as executive committee level buy-in for
change; and (ii) making sure senior leader directions are then fully
reflected in a suitably flexible customer experience, accounting
for different needs.
As a result of the new guidance, the review of previous approaches,
the attention of the board’s risk committee and the engagement
of all levels of management, significant progress has been made in
2015 in handling vulnerable consumers. Changes have been made
to the identification and handling of vulnerable consumers, with
specialist resource dedicated to the issue along with the tracking
and monitoring of cases and outcomes. Further refinement has
been identified and planned going forward. The approaches used,
and training delivered has benefited from the expertise of external
bodies specialising in the various drivers of vulnerability, and will
continue to do so.
The key question for the FCA was “How do we bridge that gap
between policy intention on the one hand, and frontline delivery
on the other?”
In response to the paper, each of the group’s divisions began
a thorough review of their own existing vulnerable consumer
policies, procedures, processes, quality control monitoring and
customer outcomes in light of the new clarity from the FCA.
In response to the higher level issues highlighted by the FCA, the
board requested a ‘deep dive’ on vulnerable consumer practices
at the risk advisory committee in October 2015 to fully consider
the issues, progress made and the extent to which the intended
approach was delivered in the frontline. Specific time was set
aside in the committee to discuss the issue and the divisions
prepared materials including case studies of actual customer
situations in order to demonstrate how the challenges were
being addressed. The managing directors and chief risk officers
of the divisions attended the ‘deep dive’ session at the committee
in order to discuss the issues and answer questions from
committee members.
The group business model and products are founded on higher
levels of flexibility and personal contact than prime issuers
to match the needs of non-standard customers. The group’s
approach is naturally suited to dealing sympathetically with the
variety of needs of those who find themselves in difficult personal
circumstances. The challenge is often to ensure consistency and
tracking of customer outcomes, and to be able to demonstrate
that customers with a wide variety of needs have been treated
appropriately in the frontline as intended.
Read more about a vulnerable customer’s support journey on pages 60 to 61
Strategic report 60
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Risk management and principal risks (continued)
Vulnerable customer support journey
New credit card customer
Normal use of credit card
Indication of
potential
vulnerability
Vanquis Bank’s ‘low and grow’ cardholder example
John was delighted to be
accepted for his first
credit card with
a £250 credit limit.
John uses his credit card,
makes repayments,
building a credit history,
qualifying for an increase
in credit limit to £500.
After 18 months, John starts
missing payments.
Contact centre team
During a regular collections call, John
mentions that he has recently had a severe
mental breakdown following a difficult
divorce and family bereavement, and is
finding it difficult to cope with his finances
or anything else at the moment. He is
currently signed-off from work and under
the care of a mental health crisis team.
A member of the contact centre team uses
the TEXAS protocol and with consent,
captures details within the ‘Customer Care’
page. With John’s agreement, they would
like to pass him through to the Specialist
Support team who are better placed
to talk through the appropriate
options available to John.
Vulnerable customer support journey
Vanquis Bank’s ‘low and grow’ cardholder example
Provident Financial plc
Annual Report and Financial Statements 2015
61
Specialist
assessment
Resolution plan
developed
Issues resolved
Based on a full review of John’s
current medical and financial
situation, an affordable payment
plan is agreed which will be
monitored closely by the
Specialist Support team.
John is eventually able to return
to work and resume the
normal use of his credit card,
but has the Specialist Support
number should he need support
again from them.
John is transferred to
a specialist who has
a lengthy discussion with
him about his situation.
Specialist Support team
John’s account is ‘flagged’ as particularly
vulnerable, taking it out of mainstream
collections. John is transferred to a member
of the Specialist Support team who has
a further in-depth conversation with
him about his current situation and what
support he needs.
All of our contact centre team receive initial and ongoing training
to help recognise and deal with possible vulnerable customers.
They use a technique developed by the Money Advise Trust/Royal
College of Psychiatrists – Thank, Explain, eXplicit consent, Ask,
Signpost (TEXAS) – to construct calls. Calls will also be augmented
with ‘Speech Analytics’ monitoring to automatically highlight calls
and cases for review to ensure customers are handled appropriately.
Specialist members of our team are able to offer a range of
forbearance options to help vulnerable customers, dependent upon
their situation and needs. This may include offering breathing space,
short-term or long-term payment plans with interest and charges
reduced or frozen, or in some serious cases, a decision may be taken
that the debt will no longer be pursued.
The ‘Customer Care’ page alerts front-line members of staff in all
business areas that a customer has disclosed and consented to
sensitive information being noted onto their account. This alert
allows our team to tailor their conversation appropriately right
from the start of the call.
We also use external expertise including partnerships with Macmillan,
Shelter, Samaritans and Step Change as well as guidance from the
FCA and the BBA taskforce who are currently considering the issues.
All calls are recorded and monitored. Monthly case studies are
discussed in detail with senior management and any complaints
are analysed and action taken to avoid a repeat of the situation
giving rise to the complaint. Internal thematic reviews are
conducted on specific issues along with group internal audit
and external legal reviews.
Our processes are designed to comply with The Equality
Act 2010, The Mental Capacity Act 2005, CONC, SYSC, TCF,
The Data Protection Act 1998, and EHRC guidelines.
Strategic report 62
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Risk management and principal risks (continued)
Provident Financial Group risk map
d i t
e
r
C
10
8
9
ess
sin
u
B
Customer and co
3
n
d
u
ct
2
1
7
6
R
e
g
u
l
a
t
o
r
y
4
5
17
15
l
a
i
c
n
a
n
i
F
16
18
11
al
n
Reputatio
High
Likelihood
Low
21
19
20
14
P
e
o
ple
13
12
O
p
e
r
a
tional
Principal and emerging risks
1 Conduct
2 Responsible lending
3 Agent/customer relationship
4 UK regulation
5 EU regulation
6 Credit
7 Home credit collections
8 Competition
9 New initiatives
10 Change management
11 Publicity and political
Selected risks discussed in more detail
12 Information security
13 Supplier
14 IT change management
15 Capital
16 Liquidity
17 Pension
18 Tax
19 Remuneration
20 Recruitment and retention
21 Self-employment status
Impact
Likelihood
High/current principal risks
Increase
from 2014
Decrease
from 2014
Low/emerging risks
Provident Financial plc
Annual Report and Financial Statements 2015
63
Risks in more detail
Selected key risks
Risk mitigation
Change and progress in 2015
Relation to
business model
01
02
08
07
06
03
04
05
1. Conduct:
The risk of poor
outcomes for customers
in any of the group’s
divisions.
All divisions have policies, practices and
procedures in place to:
Conduct has remained a central focus of
the FCA.
> Minimise the risk of customers potentially
receiving loans or lines of credit that are
unaffordable or unsustainable.
> Ensure that financial promotions are clear,
fair and not misleading.
> Ensure effective complaints handling.
Regular customer satisfaction surveys are
undertaken in all businesses.
Vanquis Bank has had treating customers
fairly (TCF) principles firmly embedded into
the business since they were introduced by
the FSA in 2007 and CCD has been operating
a first line Customer and Conduct Risk
Committee during the transition to FCA
regulation in order to help embed customers’
interests at the heart of the business.
All businesses have second line risk
committees overseeing all risks, with conduct
issues central to the agendas.
Vanquis Bank also has a second line
compliance committee focused on FCA rules
and guidelines and a customer experience
forum to ensure issues are considered from a
customer perspective.
The risk advisory committee has oversight of
the divisional risk frameworks and devotes at
least half its time specifically to conduct risk.
Divisional compliance functions are in place
which monitor compliance with relevant
regulations and report to divisional boards.
An experienced central in-house legal team
is in place which monitors legislative changes
and supports divisional compliance and
legal functions.
Expert third-party legal advice is taken
where necessary.
Ongoing constructive dialogue is maintained
with regulators and the group plays a full and
active part in all relevant regulatory reviews
and consultation processes.
Group chief executive, Peter Crook, and
Moneybarn managing director, Peter Minter,
are active members of the FCA Practitioner
Panel and FCA Smaller Business Practitioner
Panel respectively.
Customer satisfaction has remained high and
complaints low in all divisions.
FOS rulings in favour of customers remain low
for all divisions, reflecting internal efforts to
resolve any issues that arise quickly and fairly.
Vanquis Bank and CCD have continued to
develop and improve their conduct risk
frameworks and management throughout
the year, including particular focus on the
treatment of vulnerable consumers following
FCA guidance published in February 2015.
Moneybarn has put in place formal conduct
risk management and monitoring processes,
and continues to lead the industry in ensuring
FCA-compliant broker commission structures
and behaviours are in place.
CCD and Moneybarn submitted applications
to the FCA for full authorisation in May
2015, following Vanquis Bank’s application
for a variation in its existing permissions in
December 2014. The group has received
and continues to receive enquiries from
its regulators including the FCA, including
in connection with its requests for its
authorisations and variation of permissions.
The group’s businesses continue to have
a constructive dialogue with regulators,
responding to questions and information
requests. However, the outcome of such
enquiries is inherently uncertain and there
is a risk of a potential adverse impact on
the group.
The FCA introduced a cap on the cost of
High Cost Short Term Credit (HCSTC) in
January 2015. Satsuma is the group’s only
business subject to the cap and continues
to operate within the cap’s constraints, as
it did from launch.
The FCA published the interim report of
its credit card market study in November
2015 noting that consumers were engaged
and open to switching providers and that
competition was working fairly well for
consumers. The FCA is seeking views on
a range of potential remedies to make the
market work better, before consulting on
final proposals to be published in Spring 2016
for consultation.
01
02
08
07
06
03
04
05
4. UK Regulation:
The risk of adverse
regulatory change
and/or failure to comply
with relevant UK
regulatory requirements.
5. EU Regulation:
The risk of adverse
regulatory change
and/or failure to comply
with relevant EU
regulatory requirements.
Strategic report
64
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Risk management and principal risks (continued)
Selected key risks
Risk mitigation
Change and progress in 2015
All businesses have first line credit committees
that set policy and regularly review
credit performance.
All divisions have maintained tight
underwriting standards on both new
and existing customers.
Relation to
business model
01
02
08
07
06
03
04
05
6. Credit:
The risk of suffering
unexpected losses in
the event of customer
defaults.
Comprehensive daily, weekly and monthly
reporting is produced on credit KPIs.
All businesses have non-standard specific
lending experience spanning economic cycles.
Home credit loans are underwritten face-
to-face 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.
Vanquis Bank utilises a welcome call and
‘low and grow’ approach to granting credit
appropriately as the customer demonstrates
sustainability and affordability.
CCD loans are small-sum and short-term in
nature and Vanquis Bank credit card lines are
far lower than mainstream equivalents.
Vanquis Bank’s expertise in collections
and credit assessment has been applied
to Satsuma, glo and Moneybarn.
Ongoing monitoring of all existing markets
and competitors at a group and divisional
level feeding into the biannual budgeting and
strategy review process.
Historic, current and forward looking analysis
of the group’s sectors and the UK non-
standard credit market in general.
Product development frameworks and
business development processes in all
divisions take account of the external
environment and competition.
During 2015, CCD completed full roll-out of
smartphone apps to all home credit agents
which automate and evidence the lending
process for the agent.
Vanquis Bank arrears continued to run
at record lows.
Significant further improvement in credit
quality within home credit.
Moneybarn default rates remained stable.
Continued refinement of Satsuma
underwriting standards, with material
tightening in October 2015.
Competition in UK credit cards remains
consistent with Barclaycard Initial, NewDay
and Capital One all being active. However,
Vanquis Bank has been able to maintain the
flow of new accounts and continue to grow the
business in line with its plan.
Home credit has seen further consolidation
and a new entrant in Non Standard Finance
plc acquiring S&U’s business.
Satsuma’s high-cost, short-term competitors
have reduced in scale, having had to adapt to
a rate cap, a tougher regulatory regime and
go through a number of redress processes
during 2015.
Moneybarn has successfully doubled the
volume of new business since acquisition
having been freed from funding constraints.
Further investment of £5m in developing
Satsuma in 2015, leveraging Vanquis Bank
collections capabilities.
Satsuma is now expected to produce a small
contribution to CCD’s profits in 2016.
Guarantor loans pilot, glo, has confirmed the
potential of a business capable of delivering
the group’s target returns. glo will be rolled
out and, subject to regulatory approval,
transferred from CCD to Vanquis Bank during
2016 where the management capacity and
business skills required to develop the
business are readily available.
Vanquis Bank closed its Polish credit card
pilot, as it was determined that the pilot could
not achieve the group’s target returns in an
acceptable timescale. Vanquis Bank will focus
on the UK market going forward.
.
01
02
08
07
06
03
04
05
8. Competition:
The risk that new or
existing competitors
impact business
performance
unexpectedly.
01
02
08
07
06
03
04
05
9. New initiatives:
The risk that new
businesses and
new initiatives under
development internally
fail, or are delayed in
achieving scale or
expected returns.
Biannual budgeting process.
Annual corporate planning conferences in
CCD, Vanquis Bank and at group level where
current and potential new initiatives are
thoroughly discussed.
Comprehensive daily, weekly and monthly
reporting on performance KPIs.
New businesses and initiatives are subject to
pilot testing phases before full implementation
is approved.
Provident Financial plc
Annual Report and Financial Statements 2015
65
Selected key risks
Risk mitigation
Change and progress in 2015
Relation to
business model
01
02
08
07
06
03
04
05
15. Capital:
The risk that the group
might have insufficient
capital to meet our
regulatory and/or
business requirements
or that regulatory capital
requirements increase
significantly.
01
02
08
07
06
03
04
05
20. Recruitment
and retention:
The risk that the group is
unable to recruit and/or
retain key management
and staff impacting
business performance
The group maintains surplus regulatory capital.
The surplus over the PRA (Prudential
Regulation Authority) capital guidance is
assessed when determining the group’s
actual and budgeted dividend payments
to ensure the buffer is maintained.
Regulatory capital is monitored monthly and
reported through the management accounts
to the Treasury Committee and the board.
All budget and plans assess the impact on
regulatory capital.
The group has a good working relationship
with its supervisor at the PRA.
Senior management and directors from all
key functions are involved in the planning
and production of the ICAAP (Internal Capital
Adequacy Assessment Process) to ensure the
ICG (Individual Capital Guidance) set for the
group and Vanquis Bank is appropriate.
Succession planning is assessed across
all divisions.
A recruitment strategy is established for each
critical role prior to commencing recruitment.
The recruitment process embraces
competency based assessments to assist in
finding the right person for the role.
Continued focus on retention initiatives such
as performance management, development
plans, encouraging internal transfers wherever
appropriate, performance and quality driven
reward frameworks.
Focus on employee turnover levels, exit
interviews, monitoring and identifying
trends, implementing changes to recruitment
and retention strategies as needed.
Regular business updates given to employed
staff as well as forums encouraging open, two-
way communication.
Employee feedback sought by way of an
employee attitude survey.
Turnover, recruitment, and attendance activity
regularly reviewed as part of divisional monthly
MI packs.
The group continues to hold surplus
regulatory capital above the ICG set by
the PRA.
The regulatory environment continues to
be subject to change and IFRS 9, which
introduces expected loss accounting and will
be implemented in 2018, together with the
new Pillar 2 capital buffers implemented under
CRR, will impact regulatory capital levels.
Moneybarn has successfully scaled up
employee levels in key areas to handle a
doubling of new business flows utilising
growth space in current building.
All divisions have a cash-based equity plan
which is intended to provide a long-term
incentive for a population of staff through
deferred bonus arrangements based on
the group’s share price.
The group, CCD and Moneybarn have
successfully recruited specialists to put in
place three lines of defence risk management
and systems and controls required by FCA
rules and guidance (these were already in
place in Vanquis Bank).
Specific areas of challenge in either recruiting
or retaining the right staff across all divisions
have been identified and targeted actions are
underway to address them.
Strategic report
66
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Financial review
Our financial strategy
The group’s strategy to deliver
high returns is underpinned
by the group’s consistent
financial model.
Andrew Fisher
Finance Director
High returns business
Dividend policy
Cover ≥ 1.25x
Gearing
≤3.5x versus
covenant of 5.0x
Growth
Supports receivables
growth of £275m+
The group’s financial strategy is to grow
high-return businesses in order to provide
high shareholder returns.
To support the delivery of the group’s strategy, the
group operates a strict financial model that aligns
dividend policy, gearing and growth plans.
The financial model has been developed, and
applied consistently, 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.
How this works in practice:
> 2015 adjusted pre-tax profit amounts to £293m (prior to the
amortisation of acquisition intangibles and exceptional items
which equates to a profit after tax of £234m (tax at 20.25%);
> Dividend cover in recent years has been around 1.35 times
which amounts to dividends of £173m (£234m/1.35);
> Equity retained in the business to fund growth equals £61m
(£234m less £173m);
> Target gearing ratio of 3.5 times allows debt funding of £214m
(£61m multiplied by 3.5);
> Provides total funding and capital for receivables growth
of £275m (£61m plus £214m); and
> Pre-tax profit in excess of £293m allows dividends to be
increased and receivables growth in excess of £275m.
Provident Financial plc
Annual Report and Financial Statements 2015
67
Table 1: Calculation of ROA
£m
Adjusted profit before tax1
Interest
Adjusted PBIT
Taxation (20.25%/21.50%)
Adjusted PBIAT
Average receivables
ROA
Vanquis
Bank (UK)
185.5
43.1
228.6
(46.3)
182.3
1,157.1
15.8%
2015
CCD Moneybarn
Group
105.4
27.1
132.5
(26.8)
105.7
499.5
21.2%
21.3
9.5
30.8
(6.2)
24.6
292.9
80.0
372.9
(75.5)
297.4
190.8
12.9%
1,851.2
16.1%
Vanquis
Bank (UK)
151.0
39.7
190.7
(41.0)
149.7
967.2
15.5%
1 Prior to the amortisation of acquisition intangibles of £7.5m (2014: £2.5m) and exceptional costs of £11.8m (2014: £7.3m).
2 Restated to apply the group’s lower cost of funding to pre-acquisition results.
CCD Moneybarn2
2014
Group
234.4
77.5
311.9
(67.1)
244.8
15.0
7.2
22.2
(4.8)
17.4
135.1
12.9%
1,623.9
15.1%
103.9
33.9
137.8
(29.6)
108.2
598.5
18.1%
Table 2: Calculation of ROE
£m
Adjusted profit before tax1
Tax
Adjusted profit after tax
Shareholders’ equity
Pension asset
Deferred tax on
pension asset
Hedging reserve
2015
292.9
2014
234.4
(59.3)
(50.4)
233.6
707.7
184.0
613.0
(62.3)
(56.0)
11.2
0.5
11.2
3.3
Proposed final dividend
(117.0)
(91.6)
Adjusted equity
Average adjusted equity
ROE
540.1
510.0
46%
479.9
391.1
47%
1 Stated prior to the amortisation of acquisition
intangibles of £7.5m (2014: £2.5m) and exceptional
costs of £11.8m (2014: £7.3m).
Returns
Delivering high returns remains at the heart
of the group’s financial model to deliver the
group’s strategy.
Management assesses the relative
performance of each business through a
return on assets (ROA) measure. 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. 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.
Table 1 sets out the calculation of ROA in
2015 and 2014.
The table 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 and glo in the
early stages of their development.
Vanquis Bank delivered an ROA of 15.8% in
2015, up from 15.5% in 2014. The benefit
from stable delinquency and operational
leverage has more than offset the impact of
a lower risk-adjusted margin following: (i) 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; and, (ii) lower interchange
income following the European Commission
agreement with Visa to reduce interchange
rates which has had a phased impact in 2015.
CCD’s ROA has strengthened from 18.1% to
21.2% in 2015 as the measures to improve
margins through tighter underwriting and
better collections processes, together with
the cost reduction measures, have generated
a modest increase in 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 glo, enhancing IT 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).
Moneybarn’s ROA has remained stable
at 12.9% (2014: 12.9%), reflecting the
investment in additional headcount to
support future growth, meet the higher
regulatory standards under the FCA and to
bring governance processes into line with
those of the rest of the group.
The group’s overall ROA has increased from
15.1% in 2014 to 16.1% in 2015 primarily
reflecting the improvement in CCD’s ROA.
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
2015 and 2014.
The group’s ROE of 46% in 2015 is marginally
lower than 2014, wholly due to the full-year
impact of the £120m equity raised to fund
the acquisition of Moneybarn in August 2014
to preserve regulatory capital levels.
Strategic report 68
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Financial review (continued)
Table 3: Reconciliation of retail deposits
£m
At 1 January
New funds
Maturities
Retentions
Cancellations
Capitalised interest
At 31 December
Table 4: Committed borrowing facilities
Bank facility
Bonds and private placements:
Senior public bond
M&G term loan
Other sterling/euro medium-term notes
Retail bond 2010
Retail bond 2011
Retail bond 2012
Retail bond 2013
Retail bond 2015
Total bonds and private placements
Vanquis Bank retail deposits
Total committed facilities
Borrowings on committed facilities
Headroom on committed facilities
Retail deposits capacity1
Funding capacity
2015
580.3
225.7
(121.6)
58.5
(19.4)
7.5
731.0
2014
435.1
190.7
(69.7)
26.6
(8.9)
6.5
580.3
Maturity
2018
2019
2016–2021
2018
2020
2016
2017
2021
2023
2016–2020
£m
382.5
250.0
100.0
27.4
25.2
50.0
120.0
65.0
60.0
697.6
731.0
1,811.1
1,588.8
222.3
283.0
505.3
1 Based on the Vanquis Bank intercompany loan from Provident Financial plc of £283.0m as at 31 December 2015.
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.
Provident Financial plc
Annual Report and Financial Statements 2015
69
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 2015 were £1,588.8m compared
with £1,495.3m at the end of 2014.
Borrowings have increased during the
year primarily due to the strong growth in
Vanquis Bank’s UK receivables of £158m and
Moneybarn receivables of £68m during the
year, partly offset by the contraction in the
CCD receivables book of £43m.
At the end of 2015, the group had
committed borrowing facilities of £1,811.1m
(2014: £1,606.8m). These facilities provided
committed headroom of £222.3m as at
31 December 2015 (2014: £111.5m) with
an average period to maturity of 2.8 years
(2014: 3.1 years).
In January 2015, the group exercised its
option to extend the £382.5m syndicated
bank facility by 12 months to May 2018.
New funds were raised through a £60m retail
bond issued on 9 April 2015 at a coupon of
5.125% and a maturity of 9 October 2023.
The only maturity in the year was in respect
of the £6.0m of residual subordinated loan
notes which matured on 15 June 2015.
At the end of 2015, Vanquis Bank had taken
£731.0m of retail deposits, up from £580.3m
at 31 December 2014. A reconciliation of
the movement in retail deposits during
2015 is set out in Table 3. The overall inflow
of new funds through Vanquis Bank’s retail
deposits programme during 2015 of £225.7m
(2014: £190.7m) was appropriately managed
through pricing, reflecting the high level
of headroom on the group’s committed
debt facilities.
There were £121.6m of retail deposit
maturities during the year (2014: £69.7m), of
which £58.5m were retained (2014: £26.6m).
This represents a retention rate of
approximately 48% (2014: 38%), in line with
the positioning of the interest rates offered
during the year.
Rates of between 1.51% and 4.65%
(2014: 1.51% and 4.65%) have been paid
on retail deposits during 2015 and the
overall blended interest rate on the deposit
portfolio in 2015 was 2.9% (2014: 3.2%).
The average period to maturity of retail
deposits at 31 December 2015 was 2.3 years
(2014: 2.4 years).
The total balance held in fixed-term bonds
in the UK 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 £283.0m
at the end of 2015 (2014: £342.2m). 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 2015
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 £505.3m (2014: £453.7m).
Strategic report 70
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Financial review (continued)
Table 5: Performance against bank covenants
Covenant
Gearing1
Net worth – group2
– excluding Vanquis Bank2
Interest cover3
Cash cover4
Limit
< 5.0 times
> £265m
> £140m
> 2.0 times
> 1.1 times
2015
2.2
657.1
302.0
4.8
1.26
2014
2.4
571.6
287.0
4.1
1.31
1 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.
The group has comfortably complied with
these covenants during 2015.
Gearing has reduced from 2.4 times in 2014
to 2.2 times in 2015, 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 strong capital generation,
particularly from Vanquis Bank.
The group’s credit rating was reviewed by
Fitch Ratings in 2015 and remains at BBB
with the outlook being upgraded from
negative to stable.
The group’s strategy
is to invest in
businesses which
generate high
reTurns to support
the group’s high
distribution policy
to its shareholders.
Excluding the retail deposits programme,
maturities on the group’s committed debt
facilities in 2016 represent: (i) the first
instalment of £10m in January 2016 on the
M&G term loan; and (ii) £50m in September
2016 in respect of the retail bonds issued in
2011. Maturities in 2017 are: (i) the second
instalment of £10m in January 2017 on the
M&G term loan; and (ii) £120m in October
2017 in respect of the retail bonds issued
in 2012. After assuming that Vanquis Bank
funds its receivables with deposits, 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 2016.
The group’s blended funding rate in
2015 was 5.9%, down from 6.5% in 2014.
This primarily reflects the lower blended
cost of retail deposits of 3.1% in 2015
compared with 3.4% in 2014 and an increase
in the mix of retail deposit funding, which
represents approximately 46% of the group’s
funding at the end of 2015 compared with
approximately 39% in 2014.
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.
Performance against these bank covenants
at 31 December 2015 and 2014 is set out in
Table 5.
Provident Financial plc
Annual Report and Financial Statements 2015
71
Table 6: Capital generation
£m
Operating cash flow
Interest paid
Tax paid
Net capital expenditure
Add back 80% of receivables growth funded by debt
Capital generated
Analysed as:
– Vanquis Bank
– CCD
– Moneybarn
– Central
Dividends declared
Capital retained
Dividend cover1
1 Prior to the amortisation of acquisition intangibles and exceptional costs.
2015
202.0
(73.0)
(47.5)
(25.6)
134.0
189.9
143.5
65.1
0.2
(18.9)
(173.6)
16.3
1.35
2014
221.5
(72.3)
(44.9)
(17.9)
89.1
175.5
70.2
115.0
(1.3)
(8.4)
(141.3)
34.2
1.35
surplus capital of £16.3m (2014: £34.2m).
Table 6 sets out an analysis by division.
On a divisional basis, Vanquis Bank
generated £143.5m of capital during the
year (2014: £70.2m), showing another
strong year-on-year increase. This reflects
the strong growth in UK profits, elimination
of the Polish start-up losses and a £20m
reduction in the rate of investment required
to support receivables growth. 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 £98m during 2015
and paid a further £69m subsequent to the
year-end. Vanquis Bank has now cumulatively
paid dividends of £250m out of its surplus
capital since it commenced paying dividends
in 2011.
CCD generated £65.1m of capital in 2015,
down from £115.0m in 2014. This reflects:
(i) a lower release of capital from the
shrinkage in receivables (£24m), (ii) increased
capital expenditure supporting the
deployment of technology in home credit
and the development of Satsuma and
glo (£8m); (iii) the timing of tax payments
(£7m); and (iv) increased exceptional
costs. The business continues to be highly
capital generative.
Moneybarn generated £0.2m of capital
in 2015, supporting its own rapid growth.
The business is set to become increasingly
capital generative.
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 to its shareholders. 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.
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 1.35 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 2015, the group generated
Strategic report
72
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Financial review (continued)
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.
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, large
exposures and, with effect from October
2015, liquidity.
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.
The ICG comprises credit, operational,
counterparty and market risk, calculated
using predetermined formulae together with
certain additional capital add-ons to cover
any additional risks.
As stipulated by the Capital Requirements
Directive IV (CRD IV), regulatory capital
equates to equity share capital and reserves
after deducting foreseeable dividends in
line with the current dividend policy 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 2015, the group’s common
equity tier one ratio and leverage ratio were
22.0% (2014: 20.5%) and 16.9% (2014: 15.9%)
respectively. The level of regulatory capital
held by both the group and Vanquis Bank
is 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 has been initially set
at 0% by the Bank of England.
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 Internal Liquidity
Adequacy Assessment Process (ILAAP)
undertaken 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.
As at 31 December 2015, the liquid assets
buffer, including the liquid resources held
against the daily stress tests, amounted
to £134.2m (2014: £121.4m). The increase
during the year reflects the growth in
the receivables book of Vanquis Bank.
Vanquis Bank holds its liquid assets
buffer, including other liquid resources,
in a combination of a Bank of England
Reserves Account and UK government gilts.
CRD IV introduced further liquidity measures,
the Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio (NSFR). The LCR, which
became effective in October 2015, and NSFR,
which will become effective in January 2018,
are applicable to both the group and Vanquis
Bank. These are not expected to significantly
affect the group’s liquidity position.
Provident Financial plc
Annual Report and Financial Statements 2015
73
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.
The group’s prudent accounting policies are
reflected in the impairment policies adopted
across the group.
In Vanquis Bank, Moneybarn and CCD’s glo
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 and Satsuma
businesses 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.
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 2015
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 2015 represents an
effective rate of 20.25% (2014: 21.50%)
on profit before tax, the amortisation of
acquired intangible assets and exceptional
costs, and is in line with the UK corporation
tax rate which reduced from 21% to 20% on
1 April 2015.
The group is expected to benefit in future
years from the further rate reduction to 19%
on 1 April 2017 and to 18% on 1 April 2020
announced by the Government and enacted
in the 2015 Finance Act.
The 2015 Finance Act (No 2) also
incorporated a bank corporation tax
surcharge which imposes an additional
corporation tax of 8% on banking companies.
The surcharge came into force on 1 January
2016 and applies to profits in excess of £25m
attributable to Vanquis Bank only.
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 139 to 144.
Strategic report 74
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Corporate responsibility
Responsibilities and relationships
We have a social purpose and
corporate responsibility (CR) strategy
in place which make clear what
our CR priorities are. This means
continuing to serve our customers in
a responsible manner at every stage
of their relationship with us, and acting
responsibly and with integrity with
all our other stakeholders. By doing
this, we can deliver our mission to be
the leading non-standard lender in
our chosen markets, acting responsibly
in all our relationships and playing
a positive role in the communities
we serve.
Peter Crook
Chief Executive
The strategic importance of CR
We have served the non-standard credit
market since 1880; putting the needs of our
customers at the centre of all we do. CR has
been, and continues to be, an important
part of how the Provident Financial
Group operates.
This commitment to our customers’ needs
is demonstrated by the relationship we have
with them and in the products and services
we develop and deliver. It is also enshrined
in our social purpose and CR strategy
which underline the importance of lending
responsibly to our 2.4 million customers and
managing the other social, environmental
and economic issues that are material to
our business. This encompasses how we
manage our relationships with our other key
stakeholders – including how we treat our
employees, agents and suppliers, as well as
supporting and investing in the communities
we serve – and ensuring that we take our
responsibility to minimise our impact on
the environment seriously.
Our material CR issues
To help ensure that we manage and
report on the CR issues that matter most
to our business and stakeholders, we
undertook an exercise during 2015 to
identify and prioritise our material CR
issues. This was performed to inform
our social purpose and CR strategy, and
to ensure that future CR reports comply
with the Global Reporting Initiative’s G4
reporting guidelines.
We engaged Corporate Citizenship, an
independent sustainability management
consultancy, to reassess the materiality
of our CR issues. This involved desk-
based research to identify and prioritise
current and future CR issues, roundtable
discussions with external stakeholders
and stakeholder interviews, to assess
the importance of each issue. Finally, we
engaged with internal stakeholders to
identify the CR issues most important
from their point of view. The issues
that were identified as a result of the
materiality assessment exercise have
been plotted on the materiality matrix
set out opposite.
Provident Financial plc
Annual Report and Financial Statements 2015
75
Our mission is…
Our social purpose is…
Our CR strategy involves...
…to be the leading non-standard
lender in our chosen markets, acting
responsibly in all our relationships
and playing a positive role in
the communities we serve.
…financial inclusion for those
who are not well served by
mainstream credit products or are
excluded altogether.
…operating our core business
of lending to our customers in a
responsible manner, and acting
responsibly and sustainably in all
our other stakeholder relationships.
This commits us to…
…being a responsible
corporate citizen.
Materiality matrix
Business
Social
Environmental
l
s
r
e
d
o
h
e
k
a
t
s
o
t
e
c
n
a
t
r
o
p
m
I
This commits us to…
This commits us to…
…providing non-standard credit
customers with appropriate
amounts of credit, maintaining
close contact with them throughout
the term of their loan, and working
with them sympathetically if they
experience difficulties. The terms
and conditions are also designed
to meet their particular needs,
and rigorous checks are made to
ensure customers can afford their
repayments. We have been doing
this since 1880.
…putting the needs of our
customers at the heart of
everything we do; creating a
working environment that is safe,
inclusive and meritocratic; treating
our suppliers fairly; supporting
our communities; engaging
with the investment community
on sustainability matters; and
minimising the environmental
impacts of our business.
Responsible lending
practices
Employment
practices
Customer satisfaction
and customer care
Financial inclusion
and well-being
Major social challenges
affecting low-income
households
Community
contributions
Ethical business
conduct
Accountability and
transparency
Governance and
management
Responsible
procurement
Environmental
impact
Diversity and
inclusion
Importance to the business
Strategic report
76
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
CR management and our core business
Measuring and reporting CR performance
The CR strategy which we launched last year is supported by a scorecard which includes a range of qualitative and quantitative metrics
to help monitor our progress in delivering against our strategy.
Provident Financial’s CR strategy scorecard
CR strategy commitment
Key metrics
Operate our core business of lending to our customers in a responsible and sustainable manner,
putting customers’ needs at the heart of everything we do
Be transparent in
how we do business
Treat our customers
responsibly throughout
their journey with us
> Information on products (eg APRs), the role played by agents, tax and governance.
> The percentage of customers surveyed who are satisfied with the service with which
they have been provided.*
> Total number and nature of complaints.
> Total number and nature of complaints referred to the Financial Ombudsman Service
and the proportion which are upheld in favour of customers.
> Impairment as a percentage of revenue.
> Total number of accounts handled by debt collection agencies per annum.
> Total customer-focused training hours undertaken by employees and agents.
Act responsibly in all our other stakeholder relationships
Create a working environment
that is safe, inclusive and
meritocratic
> Workplace diversity.
> The percentage of women in senior management roles.
> Average number of days lost to absence per employee per annum.
> Number of calls made to the group-wide whistle-blowing hotline per annum.
Treat our suppliers fairly
Support our communities
Engage with the investment
community on sustainability
matters
Minimise the environmental
impacts of our business
> Percentage of suppliers paid in accordance with their terms and conditions.
> The amount of money invested in support of community programmes, money advice
and social research.*
> The number of people who directly benefit from Provident Financial’s community involvement activities.
> The number of people supported to develop new skills or improve their personal effectiveness
as a result of Provident Financial’s community involvement activities.
> The number of people who experience a positive impact on their quality of life or well-being through
Provident Financial’s community involvement activities.
> Total number of hours volunteered by employees in community involvement activities.
> Dow Jones Sustainability Indices/FTSE4Good scores, presence within Euronext Vigeo and
Forum ETHIBEL indices, and information on investor engagement activities.
> Total greenhouse gas emissions (reduce Scope 1 and 2 emissions and increase the reporting
of Scope 3 emissions).
> Total energy use (MWh).
> Total waste arising from our activities (tonnes).
* Two of the metrics from this scorecard – customer satisfaction and charitable contributions – are reported in the strategy and performance section of this report see pages 14 to 17.
We also publish a stand-alone, annual CR report which sets out a full account of our performance against all the metrics within
this scorecard.
Our 2015 CR report will be published during the summer of 2016. Information on our CR reports can be found at www.providentfinancial.com
Provident Financial plc
Annual Report and Financial Statements 2015
77
How CR is governed and managed
Overall responsibility for our CR programme
rests with Peter Crook, the Chief Executive.
CR matters are regularly considered by
the board and 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 and Community Affairs Manager,
who are supported by a number of working
groups made up of representatives from our
subsidiary businesses.
Our core business: Lending
responsibly and sustainably
Our social purpose places great importance
on putting the needs of our customers at
the centre of everything we do. Our primary
focus is to serve the needs of the non-
standard credit market – something we have
135 years’ experience of doing. We do this
by delivering credit products that meet the
particular needs of our customers and by
treating them responsibly throughout their
journey with us – from the point at which we
market our products to customers, through
the entire term of their loan, including if they
experience any difficulties along the way,
and even when our credit agreement with
them is over.
Our products and the customers
who use them
Treating our customers
responsibly every step of the way
The Provident Financial Group has been
serving the non-standard credit market since
1880 and, in this time, we have gained a good
understanding of what our customers are
looking for in credit products. This includes:
> 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.
Our products are tailor-made to meet
our customers’ needs – a sensible amount
of credit provided in a transparent,
responsible, sustainable way. All of the
businesses within the group specialise
in offering simple and suitable products
which are delivered in a way which suits
our customers’ particular needs.
Our ‘low and grow’ approach to lending
is a key characteristic of our products; it
enables us to extend small amounts of
credit to customers in a responsible and
prudent manner. Under this approach,
new customers to Vanquis Bank, Provident
and Satsuma receive lower credit limits, or
smaller, shorter-term loans to begin with.
This enables us to observe and understand
the behaviour of our customers before we
consider granting further amounts and also
enables the customers to experience our
products and see if they suit their needs.
We also offer non-standard car finance loans
through Moneybarn. Moneybarn is the UK’s
largest provider in the non-standard, dealer-
purchased, used-car finance market.
Treating our customers responsibly is built
into everything we do – from the way we
market and sell our products and how we
make our lending decisions, to how often
we contact customers and the process we
have for complaints. We have developed
our products to meet our customers’ needs;
creating simple, transparent products with
high levels of forbearance and flexibility.
Developing our digital channels
We have continued to develop digital
channels for customers to initially apply
for their chosen product and service
their needs throughout their relationship
with us both online and through apps
on their smartphones. In addition, the
agents in the Provident business now use
smartphones and apps to maintain their
customers accounts.
In 2015:
> 4m Vanquis Bank customers self-served
over the phone.
> 100% of Provident home credit agents
use smartphones to maintain their
customer rounds.
Dealing with customer complaints
We aim to provide our customers with an
excellent service. This is evidenced through
our high levels of customer satisfaction,
Feefo and Trust Pilot reviews, and the low
levels of customer complaints across all
our businesses.
Customer complaints per 1,000
customers per month:
Vanquis Bank – 1.05
Provident home credit – 1.00
Feefo percentage of customers who
rated the service they receive
as good or excellent and Trust Pilot
review scores:
Provident home credit – 98%
Satsuma – 98%
Vanquis Bank Trust Pilot review – 9/10
Strategic report 78
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Our core business
Vanquis Bank
Provident
Satsuma
In line with our ‘low and grow’ approach
to lending, Vanquis credit limits start as
low as £250 and we only extend a limit if
it is appropriate to do so. Our bespoke
underwriting process has been developed
over the last 13 years and our prudent
approach to risk is reflected in the fact we
only approve around 25% of applications.
Our lending decision is based on both
external credit reference data and our own
scorecards, which have been developed
through our extensive experience.
Once we have approved an application, we
understand that we need to get to know our
customers so that we can put them at the
heart of our business. So, all new customers
receive a welcome call from one of our two
UK call centres and we continue to have high
levels of customer contact throughout the
relationship. Every customer also receives
a welcome pack which outlines their rights
and responsibilities and offers tips on
managing their finances and improving
their credit rating. Customers tell us they
understand their statements and we send
SMS text messages to remind them when
their payment is due. We also follow-up
any missed payments by contacting them
immediately by telephone. The Vanquis Bank
UK contact centre staff respond quickly to
calls from customers and answer queries
efficiently; 81% of calls to us are answered
within 90 seconds.
Our Provident home credit business is
built around the relationship between the
customer and our self-employed agent.
The agent makes the final lending decision
– using central underwriting but also basing
their final decision as to whether to lend on
their personal assessment of the customer’s
ability and willingness to make their
contracted repayments. This relationship
means the customer knows they will get a
sympathetic response should they get into
difficulty. This may take the form of making a
reduced payment, or even missing a weekly
payment altogether, at no extra cost to
them whatsoever.
Our commission structure means that 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. Also, our ‘low and grow’
approach means first-time borrowers
typically receive smaller, shorter-term loans
to give agents the opportunity to observe
and understand the customer’s behaviour.
Our UK contact centre staff are available to
deal with Provident home credit customer
queries. 70% of calls from customers are
answered within 20 seconds.
88%
Vanquis Bank
customer satisfaction
93%
Provident
customer satisfaction
Satsuma is building on the knowledge of
issuing Provident home credit loans and
Vanquis Bank credit cards. We base lending
decisions on external bureau data and our
own scorecard, which enables us to include
behavioural and social data in our credit
decisions. Satsuma also reflects the ‘low and
grow’ approach of both Vanquis Bank and
Provident home credit and maintains high
levels of customer contact.
Satsuma collections processes are handled
by Vanquis Bank’s Chatham contact
centre collections team. This team works
closely with Satsuma customers, including
contacting customers by phone and text
message and working with them to ensure
the best possible outcome for them if they
get into difficulty.
Read more on Satsuma on pages 40 to 43
glo
The longer, larger loans that we offer to
customers through our glo business are
underpinned by a guarantor – typically a
family member or friend of the customer
with a good credit history – who agrees to
guarantee the customer’s loan and pay for
that loan if the customer’s circumstances
change and they cannot afford to make
their repayments.
Both the customer and guarantor are
subject to rigorous affordability checks,
and both are required to co-sign the loan
agreement. As with the group’s other
products, ensuring that glo delivers a
customer-centric approach to forbearance
should the customer get into financial
difficulty is an important part of the way that
the business operates. Other responsible
lending characteristics of the loans offered
by glo include no set-up fees or early
repayment fees and making repayments
through direct debit arrangements.
Read more on Vanquis Bank on pages 26 to 31
Read more on Provident on pages 34 to 37
Read more on glo on pages 44 to 46
Provident Financial plc
Annual Report and Financial Statements 2015
79
Our working environment
The 3,758 people we employ across the
group are key to our ongoing success.
They help us to meet the needs of
our 2.4 million customers, and are
invaluable drivers of new services and
products. As such, our people are an
important stakeholder.
Our continued success relies on having a
talented workforce. To recruit and retain the
best, it is essential we provide our staff with a
safe and inclusive working environment that
encourages everyone to reach their potential,
and develops them to meet their personal
career goals.
We are committed to creating open and
inclusive workplace cultures in which
everyone feels valued and respected. Not
only does our diverse workforce enable
us to deliver existing services, it also helps
inform the development of new or enhanced
products and services, open up new market
opportunities, improve market share, and
broaden our customer base. To help ensure
that there is continual improvement in this
area, we took the decision in 2015 to work
towards the National Equality Standard
(NES). The NES has been launched with the
support of the Equality and Human Rights
Commission and the Confederation of British
Industry. It is the first industry-recognised
national standard for equality, diversity and
inclusion in the UK and has been developed
by Ernst & Young in partnership with 18
large UK employers. It aims to become the
accepted equality standard for business
across the UK.
The NES assessment process includes a
review of policies and practices, identifies
areas for improvement and provides
implementation recommendations.
We continue to monitor and report the
gender split of the group’s workforce.
Proportion of female/male
company directors (%)
Proportion of female/male senior
managers, including executive
directors, directors of subsidiary
businesses and heads of
function (%)
Proportion of female/male
employees (%)
Female
Male
29
71
30
48
70
52
Taking part in the national Equality
Standard will EnablE the group
to undertake a comprehEnsive
asSessmEnt focused on a range of
equality, diversity and inclusion
isSues. This will improve group
performance in thEse areas, ensure
our businessEs comply with all the
elEmentS of The Equality act 2010
and demonstrate lEaderShip in this
fiEld which will Strengthen the
group’s reputation as an employer of
choice and good corporate citizen.
Peter Crook
Chief Executive
Treating our suppliers fairly
However simple our supply chain may be,
we recognise that an important part of our
CR involves treating these suppliers fairly,
and using our purchasing power to procure
sustainable products and services.
In 2015, our annual spend on products
and services was £194.0 million
(2014: £143.9 million). This level of buying
power gives us the potential to encourage
and support our suppliers to become more
sustainable. The majority of the suppliers
we use are based in the UK and Ireland.
We are committed to making prompt
payments to our suppliers as we recognise
that late payment can cause serious
cash flow problems, especially for small
businesses. As such, we endeavour to
pay our suppliers in accordance with the
payment terms we have agreed with them.
Rather than standard payment terms, our
businesses have individually-negotiated
payment terms with each supplier which
are typical of those in the wider market.
In 2015, the group became a signatory
of the Prompt Payment Code. This code
sets standards for payment practices and
best practice, and is administered by the
Chartered Institute of Credit Management.
Compliance with the principles of the
code is monitored and enforced by the
Prompt Payment Code Compliance Board.
The code covers prompt payment, as well
as wider payment procedures. An update
on the performance of the Provident
Financial group of businesses against the
requirements of the code will be included in
the 2015 corporate responsibility report.
Moneybarn
The primary source of our new customer
leads is through a network of well-
established brokers. These brokers 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. 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.
Underwriting at Moneybarn is highly
automated to allow for rapid provisional
approvals. Decisions are based on external
credit data, our own scorecards, and
affordability assessments.
Moneybarn typically requires customers to
pay a deposit. The car is formally owned by
Moneybarn until the final instalment is paid.
Moneybarn also maintains close contact
with its customers over the telephone and
responds to their calls within 70 seconds
on average.
89%
Moneybarn
customer satisfaction
Read more on Moneybarn on pages 52 to 56
Strategic report 80
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Investing in our communities
Supporting our communities
We recognise that we have a significant
responsibility to the communities we serve.
Our financial products and services meet
the specific needs of those who are not
well served, or are excluded altogether,
by mainstream credit providers, thereby
providing a direct social benefit. However,
in our commitment to responsible corporate
citizenship, we also invest in programmes
that support the needs of non-standard
credit customers and those living in the
local communities we serve. As a result,
we invest a minimum of 1% of profit
before tax (as measured under the London
Benchmarking Group’s guidelines) in a
range of programmes which align with
this principle.
The projects we support have a broad geographical spread throughout
the UK and Ireland in addition to a local education project in Kenya.
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 in a project or a
longer-term investment for three years or more. The projects
we support on a longer-term basis are set out on page 83.
United Estates of Wythenshawe
(a Good Neighbour partner)
The United Estates of Wythenshawe was established in 1996 by a group of
Wythenshawe families and local community leaders who were concerned
by increasing instances of anti-social behaviour and the growing destructive
influence of youth street-gang culture, coupled with the desire to prevent a local
landmark building closing its doors for good. The project worked first with hard-
to-reach young people ‘not in education, employment or training’ (NEETS) and is
now open to the whole community. Still under the management of local people,
the organisation is able to provide activities suitable for the very young through
to the elderly, based on their needs. Their approach has meant they have
been able to create a route away from anti-social behaviour, leading to social
responsibility for young people and beneficial results for the whole community.
Our three-year funding pays for the post of the centre manager, as well as
the building of a new outdoor gym. In addition, a group of families were able
to benefit from a trip to Stirling, which we organised through our funding
partnership with the Scottish Youth Hostel Association. The visit gave the
families an opportunity to bond; for most of the children, this was their
first holiday and for many, their first family outing.
Provident Financial plc
Annual Report and Financial Statements 2015
81
Supporting employee giving
We know that our employees want to
support the communities which we serve as
a business. Therefore, in addition to direct
funding for community organisations, we
encourage employee giving in a number of
ways, including matched funding, matched
volunteering hours, and company-led team
volunteering challenges. As a result, staff
feel motivated and have access to personal
development opportunities.
£3.1m
invested in community
programmes, money advice
and social research
in 2015
Support from Vanquis Bank gave
us the opporTunity to diverSify,
increasE our attractivEness to
other funderS, and inTroduce
more programmes to proVide
direct Support for young
people across Kent and medway.
Carol Bentall
Chief Executive, Young Kent
Strategic report 82
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Investing in our communities (continued)
The Money Charity
A long-term partner of the Vanquis Bank Active Community
Programme, the Money Charity delivers financial education
through interactive workshops in schools across the UK. Each
workshop empowers children to build the skills, knowledge,
attitudes and behaviours to make the most of their money.
Through their volunteer programme, the Money Charity trains
and matches employees from Vanquis Bank’s contact centre
in Chatham with local schools to deliver ‘The Volunteer Money
Workshop’. Aimed at 11 to 16 year-old secondary school pupils in
a local area, the workshop covers key financial topics in line with
the National Curriculum, including budgeting and the importance
of savings, and understanding credit.
The programme is a good professional development package for
employees as it provides them with the opportunity to develop
leadership, mentoring and communication skills. In 2015, Vanquis
Bank employees delivered 25 workshops in schools across Kent,
engaging with over 600 students.
In 2016, Vanquis Bank will work with the Money Charity to develop
its relationships further and extend the volunteer programme to
cover its other office sites in Bradford and London.
Community impact in 2015
2015 community investment figures
1 Cash
2 Management costs
3 Value of
employee time
Total
£2,829,013
(2014: £2,103,946)
£229,147
(2014: £257,405)
£40,399
(2014: £53,544)
£3,098,559
(2014: £2,414,895)
42,938
people benefited from the support
provided by the projects we fund
21,780
people accessed new
services and activities
18,872
people developed new skills
as a result of their involvement
in the programmes
Our approach to community
involvement
Through Good Neighbour and the Vanquis
Bank Active Community Programme, we had
committed long-term support (three years
or more) to 50 projects across the UK and
Ireland as at the end of 2015.
Supporting the money
advice sector
As part of our commitment to help non-
standard credit customers, we work with
a wide range of free and voluntary money
advice organisations. Our financial support
enables them to help those who 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 a range
of money advice providers, including:
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 specialised money advice
providers on a range of further financial
education initiatives and help finance
publicly-available, independent research
to help understand the financial behaviour
of those on modest incomes.
123 Provident Financial plc
Annual Report and Financial Statements 2015
83
Local community projects and organisations with long-term funding
Good Neighbour projects (CCD)
1 Boomerang, Dundee
27 Baggator, Bristol
32 Early Focus Project, Dublin
2 Scottish Youth Hostel Association, Stirling
28 St Petrock’s, Exeter
33 Solas Project, Dublin
3 Oasis at Wallacewell, Glasgow
4 The Royal Lyceum, Edinburgh
5 Venchie Children and Young People’s
Project, Edinburgh
6 Made4U in ML2, Wishaw
7 Scholemoor Beacon, Bradford
8 Joshua Project, Bradford
9 Sedbergh Youth and Community Centre,
Bradford
10 The Edge, Bradford
11 Participate Projects, Bradford
12 One in a Million, Bradford
13 Immanuel Project, Bradford
14 Bradford City Women’s Football Club,
Bradford
15 Bradford City Football Club Community
Stand, Bradford
16 Sycamore Project (Zac’s Bar), Bolton
17 Northfield Sports Association, Bootle
18 Yorkshire Dance, Rotherham
19 Harvey Girls, Burton on Trent
20 Sycamore Adventure, Dudley
21 Mowmacre Young People’s Play and
Development Association, Leicester
22 Project for the Regeneration of Druids
Heath, Birmingham
23 United Estates of Wythenshawe,
Manchester
24 The Door, Stroud
25 Youth Network MK CIC, Milton Keynes
26 Ahoy Centre, Deptford
29 Young People Cornwall, Truro
30 REACH Across, Londonderry
31 Hostelling International Northern
34 Ballymun Schools Programme, Dublin
35 Laois Partnership, Portlaoise
36 An Oige, County Wicklow
Ireland, Belfast
37 OLL St Saviours Boxing Club, Limerick
30
31
32 33
34
36
35
37
1
2
3
4
5
6
28
29
16
7
15
14
13
12
11
8
38
10
9
39
40
41
16
17
23
18
19
20
22
21
24
27
42
43
25
44
26
48
47
46
49
50
45
Active Community projects (Vanquis Bank)
38 Bradford Youth Development
42 London Community Foundation, London
48 Phoenix Junior Academy, Chatham
Partnership, Bradford
39 The Outward Bound Trust, Bradford
40 Leeds Community Foundation, Leeds
41 Keighley Cougars Foundation,
Keighley and Bradford
43 Foundation for Social Inclusion, London
49 Byron Primary School, Gillingham
44 The Blue Elephant Theatre, Southwark
50 Kent Community Foundation, Kent
45 Medway Education and Business, Kent
46 Sure Start All Saints, Chatham
47 Sure Start Lordswood, Chatham
In addition, Vanquis Bank also funds the
UK-based charities Friends of the Elderly
and Mencap, as well as Hatua, a local
education project in Kenya.
Strategic report 84
Provident Financial plc
Annual Report and Financial Statements 2015
Strategic report
Investing in our communities (continued)
Young Kent
(a Vanquis Bank Active Community Programme partner)
Young Kent offers support programmes for disadvantaged, disengaged or disabled young
people aged 8 to 25 from across Kent.
One aspect of Vanquis Bank’s work with the charity supports the ‘How to Save a Life’
programme. This programme provides approximately 40 unemployed young people from
disadvantaged backgrounds first aid and emergency lifesaving skills through a partnership
with the British Red Cross. The programme increases confidence, skills and qualifications
whilst also providing valuable work experience. A key element of the programme is that
participants are trained to become first aid Peer Educators. Once qualified, Peer Educators
practise their new skills during work experience, delivering first aid training to other young
people across Kent.
Vanquis Bank also supports Young Kent’s Job Club, which provides support for
unemployed young people from across the county. Job Club sessions provide one-to-one
support with subjects such as CV writing, interview skills, job searching and completing job
applications. The support of Vanquis Bank has also allowed Young Kent to purchase the IT
equipment necessary to run the club.
Bradford is going from
strength to Strength
and the Bradford
literature festival is
a fantaStic way to
amplify the Bringing
together of The
diVerse cultures
and communities
wiThin our city.
Peter Crook
Chief Executive
Our commitment to Bradford
As a company whose historical links to Bradford
stretch back more than 135 years, Provident Financial
is committed to supporting initiatives and events
that complement the city’s ongoing economic
regeneration. To this end, in 2015 we announced that
we would be the principal sponsor of the Bradford
Literature Festival for the next two years. The first
full Bradford Literature Festival was held in May
2015 and attracted nearly 9,500 people to over 150
events over 10 days. Through our support of the
festival for the next two years, we will be helping
to spearhead Bradford’s cultural renaissance and
raise the aspirations and literacy levels of the city’s
many communities.
Engaging the investment
community
A significant part of our approach to
CR is that we share information on our
CR performance to provide evidence to
our investors and other stakeholders
that we are committed to operating in
a responsible manner.
Every year, we provide information on
environmental, social and governance
performance and make submissions to a
number of the mainstream sustainability
indices and established SRI research and
rating agencies. The information we submit
is independently assessed and considered
alongside information from external sources,
such as non-governmental organisations,
scientific institutions and the media.
For example, in 2015:
> Following the June 2015 review by
the FTSE4Good Advisory Committee,
Provident Financial continued to
be included as a constituent of the
FTSE4Good Index series.
> We continued to be included within
the Euronext Vigeo World 120 index
(the 120 most advanced sustainability
performing companies in the European,
North American and Asia Pacific regions),
the Euronext Vigeo Europe 120 index
(the 120 most advanced sustainability
performing European companies) and the
Euronext Vigeo United Kingdom 20 index
(the 20 most advanced UK companies
based on their sustainability performance).
> Following the annual review of the Dow
Jones Sustainability Indices, Provident
Financial retained its place in the two
indices in which it is eligible to be included:
the Dow Jones Sustainability World Index
(DJSI World) and Dow Jones Sustainability
Europe Index (DJSI Europe). This is the
ninth successive year that Provident
Financial has been included in these
two indices.
> We were reconfirmed as a constituent
of the Ethibel Sustainability Index
(ESI) Excellence Forum which is one
of the investment registers managed
and overseen by the Belgian socially
responsible investment (SRI) specialist
Forum ETHIBEL. The ESI Excellence
Forum is composed of companies that are
considered by Forum ETHIBEL to display
the best performance in the field of CR.
Provident Financial plc
Annual Report and Financial Statements 2015
85
We have also extended our reporting
of the GHG emissions relevant to our
business travel activities. This now includes
reporting the GHG emissions that relate
to business travel by the self-employed
agents in our home credit business, the
business-related travel activities of our
employees, and the waste that is collected
and managed from across our business.
We collect this information and then offset
some of these GHG emissions by investing
in renewable energy projects. This enables
us to reduce the carbon intensity of our
business activities.
During 2015, our business-related journeys
accounted for 5,013 metric tonnes of CO2e.
These emissions were offset through the
purchase of Gold Standard carbon credits
in the Samsun landfill gas project which is
located in the Black Sea region of Turkey.
This project captures landfill gas and turns it
into power. The project reduces greenhouse
gases by displacing fossil fuels such as coal
normally used to produce electricity and
capturing methane that would have been
released from the decay of waste disposed
in a landfill site.
Business travel GHG emissions
(tonnes of CO2e)
1 Air travel
2 Rail travel
3 Car travel – own vehicles
4 Company car fuel use
5 Self-employed agent car use
6 Extracting, refining and
transportation of raw fuel
associated with business travel
Total
276
56
1,367
1,119
1,348
847
5,013
We are also legally required to disclose the
annual amount of GHG emissions generated
by our activities. This includes activities for
which we are directly responsible (scope 1
emissions); for us, this relates to our fleet of
company cars and the gas used at our offices.
We are also required to disclose indirect
GHG emissions (scope 2 emissions) from
the electricity we purchase. During 2015,
our scope 1 and 2 emissions and associated
scope 3 emissions accounted for 5,881 tonnes
of CO2e. We have also voluntarily reported
some of our scope 3 emissions; in particular,
indirect ‘well-to-tank’ emissions from the
extraction, refining, distribution, storage,
transport and retail of the fuel we use.
GHG emissions in 2015
(tonnes of CO2e)*
1 Direct CO2 (scope 1)
CO2e emissions
2 Indirect CO2 (scope 2)
CO2e emissions
3 Associated indirect CO2
(scope 3) CO2e emissions
Total
1,405
(2014: 1,797)
3,207
(2014: 3,066)
1,269
(2014: 1,131)
5,881
(2014: 5,994)
Minimising our impact on the
environment
While we may not impact the environment
to the same extent as businesses in other
sectors, the day-to-day operations of our
businesses do have environmental impacts
which we need to manage. We are legally
required to manage and report on some of
our environmental impacts, particularly in
relation to climate change.
The environmental management system
(EMS) we have in place across our business
enables us to systematically manage 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; and
> Identifying opportunities to
continually improve.
Our EMS is audited on an annual basis
against the requirements of the international
environmental management standard ISO
14001. Our head office in Bradford continues
to be formally certified to ISO 14001. In 2016,
we will set a target to get the EMS in our
Vanquis Bank locations in London and
Chatham formally certified to ISO 14001.
* 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.
Measuring and reporting
greenhouse gas (GHG) emissions
We have measured and reported our GHG
emissions for many years. This helps us to
identify opportunities to improve the energy
efficiency of our businesses and minimise
our contribution to climate change. We are
also finding that investors are increasingly
keen to understand the carbon intensity of
our business activities. By measuring and
reporting our emissions, we can do our
part in helping the investment community
to become more aware of the climate
change risks inherent in their portfolios
and achieve better and more sustainable
shareholder returns.
.
5,881
(2014: 5,994) Total scope 1 and 2
(and associated scope 3) emissions
in tonnes of CO2e
2.92
(2014: 3.24) Scope 1 and 2
(and associated scope 3)
intensity ratio (kg of CO2e/£1,000
of receivables)
123234156Strategic report 86
Provident Financial plc
Annual Report and Financial Statements 2015
Introduction from the Chairman
87
88 Our directors and officers
90 Leadership
94 Effectiveness
97 Shareholder engagement
99 Risk advisory committee
102 Audit committee and auditor
106 Nomination committee
108 Directors’ report
Governance
Introduction from the Chairman
Manjit Wolstenholme
Chairman
Dear shareholder
I am pleased to present our governance
report to you for 2015.
During the year, the board had effective
oversight of the operation of the divisions,
made sure there were rigorous and robust
risk management processes and strong
internal controls in place and closely
monitored compliance and other related
areas across the group. In particular, we
strengthened the role of chief risk officer in
each of the divisions and ensured that there
were integrated discussions between the
board and the audit and risk committees.
As part of this process, Stuart Sinclair
was appointed to the board of the main
subsidiaries within the Consumer Credit
Division and Malcolm Le May was appointed
to the board of the companies comprising
Moneybarn. As Vanquis Bank has three
independent non-executive directors, it was
not felt necessary to appoint a non-executive
director from the group board to the board
of Vanquis Bank.
Key highlights for 2016
I have continued to develop my relationship
with the Chief Executive and seek to act as
a sounding board, adviser and confidante.
We held monthly meetings throughout 2015
and I intend to continue with this practice
in 2016.
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’ for a second
year running at the Institute of Chartered
Secretaries and Administrators’ ‘Excellence
in Governance Awards 2015’ for our 2014
Annual Report. We also won the best
Corporate Governance reporting in the FTSE
250 at the PwC Building Public Trust Awards
in 2015. It is our aim and intention to uphold
this high standard of reporting in this year’s
corporate governance report.
Following the publication of the FCA
Occasional Paper: 8 Consumer Vulnerability
in Financial Services, in February 2015,
the board, through the risk advisory
committee, carried out a review of the
vulnerable consumer processes, policies
and procedures in each of the divisions.
Further details are set out on pages 59
and 99.
We have also taken measures to improve
risk governance including, in particular,
strengthening the role of the group internal
audit function following an external review
undertaken with the assistance of PwC.
As a consequence, we extended the
group internal audit function to cover all
the divisions including Vanquis Bank and
widened the skill base and experience of the
function to support a group internal audit
work plan. This provides clearer visibility
of the Vanquis Bank audit activity to the
audit committee and aligns the structure
of the group internal audit function with the
guidance issued by the Chartered Institute
of Internal Auditors.
Provident Financial plc
Annual Report and Financial Statements 2015
87
UK Corporate Governance Code
Corporate governance determines the
allocation of authority and responsibilities
and aligns corporate culture, corporate
activities and behaviour with all applicable
laws and regulations. I am pleased to report
that we have complied in full with the
principles and provisions of the UK Corporate
Governance Code which was published in
September 2014 (the Code). A copy of the
Code can be found at www.frc.org.uk
Board evaluation
A number of action points arose from our
internal board evaluation in 2014 which were
reported on in last year’s annual report.
Progress against these action points is set
out in more detail on page 95 of this report.
An internal board evaluation was undertaken
in December 2015 and I am pleased to
report that the scores were high with the
lowest score being in relation to appropriate
prioritisation and governance of succession
planning which the board has addressed in
2015 and will continue to prioritise in 2016.
It was pleasing to note that the scoring
recognised that the board was continuing
to evolve, relationships were developing
and that different views around the board
table were being taken into account.
There was, however, some concern raised
over the quality of the information and
presentations included in the meeting packs
and the adequacy of the briefings from the
committees, which we intend to address
during 2016. Further information about
this is set out on page 96.
Board composition
Following a formal performance evaluation
that I carried out in October 2015,
the nomination committee agreed to
recommend to the board the extension
of Stuart Sinclair’s term of appointment
by three years. The committee’s
recommendation was based on Stuart’s
recent and relevant financial experience,
his knowledge of the group and the fact
that his length of tenure creates a balance
with the two 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
October 2015.
Manjit Wolstenholme
Chairman
23 February 2016
Governance 88
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Our directors and officers
Peter Crook (52)
Andrew Fisher (58)
Manjit Wolstenholme (51)
Malcolm Le May (58)
Chief Executive
Finance Director
Appointed to the board: 2006
Appointed to the board: 2006
Chairman:
Executive committee and group
executive committee
Committee membership:
Executive committee and group
executive committee
Independent non-executive
Chairman
Appointed to the board: 2007
Committee membership:
Risk advisory committee
Key achievements:
Key achievements:
Chairman:
> Successfully addressed the succession
issues at Vanquis Bank by recruiting
Chris Sweeney to replace Michael
Lenora as Managing Director following
his retirement.
> Oversaw the entry of the group into
the FTSE 100 Index.
> Integration of and support for the
non-executive directors who joined the
boards of two of the group’s divisions.
> Provided strategic input into the future
growth options for Vanquis Bank.
> Provided strategic input into the
FCA full authorisation and change
of permission application processes
being undertaken by the divisions.
Previous board and management
experience:
UK managing director, Barclaycard.
Current external appointments:
Non-executive director of Cabot
(Group Holdings) Limited.
> Oversaw the creation of a group
Nomination committee
internal audit function.
> Oversaw the group’s discussions with
the Prudential Regulation Authority
(PRA) on regulatory requirements.
> Recruited a new Director of Corporate
Finance and Development.
> Effectively managed the ongoing
relationship with ‘Fitch Ratings’, the
group’s rating agency.
> Implemented a revised investment
strategy for the group’s defined benefit
pension scheme in conjunction with
the trustees.
Previous board and management
experience:
Finance director of Premier Farnell plc
and partner at Price Waterhouse LLP.
Current external appointments:
None.
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,
partner at Gleacher Shacklock and
non-executive director of Aviva Investors
Holdings Limited.
Current external appointments:
Non-executive director of Future plc, the
Unite Group plc, CALA Group (Holdings)
Limited and CMC Markets plc.
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, 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 independent director of IG
Group Holdings plc, non-executive
director of Hastings Group Holdings
plc, governor of Twyford School, senior
advisor to Ernst & Young and to Heidrick
& Struggles, and partner at Opus
Corporate Finance and Juno Capital LLP.
Provident Financial plc
Annual Report and Financial Statements 2015
89
Alison Halsey (60)
Stuart Sinclair (62)
Rob Anderson (57)
Ken Mullen (57)
Independent non-executive director
Independent non-executive director
Independent non-executive director
Appointed to the board: 2014
Appointed to the board: 2012
Appointed to the board: 2009
Committee membership:
Committee membership:
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.
Remuneration committee, risk advisory
committee and nomination committee
Remuneration committee, audit
committee and nomination committee
Chairman:
Audit committee
Key strengths:
Chairman:
Risk advisory committee
Key strengths:
> 34 years with KPMG specialising
> Extensive experience in the financial
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 Cambian
Group plc, Aon UK Limited, Credit
Suisse International and Credit Suisse
Securities (Europe) Limited.
services market in the UK and
overseas.
> 10 years’ experience in US-based
management consulting, 14 years’
experience as CEO or equivalent in
retail banking organisations and seven
years’ experience on the boards of
financial services companies.
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, non-
executive director at Liverpool Victoria
and TSB plc and council member of the
Royal Institute for International Affairs
(Chatham House).
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 Lloyds Bank plc,
Lloyds Banking Group Limited, Bank of
Scotland plc and HBOS plc.
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 exercises, through a
combination of internal and external
legal resources, on two potential
acquisition targets.
> In his capacity as chairman of the
Trustees, renewed the investment
strategy of the group’s defined benefit
pension scheme which has resulted in
a significant de-risking of the scheme’s
assets and the creation of a hedging
strategy in respect of two key risks
faced by the scheme: interest rate
fluctuation and changes in the level
of inflation.
> Close management of the group’s
regulatory relationships, both in the
UK and Ireland.
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.
Governance
90
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Leadership
I have structured
the board in terms of
leadership, sIze and
use of committees
to enable it to
effectively carry out
its oversight role and
other responsibilIties.
Manjit Wolstenholme
Chairman
This report looks at the board and its
members, their role, their performance
and their oversight. It also looks at
director induction, succession planning,
independence and effectiveness.
An effective board is pivotal to the
company’s long-term success and viability.
The board is ultimately responsible for the
business strategy and financial soundness
of the group and for establishing a
governance structure and practices which
facilitate effective decision making and
good governance.
The board sets the tone at the top and
oversees management’s role in fostering
and maintaining a sound corporate and risk
culture. This includes clearly laying out the
key responsibilities and authorities of the
board itself and of senior management and
of those responsible for the risk management
and control functions.
The board also plays a key role in establishing
the group’s culture and values and in
ensuring there is not excessive risk taking
within the group. The structure of the group
is driven by both top down board leadership
and bottom up management involvement
and the board continually assesses whether
the senior management’s collective
knowledge and expertise remain appropriate
given the nature of the business and the
group’s risk profile.
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 having
considered the available distributable
reserves and regulatory capital requirements
of the group; 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 controls.
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
functions 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 two executive directors only.
Governance framework
Group board
Executive committee
Comprises the two executive
directors and is chaired by the
Chief Executive. The committee
deals with matters relating
to the general running of
the group.
Audit committee
See pages 102 to 105 for
more information.
Risk advisory committee
See pages 99 to 101 for
more information.
Remuneration committee
See pages 121 to 122 for
more information.
Nomination committee
See pages 106 to 107 for
more information.
Provident Financial plc
Annual Report and Financial Statements 2015
91
In 2015, 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 all the
discussions. For the first time, the Managing
Director, Commercial Director and Finance
Director of Moneybarn were also in
attendance. The agenda included:
> A facilitated discussion on the general
macro-economic environment and the
non-standard consumer credit market
in which the group operates;
> A facilitated discussion on the implications
of the UK General Election result in so
far as it has an effect on the operation
of the group;
> A presentation and discussion on what
younger generations want and expect
of their employers and careers;
> A review of the overall group strategy
including a consideration of group
strategic choices;
> Consideration of a range of potential
acquisition targets;
> Discussion on the strategic options for
the future development of the home credit
business of CCD; and
> Discussion on the future strategic options
for the development of Vanquis Bank.
The chairman of each board committee
reports to the board on the matters
discussed at each committee meeting.
Greater involvement in evaluating and
promoting a strong risk culture in the
organisation 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 group’s risk
appetite, the nature and extent of the risks
facing the group, including the framework
to mitigate such risks and notifies the
board of changes to the status and control
of risks. The committee has continued to
take measures during 2015 to improve risk
governance, including the commissioning of
detailed reviews on conduct matters such as
how the divisions are addressing the needs
of vulnerable consumers.
In addition, the group has detailed corporate
policies which are explained on page 58
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 99, 102 and 106 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 directors’ remuneration report, on
pages 113 to 132.
The right team
The board held eight meetings in 2015.
Individual director attendance is set out
in the table below.
The board has overall responsibility for
the group’s governance framework, for
corporate culture and for the group’s
strategic objectives, including approving and
overseeing management’s implementation.
As part of that process and, as in previous
years, an annual two-day corporate planning
conference (CPC) was held off-site 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 the senior management
team where appropriate.
Attendance at board and committee meetings
Total number of meetings in 2015
Manjit Wolstenholme
Peter Crook
Andrew Fisher
Malcolm Le May
Rob Anderson
Alison Halsey
Stuart Sinclair
Board
Audit
committee
Nomination
committee
Remuneration
committee
Risk advisory
committee
Percentage
attended
8
8
8
8
8
8
8
7
4
–
–
–
4
4
4
3
3
3
–
–
3
3
3
2
6
–
–
–
6
6
6
4
4
4
–
–
4
4
4
4
100%
100%
100%
100%
100%
100%
80%
Governance
92
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Leadership (continued)
Board composition
Key board discussions
and actions in 2015
JAN
FEB
MAY
JUN
JUL
SEP
OCT
DEC
> Consideration of the future of the Vanquis
Bank Polish pilot and a decision to commence
a process to exit from the Polish market.
> Review and approval of a revised investment
strategy for the group’s defined benefit
pension scheme.
> Presentation by the group Head of Tax on
current issues and the group tax policy.
> Review of the group’s talent for succession
planning purposes.
> Review of the 2014 Annual Report
and Financial Statements.
> Review, update and approval of the
£2,000,000,000 Euro Medium Term
Note Programme.
> Acceptance of the recommendation from
the nomination committee to extend Rob
Anderson’s term of office to 30 March 2018.
> Review of non-executive directors’ fees.
> Review of a potential acquisition opportunity.
> Review and approval of non-executive
appointments to divisional boards.
> Further review of the group’s talent
for succession planning purposes.
> Establishment of a group internal audit
strategy and creation of an expanded
centralised group function.
> Review of the Interim Management Statement.
> Consideration of a potential acquisition target
and review and approval of a term sheet.
> Review and approval of the 2015
budget update.
> Consideration and approval of the draft
output of the CPC.
> Approval of the group’s internal capital
adequacy assessment process (ICAAP).
> Consideration of a potential acquisition target.
> Approval of the Interim Report.
> Approval of two external appointments
requested by the Chairman.
> Acceptance of the recommendation from
the nomination committee to extend Stuart
Sinclair’s term of office to 31 October 2018.
> Review and approval of new lease terms for
the Vanquis Bank contact centre in Chatham.
> Approval of the Interim Management Statement.
> Review of the internal board evaluation.
> Review of non-executive directors’ fees
and independence.
> Review and approval of the 2016 budget
and profit plan 2016–2020.
Executive director
Non-executive director
Company Secretary
The board comprises the Chairman, two executive directors, four independent
non-executive directors and the Company Secretary. Their responsibilities
are summarised in the table on page 93. The names of the directors and the
Company Secretary together with their full biographical details, including the
skills and experience they each bring to the board, can be found on pages 88
and 89. 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 and
for its effective functioning, whilst the Chief Executive manages and leads
the businesses through their senior management teams.
At each main meeting
Discussion:
Chief Executive’s report
Acquisition opportunities
Trading results and key performance indicators (KPIs)
Finance Director’s report
Management accounts and financial commentary
Divisional operational reports
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
Implementation of actions agreed at previous meetings
Sector experience
1 Financial services
2 Retail
3 Other
3
2
1
Tenure
1: 0–3 years
2: 3–6 years
3: 6+ years
72%
14%
14%
2
2
3
3
1
2
Provident Financial plc
Annual Report and Financial Statements 2015
93
Roles
The Chairman
> Chairs the board, the nomination committee and the AGM.
> Sets the board meeting agendas with the Chief Executive and Company
Secretary to ensure that they are aligned with strategic objectives and
that the board devotes its time and attention to the right matters.
> Encourages and promotes critical discussion and ensures dissenting
views can be freely expressed and discussed within the decision
making process.
> Ensures board decisions are taken on a sound and well-informed basis.
> 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.
Manjit Wolstenholme is also a non-executive director of
Future plc, The Unite Group plc, CALA Group (Holdings)
Limited and CMC Markets plc. 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 2016. She dedicates
sufficient time to the exercise of her responsibilities.
The Chief Executive
> 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.
Peter Crook also chairs the divisional boards of CCD
and Moneybarn, and until 29 January 2016, chaired
the board of Vanquis Bank.
Executive
directors
> 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 responsibility
agenda of the group.
> Responsible for all matters affecting the performance of the group.
> Responsible for implementation of strategy, policies, budgets and the
financial performance of the group in a manner consistent with the
business strategy, risk appetite and other procedures approved by
the board.
> Provide specialist knowledge and experience to the board.
> Responsible for the successful leadership and management
of the 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.
> Monitor and review the performance of the executive directors.
> Bring experience and knowledge from other sectors which is of
relevance to the group.
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.
Company
Secretary
> Acts as a sounding board for the other directors and confidant 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 performance evaluation.
> Responsible to the board.
> Ensures the information sent to the board is fit for purpose and
facilitates effective discussions.
> Provides comprehensive practical legal support and guidance
to directors, both as individuals and collectively.
> Provides support for 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.
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
retail consumer experience as detailed on pages 88
and 89.
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.
Stuart Sinclair’s term of appointment has been
extended for an additional three years, subject
to shareholder approval at the 2016 AGM.
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 wide ranging public company and corporate
experience.
All directors are able to consult with Ken Mullen as
the Company Secretary, 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 is facilitated by the
Company Secretary.
The appointment and removal of the Company
Secretary is a matter for the board.
Governance 94
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Effectiveness
What does effectiveness mean to the company?
Board members are qualified, individually and collectively, for their
positions. They understand their oversight and corporate governance
responsibilities and are able to exercise sound objective judgement
about the affairs of the group. The balance of the board in terms
of skills, diversity and expertise is commensurate with the size,
complexity and risk profile of the group.
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.
Induction of new directors
On appointment, to help board members
acquire a good understanding and
knowledge of the group’s businesses and to
enable them to fulfil their responsibilities,
they are required to participate in a
comprehensive induction programme which
introduces them to the group’s businesses
and its senior management.
The programme includes individual
meetings with the executive directors and
the Company Secretary; meetings with the
divisional boards and senior management
teams in each division; spending a day at one
of the CCD branches; and meeting 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, skills and experience.
Ongoing training is arranged to suit their
specific needs and the Chairman periodically
reviews and agrees with each director
their training and development needs.
Following last year’s report, the Chairman
has put in place individual development
plans for each of the non-executive directors
which focus on areas where they can add
value to the key strategic matters facing the
group. In addition, the board requested,
through the Chief Executive, that as part
of the group’s succession plan, action was
in hand to create personal development
plans for those divisional and corporate
office employees who were identified as
high potential individuals through the group
talent review exercise carried out by the
board during 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 considers and reviews 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, the ability of the
director to provide objective challenge to
management and each director’s other
material commitments.
Each of the five non-executive directors
was formally determined by the board in
December 2015 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 than 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 has determined that there are no
current or past matters which are likely to
affect their independent judgement and that
there have been no material changes since
the determination was made.
Provident Financial plc
Annual Report and Financial Statements 2015
95
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
Board evaluation 2014
place to deal with situations where a director
has an actual or potential conflict of interest.
Each director abstains from approving their
own reported and potential conflicts, and as
part of these procedures the board:
> Keeps records and board minutes on
authorisations granted by directors and
the scope of any approvals given; and
> Regularly reviews conflict authorisations.
> Considers each conflict situation
separately based on its particular facts;
> Considers any potential conflict situation
in conjunction with the other duties of
directors under the Act;
The board has complied with these
procedures during the year.
Following the internal board evaluation in 2014, a summary of the board’s progress against the actions that arose is set out below:
Actions
Progress/outcomes
1. Continue to develop and extend the board’s work on
succession planning, which will include consideration of high
potential individuals and their development in the business.
The board carried out a group talent review at its meetings in February and May
and requested that the Chief Executive ensure personal development plans were
established for divisional and corporate office employees who were identified as
high potential individuals as part of the group talent review. This is a continuing
action which was also identified in the 2015 evaluation.
2. Consideration to be given to complementing and
strengthening the board’s existing skill set.
The Chairman has put in place personal development plans for the non-executive
directors and will continue to keep under consideration the need to strengthen
the board’s existing skill set through the recruitment of a board member with
digital and technology skills. This is a continuing action which was also identified
in the 2015 evaluation.
3. Continue to encourage interaction between the
non-executive directors and the businesses and
senior management.
Various meetings and events took place during 2015 which fostered more extensive
contact between the non-executive directors and the senior management of the
businesses, which included an on-site board meeting at Moneybarn followed by
a lunch with all the staff.
4. Improvements to the board agenda to ensure that there is a
substantial element of strategy discussed, more discussions
on broader topics, more variety in presentation and themes
and less ‘run of the mill’ reporting.
During 2015 a number of strategic issues were discussed at the board meetings,
with some of the discussion being facilitated by external parties including potential
acquisitions, future funding options for the group and the group talent review.
5. Further integration of the CPC output required.
A summary of the output from the 2015 CPC was presented at the board meeting in
June 2015 and progress on identified actions was considered and approved. This is a
continuing action which was also identified in the 2015 evaluation.
6. Consider the board’s visibility and control over the divisions,
whilst allowing FCA approved persons within the divisions to
fulfil their responsibilities.
Within the group structure, the board is aware of the material risks and issues which
might affect the group as a whole and, during 2015, it considered various alternative
governance structures to ensure it could exercise adequate oversight of the divisions,
while respecting the independent legal and governance responsibilities that apply to
its subsidiary boards. Work has commenced, but is not yet completed, to establish
a corporate governance framework with clearly defined roles and responsibilities,
including those at the parent company level and at the subsidiary level, as may be
appropriate, based on the complexity and significance of the divisions.
Stuart Sinclair was appointed as a non-executive director of the companies
comprising CCD and Malcolm Le May was appointed as a non-executive director
of the companies comprising Moneybarn in order to further enhance the board’s
oversight of these divisions.
Governance 96
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Effectiveness (continued)
Board evaluation 2015
Following the internal board evaluation in 2014, this year’s evaluation of the board, its committees, individual directors and the Chairman
was also carried out internally in December 2015, by way of a detailed questionnaire.
The results of the evaluation were discussed by the board as a whole at its meeting in December 2015, and at the committee meetings in
December 2015 and January and February 2016. 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 the internal evaluation in 2014, and also identified a number of areas for further improvement.
Areas
1. Overview
Progress
The board overall scored well, either meeting or exceeding
requirements.
Action points
No significant actions were identified.
2. Role of directors and
the board
The board scored well and exceeded requirements on acting
effectively. The board gave excellent feedback on the role of
the Company Secretary.
It was felt important that the board maintains a clear and
rigorous process for identifying, assessing and selecting
board candidates.
3. Board composition
4. Non-executive
directors
5. Executive
directors
6. Board meetings
7. Monitoring
performance
8. Information
The board unanimously felt that additional skills would be
beneficial as the group evolves in the technology and digital
sphere. It was also agreed that a sufficient amount of time
had been spent on succession planning in 2015, and that this
should remain a priority for 2016.
The board was extremely satisfied with the non-executive
directors’ contribution to the board’s effectiveness. In 2015,
the non-executive directors continued to have discussions
without the executive directors present which were
considered to be beneficial.
The board agreed that the executive directors have a strong
and balanced relationship and that they have a broad range
of skills. Their effectiveness was determined to be at a very
high level.
The board and the nomination committee should continue
to look at succession planning as a priority in 2016.
Consideration should be given in the future to recruitment
of a board member with technology and/or digital skills.
No significant actions required.
No significant actions required.
The board agreed that its meetings were effective but that
there was still a need for a stronger link to the output from
the CPC and to strategy in general.
The timing, content and scope of meetings will be kept under
review, particularly regarding the monitoring of the output
from the CPC.
The board agreed that the monthly financial and operational
performance reporting was very comprehensive but that it
should include more information on the important issues
that require discussion.
The board agreed to keep under review the content and
format of presentations and background information
provided for decisions.
The board agreed that this was a particular area that
had significantly improved over recent years but thought
there was still a lack of information between board meetings
on occasions.
The executive directors agreed to ensure that more
information, particularly on key or strategic issues, would be
provided in the form of a regular update between meetings
in 2016 as required.
9. Leadership and culture
10. Corporate governance
11. Committees
The board, excluding the Chairman, agreed that the
Chairman demonstrates effective leadership, allows
everyone to contribute and summarises actions, decisions
and the nature of the debate very well. She is well respected
and has a strong relationship with the Chief Executive and
other board members.
The board agreed that it continues to maintain a high
standard of corporate governance but thought that there
could be more briefings on emerging topics.
Overall, the committees scored well and met the
requirements of the board. The board agreed that there had
been an appropriate level of focus on customer and conduct
risk but felt risk management methodology required better
alignment across the group.
No significant actions were identified.
The executive directors agreed to ensure that going forward
there are effective briefings on any emerging topics.
It was agreed that the following improvements would be
implemented: greater alignment of risk reporting across
the group; greater links between risk and remuneration;
and a continued focus on succession planning.
Board evaluation 2016
In accordance with the requirements of the Code, an externally facilitated board evaluation will be carried out in 2016.
Governance
Shareholder engagement
Provident Financial plc
Annual Report and Financial Statements 2015
97
Key themes discussed with shareholders in 2015
Provident home credit
> Levels of disposable income and confidence in the
Satsuma and glo
> Development of underwriting at Satsuma and glo.
customer base.
> Competitive environment in online short-term credit and impact
> The point at which the contraction in customer numbers and
on business volumes.
receivables stabilises following completion of the repositioning
of home credit into a smaller, better quality, more cost-
efficient business.
> Impact of regulation on High-Cost Short-Term Credit.
> Progress with glo and rationale behind decision to roll-out in 2016.
> Next stages of development for the business.
Moneybarn
> Growth in new business volumes.
Vanquis Bank
> Medium-term growth targets.
> Development of product proposition and distribution channels.
> Competitive environment.
> Progress in building an infrastructure to support growth
> Focus and outcome of the FCA credit card review.
in the business.
the primary objective
of corporate
governance should
be safeguardIng
shareholder and other
stakeholder Interests.
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 engages
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 and was
included in a shortlist of four in 2013 and
2014. The group has also been awarded
the ‘Excellence in Financial Reporting in the
FTSE 250’ for two consecutive years at the
PwC Building Public Trust Awards.
Specific information on the 2015 IR
programme can be found in the calendar
on page 98. 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.
Management continually strives to
produce an award-winning, clear and
transparent annual report which provides
shareholders with a complete picture
of the group.
> The corporate website – provides
investors with timely information on the
group’s performance as well as details
of the group’s corporate responsibility
(CR) activities. In 2015, a full refresh of
the website was undertaken to improve
its look and feel and to ensure that the
website was fully accessible from either
a PC, tablet or smartphone without the
need for a separate mobile app.
> 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 most recent investor
day took place at Vanquis Bank’s London
headquarters on 16 April 2015 and was
very well attended. The next investor day
is likely to be held in spring 2017, subject
to newsflow.
Governance 98
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Shareholder engagement (continued)
> 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.
> US and European roadshow programmes –
allows overseas investors better access to
management, enabling them to receive the
same access to information as investors
in the UK. Usually attended by the Chief
Executive, the Finance Director and the
Head of IR.
> Attending broker conferences –
management regularly attend and
present at various conferences hosted
by brokers to ensure that a wide variety
of shareholders, including those from
different geographies, have access
to management.
> An annual CR report – a stand alone report
clearly demonstrating the significant
importance placed on corporate
responsibilities within the group.
> Responding promptly – the group is
committed to responding 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 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 both in his capacity
as senior independent director and as
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
through an annual perception audit and
reviewed by the board. The group collates
broker feedback from roadshows to present
in the IR board report and 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 board members
are available to answer any shareholders’
questions. Facilities are also available
for shareholders to submit questions in
advance of the meeting and to cast their
votes electronically or by post. Details of
the proxy votes cast are made available
by means of an announcement to the
London Stock Exchange and on the group’s
website. In the event that, in the opinion of
the board, a significant proportion of votes
have been cast against a resolution at any
general meeting, the company will explain
when announcing the results of voting what
action it intends to take to understand the
reasons behind the vote result. It is the
company’s policy to give shareholders in
excess of 20 working days’ notice of the
AGM and with regard to any other general
meeting, the company will provide at least
14 working days’ notice of the meeting.
The Notice of the 2016 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 2016 AGM are set
out on page 112 of the Directors’ Report.
AGM
JAN
FEB
Investor relations
programme in 2015
Shareholders are invited each year to
attend the AGM, where the board members
are available to answer any questions
> Trading statement.
shareholders may have. Facilities are
also available to shareholders to submit
questions in advance of the meeting and
> Preliminary results
to cast their votes electronically or by
announcement.
post. Details of proxy votes cast are made
> London and Edinburgh investor/
available by means of an announcement
to the London Stock Exchange and on the
group’s website. It is the company’s policy
> Dublin roadshow.
to give shareholders in excess of 20 working
days’ notice of the AGM and the Notice of
the 2016 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 2016 AGM are set out on page [•••] of the
Directors’ report.
> Investor & Analyst Event
(Vanquis Bank, London).
sales team roadshows.
MAR
APR
> AGM and Q1 IMS.
> US investor roadshow
MAY
JUN
JUL
SEP
OCT
NOV
DEC
(Chicago, Boston and New York).
> KBW UK Challenger Banks
Conference.
> Shore Capital UK Specialist
Lending Seminar.
> Interim results announcement.
> London and Edinburgh investor/
sales team roadshows.
> KBW UK Growth Bank
conference.
> Q3 IMS and analysts call.
> Zurich and Geneva roadshow.
> US investor roadshow
(New York and Chicago).
> JP Morgan ‘Best of British’
Conference.
> Berenberg European Investor
Conference.
> Citi ‘Diversified Financials’
Conference.
Find out more online – we publish
our results and presentations
on our investor website at
www.providentfinancial.com
Risk advisory committee
Provident Financial plc
Annual Report and Financial Statements 2015
99
Accountability
As part of the overall corporate governance framework,
the board has ultimate responsibility for overseeing a
strong risk governance framework and determining
the nature and extent of the principal risks it is willing to
accept to achieve its strategic objectives. The board is
also responsible for maintaining a sound system of risk
management and internal controls, in accordance with
the Code.
The risk advisory committee assists the board by taking
an active role in defining risk appetite and monitoring
the risk management and internal control systems
across the group.
Risk advisory committee
Members
Attendees by invitation
Stuart Sinclair (Chairman)
Peter Crook
Alison Halsey
Malcolm Le May
Manjit Wolstenholme
Rob Anderson
Andrew Fisher
David Mortlock
(Head of Group Internal Audit)
David Merrett
(Director of Corporate Strategy
and Risk)
The managing director and
chief risk officer of each division
also attend meetings of the
committee to discuss customer
and conduct risk and related
governance issues.
Secretary
Ken Mullen
Risks are identified, monitored and controlled on an
ongoing group wide and individual divisional basis.
The sophistication of the group’s risk management
and internal control infrastructure needs to keep
pace with changes to the group’s risk profile, to the
external risk landscape and to the requirements
of the regulatory environment.
Stuart Sinclair
Risk advisory committee chairman
Governance in action
Risk management
A substantial number of changes were
made to the committee during 2014, which
were reported in last year’s Annual Report
and Financial Statements.
During 2015, the committee assumed
responsibility for the review of the group’s
management of customer and conduct
risk and related governance, as part of
its wider remit to review and monitor
risk management across the group.
The principal purpose of the committee in
this regard is to monitor the effectiveness of
the divisions in establishing and maintaining
frameworks, policies and procedures to
identify and manage customer and conduct
risk and related governance. This ensures
that customers’ needs are at the heart of
divisional and group objectives and that
there is a fair deal between the divisions and
their customers.
The committee also recommends an
overall group customer and conduct risk
appetite, culture and tone for approval by
the board.
The time allocated for committee meetings
has been significantly extended to allow
a full review to be undertaken of each
division’s conduct risk framework and their
conduct risk governance policies.
During 2015, the committee received
regular reports from the managing director
and the chief risk officer of each division
on: (1) how customer and conduct risks
were being managed within divisional and
group appetite; (2) on current or emerging
conduct risk issues that the board and
committee should be aware of; and (3) on
the key conduct risk issues that have been
discussed at divisional level. In addition,
the committee carried out a review of the
processes, policies and procedures in
each of the divisions in relation to the FCA
requirements on vulnerable consumers.
This review was to ensure not only that
there was compliance with the FCA
requirements and that consumers were
being treated with the appropriate level
of care, but also to ensure that the FCA
requirements on vulnerable consumers
had been considered in the context of
the current statutory framework in the
UK in relation to data protection, equality,
privacy and discrimination.
Further details on the review of the
vulnerable consumer processes, policies
and procedures in each of the divisions are
set out on page 59 of the strategic report.
Governance 100
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Risk advisory committee (continued)
An effective risk
governance framework
requires robust
communication within
the group about
risk, both across
the orgAnisation And
through reporting
to the board and
senior management.
Stuart Sinclair
Risk advisory committee chairman
Role and responsibilities of
the risk advisory committee
The risk advisory committee’s principal
purposes are to recommend an overall
customer and conduct risk appetite,
culture and tone for approval by the board
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:
> Carrying out a robust assessment of the
principal risks facing the group, including
those that would threaten its business
model, future performance, solvency or
liquidity. A description of the principal
risks and the actions taken to manage or
mitigate those risks are set out in detail on
pages 57 to 65 of the strategic report;
> Reviewing the group’s capability to
identify and manage new risk types, and
keeping under review the effectiveness
of the group’s internal control and risk
management systems in conjunction with
the audit committee;
> Reviewing the group’s identification
of current and forward-looking
risk exposures;
> Reviewing the group’s business
continuity plans;
> Notifying the board of any changes in the
status and control of risks; and
> Reviewing and approving the ICAAP stress
testing and capital allocation approach for
submission to the board for approval.
Update on 2015 activities
During 2015, the risk advisory committee:
> Updated its terms of reference to reflect
its responsibilities in relation to customer
and conduct risk and related governance
and to reflect the attendance of the
managing directors and chief risk officers
for the discussion on these matters at
committee meetings;
> Assisted Moneybarn in developing a risk
register, risk profile and supporting risk
dashboards in a format consistent with
the other divisions within the group;
> Commissioned a detailed IT review across
the CCD and Vanquis Bank divisions and
discussed the output;
> Updated the group risk management
framework and group risk appetite
to include customer and conduct risk
management and related governance and
customer outcomes;
> Undertook the activities set out in the
calendar on page 101;
> Recalibrated the overall group risk appetite
to the 2015 budget; and
> Updated the corporate policy on
risk management.
The group is exposed to changing
regulatory requirements as its activities
change and develop. Consequently, the
committee received regular updates of
known and anticipated regulatory changes
and challenged management’s approach
to preparing for and implementing
new requirements.
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 58.
This risk management framework has been
in operation throughout 2015 and continues
to operate up to the date of approval of this
annual report. This framework is the process
by which group-wide compliance with laws
and regulations, the reliability of the financial
reporting process (including in relation to
the preparation of consolidated accounts)
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 internal control and risk management
systems. Through the risk advisory
committee, it reviews the assessment of risks
and the risk management frameworks.
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 the divisions
and the group in the management of risk
and ensures in particular that customer
Provident Financial plc
Annual Report and Financial Statements 2015
101
Risk advisory committee key items in 2015
At each meeting, the committee:
> Reviewed the key group risks.
> Reviewed and discussed the financial risk review.
> Reviewed the overall risk management status of the group.
> Reviewed the risk appetite status across the group.
> Reviewed the quarterly internal audit opinion on risk
management reporting.
> Reviewed the divisional customer and conduct risk frameworks
and appetite.
> Considered and accepted updated terms of reference.
JAN
> Reviewed and approved the revised group risk appetite framework,
risk management framework and risk profile.
> Approved the changes to the CCD risk management framework.
> Considered the internal board and committee evaluation.
> Received a presentation on and discussed the IT risk review.
> Reviewed the ICAAP approach and methodology and recommended
MAY
approval to the board.
> Requested a review be undertaken on the approach to vulnerable
consumers in each division.
> Reviewed the ICAAP, including the Vanquis Bank recovery and resolution
JUL
plan and agreed to recommend approval to the board.
> Discussed the output of the initial review report on Satsuma.
> Reviewed an update on divisional risk management developments.
OCT
> Reviewed the output of the vulnerable consumers review carried out
by each of the divisions.
outcomes remain central to the group’s risk
management programme.
The board is satisfied that the group’s risk
management and internal control systems,
including in particular the financial reporting
processes, were effective throughout 2015
and up to 23 February 2016 and continue to
be so. The board does this through: (1) the
risk advisory committee, which carries out
a robust assessment of the principal risks
facing the group and (2) the audit committee,
which reviews the work of the group internal
audit function and the opinion issued by the
group internal audit function on risk and
control effectiveness. The audit committee
actively monitors the risk management and
internal control systems on an ongoing basis.
This annual review and ongoing monitoring
confirms that the internal control and risk
management 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 management
and control culture was identified across the
group 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 board believes the process and the key
elements of the internal control and risk
management systems, including in particular
the financial reporting processes, are in
accordance with the FRC’s Guidance on Risk
Management, Internal Control and Related
Financial and Business Reporting (‘the FRC’s
Guidance’) and the FCA’s Disclosure and
Transparency Rules.
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.
Further insight into the group’s principal
risks, and the management of these
can be found on pages 57 to 65 of the
strategic report.
Effectiveness
The committee formally considered its
effectiveness in 2015 at its meeting in January
2016. On the basis of the internal board
and committee evaluation undertaken,
the overall view was that it was working
effectively to fulfil its responsibilities
and duties and no significant actions
were identified.
Governance 102
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Audit committee and auditor
Audit committee
Members
Attendees by invitation
Alison Halsey (Chairman)
Manjit Wolstenholme
Malcolm Le May
Stuart Sinclair
Rob Anderson
Peter Crook
Andrew Fisher
Gary Thompson (Group
Financial Controller)
David Mortlock (Head of Group
Internal Audit)
Deloitte LLP (External Auditor)
Secretary
Ken Mullen
Through regular reporting to the board, the audit
committee provides assurance on the quality and
effectiveness of the group’s system of internal
controls and the long-term soundness of the group.
Alison Halsey
Audit committee chairman
Annual statement by the chairman
of the audit committee
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 Lab’s
‘Reporting of Audit Committee’s Guidance’,
after completing a full year as the chairman
of the audit committee.
This report summarises the activities of the
audit committee and its key responsibilities and
for the first time, confirms compliance with the
Competition and Markets Authority’s Statutory
Services Order.
Update on 2015 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 2015 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
> Considered the findings within the report
in light of current trading performance and
expected future performance; and
> Considered the work performed by
the group 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 payments have
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.
Deloitte on validating the data used in
the testing performed by management and
their challenge of the assumptions used;
Judgement is applied on whether past
payment performance is a good indication
of how a customer may pay in the future.
Provident Financial plc
Annual Report and Financial Statements 2015
103
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 group 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 company’s
external actuary, Willis Towers Watson,
propose the appropriate assumptions and
calculate the value of the retirement benefit
asset. The committee considered the work
performed by Deloitte on the valuation
and their views on the suitable ranges of
assumptions based on their experience.
Annual impairment review
of goodwill
In accordance with IFRS 3 ‘Business
Combinations’, the goodwill of £71.2m arising
on acquisition of Moneybarn in August 2014
is subject to an annual impairment review.
The impairment review is conducted by
comparing the discounted estimated future
cash flows of Moneybarn with the carrying
value of goodwill in the financial statements.
Management apply judgement in: (i) deriving
the forecast cash flows of Moneybarn; and (ii)
establishing the appropriate discount rate to
apply to the forecast cash flows.
In assessing the reasonableness of
the impairment review of goodwill,
the committee considered a detailed
paper produced by management on the
methodology adopted. 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 2015
has been the requirement to provide the
board with an assurance that the content of
the Annual Report and Financial Statements
2015, 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 2015 including:
> The full and effective assessments by the
divisions of any customer and conduct
risks and the oversight of this by the risk
advisory committee;
> The early involvement of the committee in
the preparation of the Annual Report and
Financial Statements which enabled it to
provide input into the overall messages
and tone;
> The input provided by divisional and group
senior management and the process
of review, evaluation and verification to
ensure balance, accuracy and consistency;
> The reviews conducted by external
advisors appointed to advise on
best practice;
> The regular review of the group
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:
> The key judgement papers prepared by
management covering the impairment of
receivables in CCD, the annual impairment
review of goodwill and going 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 reflect the issues
which are of concern to the committee;
> A verification process dealing with the
factual content of various aspects of the
Annual Report and Financial Statements;
> The comprehensive reviews undertaken
at different levels in the group that aim to
ensure consistency and overall balance;
and
> The comprehensive review by the senior
management team.
Internal audit
The group operates an in-house group
internal audit function which is managed
by the Head of Group Internal Audit with
specialist services provided by third-party
consultants where necessary. The group
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 Group
Internal Audit on a quarterly basis.
In 2015, a strategic review of the internal
audit resource across the group was
undertaken and it was agreed to create a
group internal audit function that would
encompass all divisions within the group
and therefore provide a more consistent
and balanced overview of the group to
the committee.
Governance 104
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Audit committee and auditor (continued)
External auditor
The committee considers the reappointment
of the external auditor, including the rotation
of the audit partner, annually. This includes
an assessment of the independence of the
external auditor and an assessment of the
performance in the previous year. This is
achieved primarily through a questionnaire
and scorecard which is completed by key
stakeholders involved in the annual and
half-yearly audit process, including the heads
of finance in each of the divisions. The scores
and results of the questionnaire are collated
and shared with the external auditor and an
action plan to address any areas of concern
identified is agreed.
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 four years.
The group carried out a rigorous audit tender
in June 2012 and as a result of the tender,
Deloitte were appointed 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 it is satisfied
with the quality of the services provided.
As part of that process, it has agreed to
recommend to the board the reappointment
of Deloitte as auditor and a resolution to this
effect will be proposed at the 2016 AGM.
In accordance with the Code, the external
audit contract will be put out to tender at
least every 10 years.
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 each of its meetings, the committee has
a separate session with the external auditor
without any executive director or employee
of the 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 external auditor for non-audit
work. This policy is reviewed annually by
the committee.
The award of non-audit work to the external
auditor is managed in order to ensure that
the external 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 external
auditor is clearly to be preferred over
alternative suppliers.
The group maintains an active relationship
with at least three 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 external auditor
was the preferred supplier.
No information technology, remuneration,
recruitment, valuation or general consultancy
work may be awarded to the external auditor
without my prior written approval and
such approval is only given in exceptional
Composition of the committee
The other members of the committee
during 2015, 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 88 and 89. Both Malcolm and
I have considerable recent and relevant
business and financial experience as
evidenced by our biographical details which
are also set out on these pages.
The role of the committee
General
The primary function of the committee is
to assist the board in fulfilling its oversight
responsibilities by monitoring the integrity
of the financial statements of the group
and other financial information before
publication and reviewing the significant
financial reporting judgements contained
in them. 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 group internal
audit function and the external auditor.
> Assisting the board in assessing the
company’s ongoing viability, the basis of
the assessment and the period of time
covered;
The ultimate responsibility for reviewing and
approving the Annual Report and Financial
Statements remains with the board.
> Reviewing and monitoring the external
auditor’s independence and objectivity
and the effectiveness of the audit process;
Specific
The committee is also specifically
responsible for:
> All matters relating to the appointment
and reappointment of the external
auditor, including the audit engagement
partner, and recommending to the
board all external auditor appointments
and reappointments;
> The external auditor’s remuneration
and the policy on the supply of non-
audit services to the company by
the external auditor;
> Initiation and oversight of any tender
process in relation to the appointment
of an external auditor;
> Negotiation of the scope and fee for
the audit;
> Approving the group internal audit plan
annually;
> Keeping under review the effectiveness
of the group’s systems of internal control
and risk management by considering
group 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 pages 100 and 101 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 2015
105
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 external auditor may not perform
internal audit work. External specialist
resource for the group internal audit function
is provided by KPMG LLP.
Where Deloitte has been used in 2015
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.
Fees paid to Deloitte for non-audit work
during the year amounted to £438,000
(2014: £823,000) comprising £65,000 for the
group interim review, £46,000 for the review
of profits for regulatory reporting purposes,
£243,000 for other projects, £70,000 for
advice on retail bonds and £14,000 for
agreed upon procedures work throughout
the year.
Effectiveness
The committee formally considered its
performance and effectiveness in 2015.
This was undertaken as part of the internal
board and committee evaluation process.
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 questionnaire.
On the basis of the evaluation undertaken,
the overall view was that the committee was
operating efficiently and effectively and no
actions were identified.
I will be available at the AGM in May 2016
to answer questions on the work of
the committee.
Alison Halsey
Audit committee chairman
23 February 2016
Audit committee key items in 2015
> Annual Report and Financial Statements
FEB
– Review of the CCD receivables valuation carried out by management.
– Review and approval of the going concern paper which confirmed it was appropriate to
prepare the Annual Report and Financial Statements for the year ended 31 December
2014 on a going concern basis.
– Review of the calculation of goodwill and intangible assets on the acquisition
of Moneybarn.
– Review of full year results and the form and content of the draft Annual Report and
Financial Statements.
– Discussion with the external auditor without any executive director or employee
being present.
– Review of the preliminary results for the year ended 31 December 2014.
– Review of the statement on internal controls.
> Recommendation to the board regarding reappointment of the external auditor.
> Review of:
– The internal audit activity report;
– A paper confirming the independence of the external auditor;
– A schedule of audit and non-audit fees paid to the external auditor for the financial year;
– A fraud report for the three month period ended 31 December 2014;
– An external report on the group wide internal audit function; and
– The annual opinion on risk management and internal control effectiveness prepared
by the group internal audit function.
> Review of Interim Results
– Review of CCD receivables valuation.
– Review of interim results.
– 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 2015 on a going
concern basis.
– Review of the report from the external auditor.
– Review of the interim results announcement.
– Discussion with the external auditor without any executive director or employee
being present.
> Review of:
– An external report on the group internal audit function and associated actions
including a review of the status of the transition of the Vanquis Bank internal audit
function to the group internal audit function;
– The internal audit activity report;
– The effectiveness of the external auditor; and
– A schedule of fees paid to the external auditor.
> Review and approval of a contract between the company and Vanquis Bank for the
provision of internal audit services by the group internal audit function.
> Review of:
– The external auditor’s planning report for the forthcoming year end;
– A schedule of fees paid to the external auditor; and
– The internal audit activity report.
> Discussion with the external auditor without any executive director or employee
being present.
> Review and approval of the 2016 internal audit plan.
> Review of:
– The internal audit activity report;
– The annual report on external whistleblowing activity;
– The register of benefits received by directors;
– The committee’s performance and effectiveness; and
– The report from the Vanquis Bank audit committee chairman.
> Review and approval of the updated terms of reference for the committee.
> Review and approval in principle of the group internal audit charter.
> Update on the proposed themes for the 2015 Annual Report and Financial Statements.
> Consideration of the audit update report from the external auditor.
> Meeting with the external auditor without any executive director or employee
being present.
JUL
OCT
DEC
Governance 106
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Nomination committee
Nomination committee
Members
Attendees by invitation
Manjit Wolstenholme
(Chairman)
Alison Halsey
Malcolm Le May
Rob Anderson
Stuart Sinclair
Peter Crook
Secretary
Ken Mullen
The nomination committee analyses the role and
responsibilities of the board members and the
knowledge, experience and competence which
the role requires. The committee strives to ensure
the board is not dominated by any one individual
or group of individuals.
Manjit Wolstenholme
Chairman
All the non-executive directors are members of
the nomination committee which 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 continue the
development of its succession planning
processes which, following the group talent
review carried out in 2015, will be extended to
include the creation of personal development
plans by the divisions and the corporate office
for certain high potential individuals identified
during the process.
Role and responsibilities
> Regularly reviews the structure, size and
composition (including skills, knowledge,
experience and diversity) of the board, and
makes recommendations to the board for
any changes to its composition to ensure it
remains appropriately refreshed;
> Fully considers the succession planning
requirements for directors and the senior
management team to ensure that succession
is managed smoothly and effectively;
> Keeps under review the leadership needs
of the group, with a view to ensuring it
remains competitive in the marketplace;
> Identifies and nominates to the
board candidates who are assessed
as having sufficient time to devote
to their prospective responsibilities
to fill board vacancies;
> Evaluation of the balance of skills,
the results of the board and committee
performance evaluation process.
Nomination committee key items
in 2015
> Reviewed the group senior management
succession plan and talent review
prepared by the Chief Executive;
> Recommended to the board the
reappointment of Rob Anderson and
Stuart Sinclair as non-executive directors
of the board; and
> Requested that the Chief Executive ensure
that each division and the corporate office
prepare a personal development plan
for those individuals identified as high
potential individuals through the group
talent review.
Diversity
knowledge, experience and diversity on
the board before any appointments are
made 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 and considers the performance
and effectiveness of the committee through
The group recognises the importance of
diversity, including gender diversity, at all
levels of the group, as well as at board level.
The group believes that diversity amongst
directors helps contribute towards a high
performing and effective board. The board
strives to recruit directors from different
backgrounds, with diverse experience,
perspectives, personalities, skills and
knowledge and uses the nomination
committee to ensure this is achieved.
In the case of non-executive directors, the
selection process is designed to ensure
there is independence of mind given the
specific responsibilities of the non-executive
directors on the board. For more information
about the board’s composition, see page 92.
The nomination committee and the group
as a whole is committed to increasing
diversity across all the group operations
and supporting the development and
promotion of talented individuals, regardless
of gender, nationality or ethnic background.
The board has been 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 I am pleased to report the
board has had 29% female representation
since 2014.
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 board also notes the
challenge in Lord Davies’ final report to
aspire to 33% female representation on the
board by 2020. The nomination committee
will, however, continue to recommend
appointments to the board based on
merit. The board remains committed to
strengthening the pipeline of senior female
Provident Financial plc
Annual Report and Financial Statements 2015
107
appropriately balanced range of skills,
experience and technical ability so that
the group is well placed to achieve its
objectives and long-term strategy in the new
regulatory environment.
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 his/her duties to the company,
including, where appropriate, chairing
a committee.
The board will consider all requests for
permission to accept 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.
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 to the company. 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 and
determined by the board.
Effectiveness
At its meeting in February 2016 the
committee formally considered its
effectiveness in 2015, and on the basis of the
internal board and committee evaluation
which was undertaken, the overall view was
that the committee was working effectively
and had made good progress in developing
a succession plan which included the
identification of high potential individuals
through the group talent review.
Manjit Wolstenholme
Nomination committee chairman
23 February 2016
executives within the group and is satisfied
that there are no barriers to women
succeeding at the highest levels within
the group.
We have previously reported that the group
was also committed to achieving a target
of 25% women within the wider senior
management population by 2015 and we are
pleased to report that as at 31 December
2015, 30% of the group’s senior management
are female.
Last year we reported that despite the
progress that has been made, the committee
was conscious that the divisional boards
were considerably lacking in female
representation. The committee looked at this
over the course of 2015 and will continue to
review this in 2016.
In support of our policy on diversity, we
will continue to operate in accordance with
the following principles and initiatives that
promote gender and other forms of diversity
amongst the 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 process.
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 knowledge, skills and experience
are being sought. The committee intends
to support the group’s diversity policy
within its succession planning activities
by continuing to ensure that the levels of
female representation within the senior
management teams across the group is
maintained and, where possible, improved
during the course of 2016.
The nomination committee will continue
its work of ensuring there are appropriate
succession plans in place across the group
and a suitable mix of skills and experience
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 within the divisions safeguards
the pipeline of talented individuals within
the group who are capable and have
the potential to succeed the executive
directors and other members of the
senior management team in the short,
medium and long term. The committee
also monitors candidates externally to
ensure that the board is continuously
refreshed and strengthened in any areas of
perceived weakness.
With a greater emphasis on developing
internal candidates, the Chief Executive
prepared a report on the talent within the
group following the acquisition of Moneybarn
which was reviewed by the board in February
and May 2015 and also by the committee in
May 2015. The report identified the potential
successors for senior management positions
(taking into account the group’s policy on
diversity), the talent pool across the group
and areas where external recruitment may
be required. The Chief Executive is in the
process of arranging for the divisions and
the corporate office to prepare personal
development plans for the high potential
individuals who have been identified through
the process for review by the committee
in 2016.
Board composition
The board
1 Male
2 Female
71%
29%
Overall senior management
1 Male
2 Female
70%
30%
As the board continues to work towards
securing FCA authorisation for each
division, the committee will ensure
that the board composition retains an
1212Governance 108
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Directors’ report
Introduction
In accordance with section 415 of the Companies Act 2006, the directors
present their report for the year ended 31 December 2015. 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 22 to 56);
> Greenhouse gas emissions (page 85);
> Risk management (pages 57 to 65).
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.
Directors
Directors’ indemnities
The membership of the board and
biographical details of the directors are given
on pages 88 and 89 and are incorporated
into this report by reference.
The company’s Articles permit it to
indemnify directors of the company (or of
any associated company) in accordance with
section 234 of the Companies Act 2006.
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 760,488 shares
to 147,173,935 shares at 31 December
2015. Details are set out in note 25 to the
financial statements.
The company’s issued ordinary share capital
comprises a single class of ordinary share.
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 year, 760,488 ordinary shares
in the company with an aggregate nominal
value of £157,628, were issued as follows:
> 323,218 shares in relation to the Provident
Financial Long Term Incentive Scheme
2006 at a price of 2,726p;
All directors served throughout 2015 and up
to the date of signing of the Annual Report
and Financial Statements. There were no
changes in directors in 2015.
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
company’s Articles. In accordance with the
recommendations of the Code, all directors
will offer themselves for reappointment at
the 2016 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.
The company may fund expenditure incurred
by directors in defending proceedings
against them.
> 180,860 shares in relation to the Provident
Financial Performance Share Plan (2013) at
a price of 2,726p; and
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) any liability
incurred by the directors 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 was
provided and no payments pursuant to these
provisions were made in 2015 or at any time
up to 23 February 2016.
> 256,410 shares in relation to the employee
share option schemes at prices ranging
between 656p and 1,644p.
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:
(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.
Provident Financial plc
Annual Report and Financial Statements 2015
109
Substantial shareholdings
In accordance with the Disclosure and
Transparency Rules DTR 5 the company,
as at 19 February 2016 (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
Woodford Investment Management
Limited (UK)
BlackRock Investment Management
Limited
M&G Investment Management
Limited (UK)
15.17%
9.55%
7.27%
5.29%
Marathon Asset Management (UK)
4.90%
Interests as at 31 December 2015 were
as follows:
Invesco Limited
Woodford Investment Management
Limited (UK)
BlackRock Investment Management
Limited
M&G Investment Management
Limited (UK)
Marathon Asset Management (UK)
14.83%
8.73%
6.97%
5.04%
4.84%
Note: all interests disclosed to the company in
accordance with DTR 5 that have occurred since
19 February 2016 can be found on the group’s website:
www.providentfinancial.com
Directors’ interests in shares
The beneficial interests of the directors in
the issued share capital of the company
were as follows:
Dividend waiver
Information on dividend waivers currently
in place can be found on pages 127 and 128.
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 2015
AGM. The board is seeking renewal of these
powers at the 2016 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).
In 2015 we launched a new savings-related
share option scheme for employees resident
in the Republic of Ireland; the Provident
Financial Irish Savings Related Share Option
Scheme 2014.
Share schemes are a long-established and
successful part of the total reward package
offered by the company, encouraging and
supporting employee share ownership.
The company operates three savings-related
share option schemes aimed at encouraging
employees’ involvement and interest in the
financial performance and success of the
group through share ownership.
Number of shares
31 December
2015
31 December
2014
Around 1,093 employees were participating
in the company’s save as you earn schemes
as at 31 December 2015 (2014: 1,246).
Peter Crook1
Andrew Fisher1
Rob Anderson
Manjit Wolstenholme
Malcolm Le May
Stuart Sinclair
Alison Halsey
532,374
346,677
4,178
5,663
–
–
–
629,669
411,870
4,047
5,663
–
–
–
1 These interests include conditional share awards
granted under the LTIS, awards under the 2013
PSP and shares purchased under the SIP as
detailed on pages 127 to 131 of the Annual Report
on Remuneration.
No director had any non-beneficial interests
at 31 December 2015 or at any time up to
23 February 2016.
There were no changes in the beneficial or
non-beneficial interests of the directors
between 1 January 2016 and 23 February 2016, except
for the automatic monthly purchases under the SIP.
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.
283 employees were investing in company
shares under the SIP as at 31 December 2015
(2014: 285).
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 the Provident Financial Performance
Share Plan (2013) (the 2013 PSP).
As set out on page 126 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 in 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 either purchases shares in the market
or subscribes 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 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 27 on page 183 of the
financial statements.
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, and the legal interest
is only transferred on vesting. 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 page 123 of the directors’
remuneration report.
In February 2015, the EBT subscribed for
the issue of 323,218 new shares in order to
satisfy the awards made under the LTIS and
180,860 shares in order to satisfy the awards
made under the 2013 PSP.
Governance
110
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Directors’ report (continued)
As at 31 December 2015, the EBT held the
non-beneficial interest in 2,556,478 shares
in the company (2014: 2,535,307). 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.
For the purposes of the financial statements,
the BAYE Trust is consolidated into the
company and group. Participants in the SIP
can direct the trustee on how to exercise
its voting rights in respect of the shares it
holds on behalf of the participant, As at
31 December 2015, the BAYE Trust held the
non-beneficial interest in 28,499 shares.
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 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 2015, the PF Trust had
no interest in any shares in the company
(2014: 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, any loans
are eliminated and the cost of any shares
acquired is deducted from equity. As the PSP
expired in July 2012, no further awards under
the PSP and no further loans to the PF Trust
have been made since then.
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 page 129 of the directors’
remuneration report.
The Provident BAYE Trust (the BAYE Trust) is
a discretionary trust which was established
on 9 May 2013 to operate in conjunction with
the SIP. The trustee, YBS Trustees, is not a
subsidiary of the company. The BAYE Trust
is funded by loans from the company which
are then used to acquire ordinary shares
via market purchase to satisfy the matching
awards to participants of the SIP.
Profit and dividends
The profit, before taxation, amortisation
of acquisition intangibles and
exceptional costs, amounts to £292.9m
(2014: £234.4m). The directors have
declared dividends as follows:
Ordinary shares
Paid interim
dividend
Proposed final
dividend
Total ordinary
dividend
(p) per share
39.2p per share
(2014: 34.1p per share)
80.9p per share
(2014: 63.9p per share)
120.1p per share
(2014: 98.0p per share)
The final dividend will be paid on 24 June
2016 to shareholders whose names are
on the register of members at the close
of business on 20 May 2016.
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
current 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 issues,
emerging 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
an associated action plan and a conflicts of
interest policy, both of which are reviewed at
least annually.
In 2015, the trustees implemented a new
investment strategy which had been
agreed with the company. The objective
of the new strategy was to reduce the risk
that the assets would be insufficient in the
future to meet the liabilities of the scheme.
The de-risking investment strategy is kept
under close review by both the trustees and
the company.
In January 2014, three new member-
nominated trustees were appointed,
bringing the total to four. In addition, there
are currently two 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 2011, the company established an
Unfunded Unapproved Retirement Benefits
Scheme (UURBS), for the benefit of those
employees who are affected by the HMRC
annual allowance and lifetime allowance
which applies to members of registered
pension schemes. The UURBS offers an
alternative to a cash payment in lieu of a
pension benefit.
Health and safety
Health and safety standards and
benchmarks have been established in the
divisions and compliance by the divisions is
monitored by the board.
Anti-bribery and corruption
The corporate policies reflect the
requirements of the Bribery Act 2010 and a
corporate hospitality register is maintained
using a risk-based approach. Although the
risks for the group arising from the Bribery
Act 2010 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.
Provident Financial plc
Annual Report and Financial Statements 2015
111
Important events since
the end of the financial year
(31 December 2015)
There have been no important events since
the end of the financial year.
Corporate governance statement
The group’s corporate governance report is
set out on pages 86 to 112. The group has
complied with the provisions of the Code
throughout 2015.
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 145 to 149
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.
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 188 to 193 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
laws 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 and company 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;
Employee involvement
The group is committed to employee involvement in each of its
divisions. Employees are kept well informed of the financial and
operational performance and strategy of the divisions 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, intranet discussion
boards and blogs by employees and managing directors.
In addition, Vanquis Bank upgraded its sharepoint technology
during 2015 to provide employees with access to a range of
communications at both a departmental and organisational level.
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. CCD plans to relaunch its colleague
forum in 2016 with an improved platform which will enable more
views and opinions to be heard. They also plan to work with leaders
in the business to improve the communication of decisions that
create long-term growth for CCD and support the delivery of the
division’s strategic priorities.
The group also provides a wellbeing programme designed
to promote physical and mental health within each division.
Both Moneybarn and CCD have a gym in their head office facility.
Vanquis Bank rolled out its wellbeing campaign throughout
2015 which focused on a different wellbeing aspect each month.
There was a high take-up rate and given the success of the
campaign, the wellbeing programme is being further expanded in
2016 and will include the launch of a cycle to work scheme.
The group also has a number of community programmes in
place. Further detail of this is set out on pages 80 to 85 of the
strategic report.
Employees are also able to share in the group’s results through
various share schemes as set out on page 109 of this report.
Training
The group is fully committed to encouraging employees at all
levels to study for relevant educational qualifications and to the
improvement in skills through training. In particular, the group has
initiated a series of talent and development initiatives as part of its
investment in the career progression of its employees.
Provident Financial plc 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 opportunities
The 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 including making
reasonable adjustments where required. 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.
Governance 112
Provident Financial plc
Annual Report and Financial Statements 2015
Governance
Directors’ report (continued)
Responsibility statement
Auditor
Deloitte, the auditor for the company,
was appointed in 2012 and a resolution
proposing their reappointment will be
proposed at the forthcoming Annual
General Meeting (AGM).
AGM
The AGM will be held at 10.00 am on 5 May
2016 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, is contained in the circular to
shareholders dated 1 April 2016.
Approved by the board on 23 February 2016
and signed by order of the board.
Kenneth J Mullen
General Counsel and Company Secretary
Each of the directors listed below, confirms
that, to the best of their knowledge, the
group financial statements which have
been 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 2015 includes a fair
review of the development and performance
of the business and the position of the
company and group, and the undertakings
included in the consolidation taken as a
whole, and a description of the principal risks
and uncertainties it faces.
Manjit Wolstenholme Chairman
Malcolm Le May
Senior Independent Director
Alison Halsey
Stuart Sinclair
Rob Anderson
Peter Crook
Non-executive director
Non-executive director
Non-executive director
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 as 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.
> 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 of accounting.
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
2015, taken as a whole, are fair, balanced and
understandable and provide 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 on page 103 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
2015 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.
Provident Financial plc
Annual Report and Financial Statements 2015
113
Directors’
remuneration report
114 Annual statement by the chairman
of the remuneration committee
115 Remuneration policy
121 Annual Report on Remuneration
114
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Directors’ remuneration report
This report sets out details of the remuneration
policy for our executive and non-executive directors,
describes the implementation of the approved
remuneration policy and sets out the remuneration
received by the directors for the year ended
31 December 2015. 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 follows
the requirements of the UK Corporate Governance
Code published in September 2014.
For completeness and transparency, this part
of the directors’ remuneration report includes a
summary of the remuneration policy approved by
shareholders at the 2014 AGM (set out on pages
115 to 120) and intended to operate until the 2017
AGM 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 121 to 132) will be subject to an advisory vote
at the 2016 AGM.
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 2015.
Aligning remuneration with company strategy
Our remuneration policy encourages achievement of our corporate
goals through: (1) an annual bonus linked to achieving profitable
growth and specific strategic objectives; and (2) long-term incentives
that only reward for absolute shareholder value creation and delivery
of long-term earnings growth.
Performance in 2015
The company has continued to deliver sustainable returns and
growth for its shareholders during 2015, with the key highlights
being as follows:
> Profit before tax, amortisation of acquisition intangibles and
exceptional costs up by 25.0% to £292.9m (2014: £234.4m);
> Total Shareholder Return (‘TSR’) growth of 40.9%;
> Adjusted Earnings Per Share (‘EPS’) growth of 22.6%;
> A 22.6% increase in dividend for the year from 98.0p to 120.1p; and
> Entry into the FTSE 100 Index on 21 December 2015.
Key outcomes in respect of 2015
The annual bonus scheme is based on an adjusted EPS1 target and
personal objectives. For 2015, the adjusted EPS target was set at
153.4p, with threshold and maximum EPS at 95% and 105% of the
target respectively. Based upon an adjusted EPS1 of 163.6p, bonuses
of 100% of the maximum of the EPS element were awarded to
Peter Crook and Andrew Fisher in respect of 2015, reflecting the
strong financial performance of the company. Having considered
the achievement against personal objectives, overall bonuses of
98% 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 2013 are due to vest in March 2016. These awards
are subject to a performance target based on annualised adjusted
EPS2 growth and absolute annualised TSR over the three financial
years ended 31 December 2015. In order for the award to vest in
full, annualised TSR of 15% and annualised adjusted EPS2 growth
of 11% was required. Based upon an actual annualised TSR of 41.7%
and an annualised adjusted EPS growth of 16.9%, the committee,
having satisfied itself that the vesting was consistent with the broader
financial performance of the company, determines that 100% of the
award will vest in March 2016. Awards made under the 2013 PSP are
due to vest in May 2016. In order for the basic award to be matched
in full, an average annual adjusted EPS2 growth of 11% was required
over the three financial years ended 31 December 2015. Based upon
an actual average annual adjusted EPS growth of 19.9%, the basic
awards were matched in full and will vest in May 2016.
1 Adjusted EPS excludes any profit or loss associated with the Vanquis Bank operation
in Poland, any amortisation of the broker relationships intangible asset created on the
acquisition of Moneybarn and exceptional items.
2 Adjusted EPS is calculated on a consistent basis with the annual bonus scheme except
that adjusted EPS in 2015 it has been restated to exclude the impact of the changes
made to IAS19, ‘Retirement Benefits’ in 2013. This ensures that adjusted EPS in 2015
is calculated on a consistent basis with the base year adjusted EPS in 2012.
Key decisions in relation to 2016
Salary increases in line with the average increase applied to the wider
employee population were awarded to the executive directors, and
further details are set out on page 122.
Awards under the Provident Financial Long Term Incentive Scheme
2015 (2015 LTIS) will be made for the first time in 2016 and will be
capped at 200% of salary for the executive directors. There are no
changes to the performance metrics or range of targets applicable
to awards to be granted under the company’s long-term incentive
schemes or the annual bonus scheme for 2016 . In accordance with
our previous disclosures, the executive directors will be required
from 2016 onwards to hold shares in the company equivalent in value
to 200% of their respective salaries, an increase from 175% in 2015.
Remuneration policy
The directors’ remuneration policy, which was approved by
shareholders at the 2014 AGM, is summarised on pages 115 to 120
for information only. In accordance with statutory requirements,
the remuneration policy will be put to shareholders for approval at
the 2017 AGM.
I will be available to answer questions on the remuneration policy
and the Annual Report on Remuneration at the AGM on 5 May 2016.
Malcolm Le May
Remuneration committee chairman
Directors’ remuneration report Provident Financial plc
Annual Report and Financial Statements 2015
115
Directors’ remuneration report
Remuneration policy
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 director 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.
The committee recognises and manages any conflict of interest when
receiving views from executive directors or senior management or
when consulting the Chief Executive or Chairman about their proposals.
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 and their individual 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 the specific
performance of the group;
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
How shareholders’ views
are taken into account
We remain committed to taking into account
shareholder views on any proposed changes
to our remuneration policy. The committee
chairman maintains contact, as required,
with the company’s principal shareholders
about all relevant remuneration issues.
Following consultation with shareholders
on the proposed renewal of the LTIS in 2015,
it was agreed that the share ownership
guidelines for executive directors be
increased to 200% of salary in 2016 from
175% in 2015. This change continues to
improve the current policy’s alignment
with the group’s shareholders vis-à-vis
the share ownership guidelines included
in the remuneration policy approved
by shareholders at the 2014 AGM.
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 group
and reflect the strong financial performance
of the group 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 divisions 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, benefits 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.
Remuneration 116
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Remuneration policy (continued)
Executive director remuneration policy
Element
Salary
Purpose and link
to strategy
Operation including
maximum levels
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
taking arising from over
reliance on variable income.
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.
Annual bonus
Incentivises annual delivery
of agreed financial and
operational goals.
Rewards the achievement
of an agreed set of annual
financial and operational
goals.
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.
Performance targets and provisions
for recovery of sums paid
Broad assessment of group 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
group’s strategy and key performance indicators (KPIs).
Any substantive reworking of the current performance
condition would be accompanied by appropriate dialogue
with the group’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 2015
117
Element
Long Term
Incentive
Scheme
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.
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.
Shareholders approved the renewal of the Long
Term Incentive Scheme at the 2015 AGM.
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 group’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.
Retirement
benefits
Provision of a range
of schemes and
arrangements to enable
executive directors to
fund their retirement.
Not applicable.
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.
Other
benefits
Provision of a range of
insured and non-insured
benefits commensurate
with the role.
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 200% of salary in the form of shares in the
company with effect from 1 January 2016.
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.
Not applicable.
The committee will operate the incentive schemes within the policy detailed above and in accordance 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.
Remuneration 118
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Remuneration policy (continued)
The commiTtee has considered The
recently published Guidelines on sound
remuneration Policies under crD iV
anD intends To take inTo account
the Guidelines, the upDated Principles
of remuneration issued by the
investment association in november
2015 and recent DeVelopmenTs in
wiDer ‘best practice’ when setting
the remuneration Policy for 2017.
This will be done in consultaTion
wiTh 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 (i.e. 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, the 2015
LTIS and the 2013 PSP have been selected
to reflect the key indicators of the group’s
financial performance.
EPS continues to be considered by the
committee as one of the broadest and most
well understood measures of the group’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 the
group’s objective of continuing to deliver
a high dividend yield and thus is aligned
with the shareholder base which is weighted
towards longer-term income investors.
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 PSP, the 2013 PSP and
the LTIS since 2012, and it is intended that
this will be the approach for all awards made
under the 2015 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 group’s
key, over-arching, long-term objective.
The committee has determined that absolute
TSR remains an appropriate performance
measure as the FTSE 250 is considered too
diverse a group against which to compare
relative TSR performance.
Provident Financial plc
Annual Report and Financial Statements 2015
119
Also, the general financial sector is a diverse
group of companies, none of which is
considered to be directly comparable to the
group. The committee agreed, however, to
keep the appropriateness of this measure
under review and at its meeting in February
2016 the committee determined that an
absolute TSR target remained appropriate
for the 2016 LTIS awards.
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.
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
served by either the executive director or
the company.
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 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.
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 12 months’ 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.
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,
in such exceptional circumstances, 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’ (eg resignation) 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).
Remuneration 120
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Remuneration policy (continued)
Non-executive director remuneration policy
Element
Fees
Purpose and link
to strategy
Operation
including maximum levels
To 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 a fee for chairing a committee and,
from 2016, for membership of the risk and audit committees (but not if performing a
chairman role).
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.
Terms of appointment for the non-executive directors
Name
Manjit Wolstenholme
Rob Anderson
Stuart Sinclair
Malcolm Le May
Alison Halsey
Appointment
Date of most
recent term
Expected
date of expiry
16 July 2007
31 July 2013
31 July 2016
2 March 2009
30 March 2015
30 March 2018
1 October 2012
31 October 2015
31 October 2018
1 January 2014
1 January 2014
31 January 2017
1 January 2014
1 January 2014
31 January 2017
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.
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 the
terms of appointment of both Stuart Sinclair
and Rob Anderson, 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
Remuneration committee chairman
23 February 2016
Provident Financial plc
Annual Report and Financial Statements 2015
121
Directors’ remuneration report
Annual Report on Remuneration
Introduction
This Annual Report on Remuneration provides an overview of the
workings of the committee during the year, sets out details of how the
approved remuneration policy was implemented in 2015, and explains
the total remuneration earned by the directors in 2015. It also sets out
details of how the approved remuneration policy will be implemented
in 2016.
This report will be subject to an advisory vote at the AGM of the company
to be held on 5 May 2016.
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 122.
The members of the committee, all of whom
are considered to be independent, and their
attendance at meetings during the year is
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. Vanquis Bank has
established a remuneration committee to
identify those Vanquis Bank employees who
are Material Risk Takers 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.
Effectiveness
On the basis of an internal board and
committee evaluation, the committee
considered its effectiveness in 2015 at its
meeting in December 2015. Overall the
committee determined that it was operating
effectively and that it continued to have
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 £81,025. 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 committee also engaged Addleshaw
Goddard LLP to provide advice and support
in relation to the establishment of the
replacement LTIS (the 2015 LTIS) which was
approved by shareholders at the 2015 AGM
and in relation to other remuneration related
matters. The total fees paid to Addleshaw
Goddard LLP in 2015 in respect of their
services were £29,153.
The terms of engagement for NBS and
Addleshaw Goddard LLP are available from
the Company Secretary on request.
The Company Secretary is secretary to the
committee and instructed all the external
advisors on behalf of the committee.
The Company Secretary attended all the
meetings of the committee in 2015 and
provides legal and technical support.
In selecting advisors, the committee
considers a range of factors, such
as 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 January 2015.
Committee members and meeting attendance
Name
Notes
Date appointed
2015
Attendance
Percentage
attended
Malcolm Le May
Chairman
1 January 2014
6 out of 6
Rob Anderson
Alison Halsey
Stuart Sinclair
2 March 2009
6 out of 6
1 January 2014
6 out of 6
1 October 2012
4 out of 6
100%
100%
100%
66.7%
Remuneration
122
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Annual Report on Remuneration (continued)
EPS 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 the targeted group EPS at which point
0% of the bonus subject to this measure will
be payable, and the maximum of 105% of
the targeted group EPS. 60% of the bonus
subject to this measure will be payable for
target levels of performance. The personal
objectives element of the scheme will
continue to be underpinned by the threshold
level of the 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 2016 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 recover 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.
The mechanisms open to the committee
when undertaking a clawback include the
withholding of variable pay to offset the value
to be clawed back and/or seeking repayment
from the individual of the value overpaid.
Any bonuses paid are non-pensionable
and are not taken into account when
determining base salary for performance-
related remuneration.
Components of the approved
remuneration policy
The approved remuneration policy will
be implemented in 2016 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 2015, 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 in order to avoid paying
more than necessary, market data on salary
rates for similar positions in comparative
companies. As a result, it agreed to increase
the executive directors’ salaries in 2016
as follows:
Director’s name
Peter Crook
Andrew Fisher
% increase
2016
3.4
3.2
Salary
£
730,000
520,000
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 2016 annual bonus will
continue to be based on the group’s EPS and
personal objectives as follows:
Measure
Targeted
group EPS
Personal
objectives
Peter Crook
Andrew Fisher
Maximum bonus
opportunity
Maximum bonus
opportunity
80% £700,800
80% £416,000
20% £175,200
20% £104,000
Remuneration committee key
items in 2015
JAN
FEB
> Review of directors’ expenses.
> Review of the committee’s
performance and effectiveness
(2014).
> Review of Chairman’s fees (2015).
> Review of feedback from
shareholders on the renewal of
the LTIS.
> Finalisation of targets under
the 2015 annual bonus scheme
for executive directors.
> Review of the 2014 remuneration
report.
> Determination of vesting of LTIS
and PSP awards granted in 2012.
> Review of proposed LTIS, PSP
and PF Equity Plan awards and
applicable performance targets.
> Review of prior year performance
against financial and non-financial
objectives in relation to the 2014
annual bonus scheme for executive
directors.
> Assessment of the remuneration
risk framework.
> Adoption of the 2015 LTIS following
MAY
shareholder approval at the
2015 AGM.
> Review of a proposed
SEP
remuneration package for the new
Vanquis Bank Managing Director.
OCT
DEC
> Review of remuneration
developments and best practice
in the market.
> Discussion on the operation of
the approved remuneration policy
for 2016.
> Review of executive directors’
shareholdings.
> Review of Chairman’s fees (2016).
> Review of the restructure of
divisional boards and severance
terms for departing subsidiary
directors.
> Agreement on the application of
the approved remuneration policy
in 2016.
> Review of the committee’s
performance and effectiveness
(2015).
Provident Financial plc
Annual Report and Financial Statements 2015
123
3. Long-term incentive schemes
The company’s long-term incentive
arrangements for executive directors
are the 2015 LTIS and the 2013 PSP.
The LTIS expires in May 2016 and a resolution
to renew the scheme on substantially similar
terms was approved by shareholders at the
2015 AGM.
A replacement PSP was approved by
shareholders at the 2013 AGM following
expiry of the previous PSP in 2012.
The Provident Financial Executive Share
Option Scheme 2006 (the ESOS) also expires
in May 2016 and is not being replaced.
In 2016 and future years, executive directors
will participate in the 2015 LTIS and the
2013 PSP.
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 subject to the award.
The aggregate market value of awards made
to a participant under the 2015 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 under the LTIS 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 2016, 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 2015.
The actual range of the EPS targets for
awards in 2016 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 2016 will be as follows (with a
sliding scale of vesting on a straight-line basis
between these lower and upper targets):
The same general underpin to the EPS
targets in the LTIS (as set out above)
applies to all awards granted under the
PSP since 2013.
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
before any award vests.
PSP
Executive directors are required to waive
a minimum of one third of annual bonus
payable into the PSP. They may also elect
to waive up to a further third of bonus.
They then receive a Matching Award under
the 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 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 2016 remains unchanged from
2015 and will be as follows:
Annual average
growth in EPS
Below 5%
5%
11%
Matching shares
vesting
No vesting
Half of one matching share
Two matching shares
ESOS
The committee does not intend to make
further grants to executive directors under
the ESOS in 2016.
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 (SAYE Scheme).
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 and employees are invited to
participate in the SAYE Scheme and monthly
savings amounts are subject to HMRC limits.
Share incentive plan
In addition to the SAYE Scheme, 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 on
page 124 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 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 PSP and 55% of the award
under the LTIS; and
Remuneration 124
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Annual Report on Remuneration (continued)
Total remuneration opportunity – Peter Crook
> Maximum (performance meets or exceeds
maximum) – fixed pay plus maximum
bonus (120/100% of salary) and maximum
vesting under the PSP and LTIS.
£4,554,000
> Fixed pay comprises:
(i) salary – salary effective as at
1 January 2016;
58%
(ii) benefits – amount received by each
executive director in the 2015 financial
year; and
(iii) pension – pension credit of 30%
of salary.
19%
Awards under the PSP and LTIS have been
assumed as follows:
£2,764,000
43%
19%
£1,050,000
5
4
3
2
1
0
(i) 2013 PSP – Matching Award of two-
thirds of bonus earned at target and
maximum performance levels; and
(ii) 2015 LTIS – award equal to 200%
of salary.
Partnership and matching shares under the
SIP and options under the SAYE Scheme 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 125 detailing
what was actually earned by the executive
directors in relation to the financial year
ended 31 December 2015, since these
values are based on the actual levels of
performance achieved to 31 December
2015 and include the impact of share price
movements in relation to share awards.
100%
38%
23%
t
e
g
r
a
t
n
O
m
u
m
x
a
M
i
m
u
m
n
M
i
i
Fixed pay
Annual bonus
Long-term incentives
Total remuneration opportunity – Andrew Fisher
5
4
3
2
1
0
£728,000
100%
m
u
m
n
M
i
i
Fixed pay
Annual bonus
Long-term incentives
£2,981,000
58%
18%
24%
m
u
m
x
a
M
i
£1,841,000
44%
17%
39%
t
e
g
r
a
t
n
O
Non-executive directors
1. Non-executive directors’ fees
At its meeting in December 2015, the board
reviewed the non-executive directors’ fees
in the context of a benchmarking exercise
undertaken by NBS, taking due account
of the need to use such benchmarking
exercises with caution. After taking into
account the anticipated ongoing time
commitment for the role and in recognition
of the increased workload of the audit and
risk advisory committees in the current
financial services regulatory environment, it
was agreed to increase the 2016 fee levels for
current incumbents as follows:
> Non-executive director base fee: £66,000
(increased by £2,000);
> Supplementary fee for chairing the audit,
remuneration or risk advisory committee:
£20,000 (increased by £5,000);
> Supplementary fee for membership
of the audit committee or risk advisory
committee: £5,000 (new for 2016).
This fee is not paid to the chairman
of each committee; and
> Supplementary fee for the role of Senior
Independent Director (SID): £10,000
(no change).
2. Chairman’s fees
On the basis of (1) a benchmarking exercise
carried out by NBS in December 2015;
(2) the fact that no increase was awarded
in 2015; (3) the anticipated increased time
commitment for the role; (4) the growth in
size and complexity of the business and
(5) the increased regulatory requirements
of the group, the committee agreed that the
Chairman’s fees for 2016 be increased to
£310,000 (2014: £255,000).
Provident Financial plc
Annual Report and Financial Statements 2015
125
Details of the implementation of the company’s approved remuneration policy in 2015 are set out below:
Directors’ remuneration
The total aggregate directors’ emoluments during the year amounted to £14,583,000 (2014: £11,566,000), analysed as follows:
Fixed pay
Total
fixed pay
Variable pay
Share incentive
schemes
Total
Total
variable pay
Salary
Benefits in
kind
Pension
Annual cash
bonus2
LTIS
PSP
PSP dividends
Director’s
name
2015
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
20153
£’000
2014
£’000
20154
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
Executive directors
706
685
971
45
223
239 1,026
969
830
822 3,106 2,492 3,412 2,174
81
137 7,429 5,625 8,455 6,594
504
489
Total
1,210 1,174
52
149
63
108
156
379
181
712
733
494
489 2,219 1,783 2,075 1,294
420 1,738 1,702 1,324 1,311 5,325 4,275 5,487 3,468
49
130
83 4,837 3,649 5,549 4,382
220 12,266 9,274 14,004 10,976
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 This increase relates primarily to a change in the Chief Executive’s normal place of work from Bradford to London.
2 The annual bonus represents the gross bonus payable to the directors in respect of 2015. Each director has agreed to waive two-thirds of gross bonus payable in order to
participate in the 2013 PSP.
3 Amount calculated based on 100% vesting of 2013 awards multiplied by an average share price for the three months ended 31 December 2015. No account has been taken of the
dividend equivalent payable on these shares, which will be calculated on the vesting date of 1 March 2016. The actual value may vary depending on the actual share price on the
vesting date of 1 March 2016.
4 Amount calculated based on 100% vesting of 2013 awards multiplied by an average share price for the three months ended 31 December 2015. No account has been taken of the
dividend equivalent payable on the matching award shares, which will be calculated on the vesting date of 9 May 2016. The actual value may vary depending on the actual share
price on the vesting date of 9 May 2016.
Director’s name
Chairman
Manjit Wolstenholme
Non-executive directors
Rob Anderson
Stuart Sinclair1
Alison Halsey
Malcolm Le May1
Total
Fees
2015
£’000
Annual cash bonus
Benefits in kind
2014
£’000
2015
£’000
2014
£’000
2015
£’000
2014
£’000
Total
2015
£’000
255
64
79
79
89
566
255
66
79
76
89
565
–
–
–
–
–
–
–
–
–
–
–
–
4
3
3
2
1
13
3
11
11
–
–
25
259
67
82
81
90
579
2014
£’000
258
77
90
76
89
590
Note: The non-executive directors did not receive a pension benefit nor did they receive any bonus or share incentive entitlements.
1 Stuart Sinclair and Malcolm Le May each receive an additional fee of £50,000 per annum in respect of their directorships of the relevant companies of CCD and Moneybarn
respectively, pro rated in 2015 from their respective dates of appointment.
Peter
Crook
Andrew
Fisher
Remuneration 126
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Annual Report on Remuneration (continued)
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 on page 125. 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 on page 125.
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 2015, these fees amounted to £61,251
(2014: £50,000).
Annual bonus scheme
The 2015 annual bonus scheme
was based on adjusted targeted group
EPS (excluding exceptional items and
amortisation of acquisition intangibles)
and personal objectives.
The maximum bonus opportunity in respect
of 2015 was restricted to 120% of salary for
the Chief Executive and 100% of salary for
the Finance Director and was split as follows:
Measure
Targeted
group EPS
Personal
objectives
Peter Crook Andrew Fisher
Maximum bonus opportunity
80%
20%
80%
20%
The actual proportions of the 2015 adjusted
targeted group EPS and the corresponding
targeted group EPS that needed to be
achieved, which the committee considered
to be challenging, were as follows:
% of the
adjusted
targeted group
EPS achieved
% of EPS
element
of annual
bonus paid
Target EPS
Threshold
Target Maximum
95%
100%
105%
0%
60%
100%
145.7p 153.4p
161.1p
Straight-line vesting operated between
95% and 105% of the 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 2016, the
committee assessed the group’s
performance against the adjusted targeted
group EPS. The adjusted EPS achieved of
163.6p exceeded the adjusted targeted
group EPS of 153.4p by more than 5%
and the committee therefore determined
that 100% of the EPS element of the 2015
annual bonus would be paid.
The balance of the annual bonus, as detailed
in the table of directors’ remuneration
on page 125, 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 committee’s assessment of the
Chief Executive’s performance against
his personal objectives was that they were
achieved at 90% of the maximum. While the
specific factors underlying this assessment
are considered to remain price sensitive
and will not be disclosed, the key factors
assessed when determining the bonus
payable included: (i) the options presented
to the board to broaden the group’s
participation in the non-standard market, the
recommendations then put forward and the
decisions taken by the board against original
plans; (ii) achievement against pre-set
targets relating to the repositioning of CCD
and delivering a clean exit from the Vanquis
operation in Poland; (iii) feedback received
from external audits in managing key
stakeholder relations; and (iv) the progress
made during the year in strengthening the
leadership team in light of the successful
growth of the group.
The committee’s assessment of the Finance
Director’s performance against his personal
objectives was that they were also achieved
at 90% of the maximum. As noted above
for the Chief Executive, the specific factors
underlying this assessment are considered
to remain price sensitive and will not be
disclosed, however, the key factors assessed
when determining the bonus payable
included: (i) working with the Chief Executive
on broadening the group’s participation
in the non-standard market, repositioning
CCD and delivering a clean exit from the
Vanquis operation in Poland as noted above;
(ii) achieving a tax charge for the group
within the target range set; (iii) delivering
an updated ICAAP in line with planning
expectations and managing the group’s risk
profile well within targeted levels; and (iv)
appraising and strengthening the finance
function in light of the continued growth and
expansion of the group.
The bonus payable as a percentage of salary
in relation to 2015 was therefore 98% for
the Finance Director and 117.6% for the
Chief Executive.
Share incentive schemes
In 2015 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 waiver of annual bonus in the case
of the 2013 PSP, provide greater alignment
with shareholders’ interests.
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 of 200% of basic salary.
Executive directors received maximum
grants in 2015.
2015 awards
The proposed performance targets for
awards made under the LTIS in 2015 were
reviewed by the committee at its meeting
in February 2015 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
2015 was the same in terms of metrics and
annual growth requirements as the targets
for the proposed 2016 LTIS awards, further
details of which are set out on page 123.
2013 awards
Vesting of the 2013 conditional share awards
was split equally between the company’s
annualised growth in adjusted 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%
Provident Financial plc
Annual Report and Financial Statements 2015
127
A sliding scale of vesting (on a straight-line
basis) applied 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 2016, with assistance from
NBS. The company’s annualised growth in
adjusted EPS over the performance period
was 16.9% which exceeded the maximum
annualised growth in EPS target 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 41.7%, which
exceeded the maximum annualised TSR
target of 15%, resulting in 100% of the TSR
element of the award vesting.
The committee therefore approved
a 100% vesting of the 2013 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 19.6% and the total
annualised growth in dividends over the
period of 15.7%.
Dividend waiver
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
on vesting.
Divisional targets
As in previous years, awards made in 2015
to employees within CCD, Vanquis Bank
and Moneybarn are subject to a challenging
divisional performance target rather than
group EPS and TSR targets.
PSP
2015 awards
In 2015, 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 payable, and other eligible employees
who were able to waive up to 50% or 30%,
(depending on their level of seniority), of their
annual bonus payable. 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.
Long Term Incentive Scheme
Details of the conditional share awards granted to the executive directors during 2015 are summarised below:
Date of
award
Number
of shares
Face
value1
Percentage
of salary
Performance
condition2
Performance
period
% vesting
at threshold
Director’s name
Peter Crook
25.02.2015
51,797
£1,411,986
Andrew Fisher
25.02.2015
36,977
£1,007,993
200%
200%
50% based on
absolute TSR and
50% based on
absolute EPS
Three consecutive
financial years
ending
31 December 2017
20%
1 Face value calculation is based on the share price of £27.26 on 24 February 2015. 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 Details of the performance conditions are set out in the notes to the table below.
Awards held by the executive directors under the LTIS at 31 December 2015 were as follows:
Director’s name
Peter Crook
Andrew Fisher
Date of award
26.03.20122
01.03.20133
08.04.20143
25.02.20153
26.03.20122
01.03.20133
08.04.20143
25.02.20153
Awards
held at
01.01.2015
111,876
90,784
72,143
Awards
granted
during
the year
–
–
–
–
51,797
80,034
64,846
51,500
–
–
–
–
36,977
Awards
vested
during
the year1
111,876
–
–
–
80,034
–
–
–
Awards
lapsed
during
the year
Awards
held at
31.12.2015
Market price
at date of
grant (p)
Market price
at date of
vesting (p)
Vesting
date
–
–
–
–
–
–
–
–
–
90,784
72,143
51,797
–
64,846
51,500
36,977
1,162.0
1,465.0
1,899.0
2,726.0
1,162.0
1,465.0
1,899.0
2,726.0
2,721.0
26.03.2015
–
–
–
01.03.2016
08.04.2017
25.03.2018
2,721.0
26.03.2015
–
–
–
01.03.2016
08.04.2017
25.03.2018
1 Dividend shares on awards which vested in 2015 were received as follows: Peter Crook 9,810 shares and Andrew Fisher 7,018 shares.
2 Details of the performance target for the 2012 award were included in the Annual Report on Remuneration in 2014.
3 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) with regard to the absolute TSR performance targets, 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) with regard to the absolute EPS performance targets, 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.
Remuneration
128
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Annual Report on Remuneration (continued)
Awards to executive directors and certain
members of the senior management team
in 2015 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.
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 118.
The actual range of the EPS targets for
awards granted in 2015 is as follows:
Average annual
growth in EPS
Below 5%
Matching shares
vesting
No vesting
5%
11%
Half of one matching 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.
2013 awards
For awards granted in 2013, the actual range
of the EPS targets was as follows:
Average annual
growth in EPS
Matching shares
vesting
Below 5%
No vesting
5%
11%
Half of one matching share
Two matching shares
A sliding scale of vesting (on a straight-line
basis) applied between these lower and
upper targets which were measured over a
period of three consecutive financial years,
the first of which was the financial year
starting immediately before the grant date
of the Matching Award.
At its meeting in February 2016, the
committee considered the extent to which
the performance target for the awards
granted in 2013 had been met. The average
annual growth in adjusted EPS over the
performance period was 19.9% and this level
of EPS growth exceeded the maximum target
of 11% resulting in 100% of the Matching
Award vesting. The committee therefore
approved a 100% vesting of the 2013 awards,
having satisfied itself that the vesting
was consistent with the broader financial
performance of the company.
Dividends
For awards granted prior to 2013, the
dividends payable on the basic and matching
shares were paid to the directors on the
normal dividend payment date.
For awards granted from 2013 onwards, the
dividend payable on the basic award only is
paid to the directors on the normal dividend
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 and to the extent
of vesting.
The dividends received in 2015 under
the 2013 PSP were: Peter Crook £80,591
(2014: £137,132) and Andrew Fisher £49,099
(2014: £82,596). These figures have
been included in the table of directors’
remuneration on page 125.
Other relevant share incentive
scheme information
The mid-market closing price of the
company’s shares on 31 December 2015
was 3,366.5p. The range during 2015 was
2,423.5p to 3,633p.
No consideration is payable on the award of
conditional shares.
There were no changes in directors’
conditional share awards or PSP
awards between 1 January 2016 and
23 February 2016.
Offshore Employee Benefit Trust
The rules of the LTIS, 2015 LTIS and 2013
PSP allow these schemes to be operated
in conjunction with any employee trust
established by the company. The company
established the Provident Financial plc
2007 Employee Benefit Trust (EBT) in Jersey
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 323,218 ordinary shares in February 2015
for the purpose of satisfying the 2015 awards
made pursuant to the LTIS. The trustee
transferred the beneficial ownership (subject
to the performance conditions set out on
page 123) in 88,774 of the shares for no
consideration to the executive directors
on 13 April 2015.
KB Trustees also subscribed for 180,860
ordinary shares in February 2015 for the
purpose of satisfying the 2015 awards
made pursuant to the 2013 PSP. The trustee
transferred the beneficial ownership
(subject to the performance conditions set
out above), in 64,124 of the shares for no
consideration to the executive directors
on 11 March 2015 and also transferred the
legal ownership in 32,062 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 2015 AGM the directors’ Annual Report
on Remuneration received the following
votes from shareholders:
Total number
of votes
% of
votes cast
114,206,094
5,402,332
119,608,426
95.48
4.52
100.00
For
Against
Total votes cast
(for and against)
The total number of votes withheld was
905,039.
At the 2014 AGM, the directors’
Remuneration Policy received the
following votes from shareholders:
Total number
of votes
% of
votes cast
104,365,608
4,254,554
108,620,162
96.0
4.0
100.0
For
Against
Total votes cast
(for and against)
The total number of votes withheld was
984,012.
Savings-related share
option scheme
As set out on page 123, 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 join the scheme were
issued to eligible employees in August 2015.
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 the Provident Financial Savings
Related Share Option Scheme 2013 during
the year. There was therefore no notional
gain (representing the difference between
Provident Financial plc
Annual Report and Financial Statements 2015
129
Performance Share Plan
Details of the awards granted to the executive directors during 2015 are summarised below:
Director’s
name
Date of
award
Peter Crook
25.02.2015
Andrew Fisher
25.02.2015
Type of
award
Basic
Matching
Basic
Matching
Number
of shares
Face
value1
Percentage
of salary
20,103
40,206
11,959
23,918
£548,008
£1,096,016
£326,002
£652,005
78%
155%
65%
129%
Performance
condition2
100% based
on absolute
EPS growth of
between 5%
and 11%
Performance
period
% vesting
at threshold
Three consecutive
financial
years ending
31 December
2017
Half a
matching
share
1 Face value is calculated based on the share price of £27.26 on 24 February 2015. The actual value at vesting may be greater or lesser depending on actual share price at
vesting and as a result of any dividend payable on vesting shares.
2 Details of the performance conditions are set out on page 128.
Awards held by the executive directors under the PSP and 2013 PSP at 31 December 2015 were as follows:
Basic awards
(number of
shares) held
at 01.01.2015
Matching
awards
(number of
shares) held
at 01.01.2015
Total basic
awards
(number of
shares) vested
during the year
Total matching
awards
(number of
shares)
vested during
the year
Total basic
awards
(number of
shares)
held at
31.12.2015
Total matching
awards
(number of
shares)
held at
31.12.2015
Market
price at
date of
grant (p)
Market
price at
date of
vesting (p)
Vesting
date
32,530
33,243
24,822
–
19,363
20,222
15,442
–
65,060
66,486
49,644
–
38,726
40,444
30,884
–
32,530
65,060
–
–
–
–
–
–
19,363
38,726
–
–
–
–
–
–
–
33,243
24,822
20,103
–
20,222
15,442
11,959
–
1,162.0
2,713.9 26.03.2015
66,486
1,533.0
49,644
1,899.0
40,206
2,726.0
09.05.2016
08.04.2017
25.02.2018
–
1,162.0
2,713.9 26.03.2015
40,444
1,533.0
30,884
1,899.0
23,918
2,726.0
09.05.2016
08.04.2017
25.02.2018
Peter Crook
Director’s
name
Date of
grant
26.03.20121
09.05.20132
08.04.20142
25.02.20152
Andrew Fisher 26.03.20121
09.05.20132
08.04.20142
25.02.20152
1 Details of the performance targets for the 2012 awards were included in the Annual Report on Remuneration in 2014.
2 The matching awards vest subject to a performance target based on average annual growth in EPS, with 25% of the matching award vesting for EPS growth of 5% per annum
(threshold) through to full vesting for EPS growth of 11% per annum. No vesting takes place below the threshold performance level with straight-line vesting taking place
between threshold and maximum performance levels. In addition, no awards will 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.
the exercise price and the market price of
the shares at the date of exercise) on the
exercise of share options (2014: £nil).
There were no changes in directors’ share
options between 1 January 2016 and
23 February 2016.
None of the directors has notified the
company of an interest in any other shares,
transactions or arrangements which
requires disclosure.
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 and the 2015 LTIS. 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.
The mechanisms open to the committee
when undertaking a clawback include the
withholding of variable pay to offset the value
to be clawed back and/or seeking repayment
from the individual of the value overpaid.
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 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 and again at the 2015 AGM in respect of
the 2015 LTIS. Information on the resolution
was included in the shareholders’ circular
and notice of both the 2008 AGM and the
2015 AGM. Awards granted under the 2015
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
Remuneration
130
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Annual Report on Remuneration (continued)
Savings-related share option schemes
Director’s name
Peter Crook
Andrew Fisher
Total
Options
held at
01.01.2015
1,777
689
547
3,013
Granted
in 2015
Exercised
in 2015
–
–
–
–
–
–
–
–
Options
held at
31.12.2015
1,777
689
547
3,013
Market value
at date of
exercise (p)
Range of normal
exercisable dates
of options held
31.12.2015
–
–
–
01.12.2016 – 31.05.2017
01.12.2016 – 31.05.2017
01.12.2017 – 31.05.2018
Exercise
price (p)
868
1,305
1,644
1. Total shareholder return: Provident Financial vs FTSE 250 – 2008 to 2015
Provident Financial
FTSE 250
700
600
500
400
300
200
100
0
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
2. Total shareholder return: Provident Financial vs FTSE 250 – 16.07.07 to 31.12.15
Provident Financial
FTSE 250
700
600
500
400
300
200
100
0
Jul 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
Jul 15
Dec 15
3. Chief Executive remuneration 2009 to 2015
Single total figure of
remuneration (£’000)
Annual bonus (%)
LTIS vesting (%)
PSP vesting (%)
Year ended 31 December
2009
2,023
2010
2,727
2011
3,443
2012
4,326
2013
4,985
2014
6,594
2015
8,455
–
100
–
81
66
100
100
49
79
98
100
–
89
100
100
100
100
100
98
100
100
re-introduce the 5% limit when the 2015 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
2015
4.5%
3.2%
2014
2.8%
3.2%
Payments for loss of office
There were no payments for loss of office
during the year.
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 seven years. This index
was chosen for comparison because the
company has been a member of this index
for the vast majority of the seven-year period
before its entry into the FTSE 100 Index on
21 December 2015. Graph (2) shows the
comparison for the period from demerger
of the international business to 31 December
2015, 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 seven-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.
Provident Financial plc
Annual Report and Financial Statements 2015
131
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 2013 and 31 December
2015 for Peter Crook, the Chief Executive,
compared to the average for the corporate
office employees during the same period.
A comparison with the corporate office
employees is considered to be more
suitable due to the range and composition
of employees across the group and the wide
range of different remuneration structures
and practices which operate in the divisions,
making any meaningful comparison difficult.
Relative importance of
spend on pay
This table shows the total pay (including
bonuses) for all the group’s employees
in the 2013, 2014 and 2015 financial years
compared to the distributions made to
shareholders in the same periods.
4. Chief Executive relative pay
2014/2015
2013/2014
%
Chief Executive
Average corporate
office employee
Salary Benefits
3.1% 118.4%1
3.4%
16.9%
Annual bonus
Salary Benefits
Annual bonus
3.1%
8.3%
3.0%
1.9%
1.1%
11.4%
16.3%
9.5%
Across the group, the budgeted salary increase ranged from 0% to 3.5%.
1 This increase relates primarily to a change in the Chief Executive’s normal place of work from Bradford to London.
Relative importance of spend on pay
Total employee
remuneration (£m)
Total shareholder
distributions (£m)
Year ended 31 December
2015
132.8
2014
123.2
2013
116.0
148.9
123.4
108.4
%
change
2013/2014
%
change
2014/2015
6.2
13.8
7.8
20.7
Share ownership guidelines
The company has share ownership
guidelines for executive directors which in
2015 required them to acquire and maintain
shares in the company with a value of 175%
of basic salary. These guidelines have been
increased to 200% of basic salary from
2016. Executive directors are required to
retain 50% of vested LTIS and 2015 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 and 2015
LTIS awards and awards granted under the
PSP and 2013 PSP are not.
The executive directors complied with these
guidelines as at 31 December 2015:
Director’s name
Peter Crook
Andrew Fisher
Actual share ownership
as a percentage of salary
420%
357%
Details of shares held by the executive
directors and their connected persons,
are shown below.
Directors’ share options at 31 December
2015, 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 130.
Executive directors’ share ownership
Director
Peter Crook
Total
Andrew Fisher
Total
Type
Own name
Held in Barclayshare Nominees Limited
Held in YBS Trustees (SIP)
LTIS
PSP
Own name
Held in YBS Trustees (SIP)
LTIS
PSP
Owned
outright
–
82,979
167
–
–
83,146
50,297
188
–
–
50,485
Unvested
Subject to
performance conditions
–
–
–
214,724
156,336
371,060
–
–
153,323
95,246
248,569
Not subject to
performance conditions
–
–
–
–
78,168
78,168
–
–
–
47,623
47,623
Total as at
31.12.15
–
82,979
167
214,724
234,504
532,374
50,297
188
153,323
142,869
346,677
Remuneration
132
Provident Financial plc
Annual Report and Financial Statements 2015
Directors’ remuneration report
Annual Report on Remuneration (continued)
Defined benefits
Cash balance
Peter Crook
Andrew Fisher
UURBS
Peter Crook
Andrew Fisher
Age as at
31 December
2015
Normal
retirement
age
52
57
52
57
60
60
60
60
Accrued retirement account
as at 31 December1
2015
£’000
–
–
1,015
654
2014
£’000
–
–
792
498
Increase in retirement account2
2015
£’000
2014
£’000
–
–
223
156
–
–
239
181
1 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 2015
(which are included in the table of directors’ remuneration on page 125) were: Peter Crook: £223,000 and Andrew Fisher: £156,000.
Peter Crook and Andrew Fisher were members of the cash balance section of the pension scheme until 3 April 2014 and 4 June 2013
(respectively) when they transferred the value of their pension rights into a Self Invested Personal Pension scheme (SIPP).
If the director dies in service, a death benefit of six times salary is payable.
Audit
The elements of the directors’ remuneration
report (including pension entitlements and
share options set out on pages 125 to 132 of
this report) which are required to be audited,
have been audited in accordance with the
Companies Act 2006.
This Annual Report on Remuneration
has been approved by the remuneration
committee and the board and signed on
its behalf.
Malcolm Le May
Remuneration committee chairman
23 February 2016
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 above.
Provident Financial
Staff Pension Scheme
No directors (2014: one) accrued retirement
benefits 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.
Personal pension arrangements
Peter Crook and Andrew Fisher also have
personal pension arrangements to which
the company has made contributions
in previous years but did not make any
contributions in 2015 (2014: £nil).
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 Lifetime
Allowance or the Reduced Annual Allowance.
Details of the pension credits earned under
the UURBS are set out in the table above.
The accumulated UURBS credit increases
each year by the lower of the increase in RPI
plus 1.5% and 6.5%. At retirement, UURBS
benefits will be provided in accordance with
the current HMRC practice.
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.
Provident Financial plc
Annual Report and Financial Statements 2015
133
FINANCIAL
STATEMENTS
134 Consolidated income statement
134 Consolidated statement of comprehensive income
134 Earnings per share
134 Dividends per share
135 Balance sheets
136 Statements of changes in shareholders’ equity
138 Statements of cash flows
139 Statement of accounting policies
145 Financial and capital risk management
150 Notes to the financial statements
188 Independent auditor’s report
134
Provident Financial plc
Annual Report and Financial Statements 2015
Financial statements
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:
– fair value movement in available for sale investment
– fair value movements on 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
Dividends per share
For the year ended 31 December
Proposed final dividend
Total dividend for the year
Paid in the year*
* The total cost of dividends paid in the year was £148.9m (2014: £123.4m).
Note
1,2
3
1,4
1,4
12
1
5
Note
16
18
20
5
5
2015
£m
1,113.1
(80.0)
(436.9)
(322.6)
(839.5)
273.6
292.9
(7.5)
(11.8)
(55.4)
218.2
2015
£m
218.2
17.5
3.6
(5.7)
0.7
(3.3)
(0.2)
12.6
230.8
Note
6
6
2015
pence
151.8
149.8
Note
7
7
7
2015
pence
80.9
120.1
103.1
Group
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
Group
2014
£m
175.6
–
2.2
17.5
0.5
(4.2)
0.3
16.3
191.9
Group
2014
pence
126.5
124.5
Group
2014
pence
63.9
98.0
88.1
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
Current assets
Financial assets:
– available for sale investment
– 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
Provident Financial plc
Annual Report and Financial Statements 2015
135
Note
11
12
13
14
15
19
20
16
15
18
22
19
1
23
24
23
18
21
1
1
25
27
2015
£m
71.2
85.2
29.5
–
218.0
–
62.3
466.2
17.5
1,798.7
–
153.4
32.4
2,002.0
2,468.2
Group
2014
£m
71.2
84.3
27.4
–
155.6
–
56.0
394.5
–
1,693.6
0.2
145.9
24.5
1,864.2
2,258.7
2015
£m
–
–
7.8
496.3
–
919.1
62.3
Company
2014
£m
–
–
7.0
496.3
–
983.8
56.0
1,485.5
1,543.1
–
–
–
7.0
606.4
613.4
–
–
–
7.7
580.5
588.2
2,098.9
2,131.3
(253.4)
(98.3)
(50.5)
(402.2)
(135.3)
(94.3)
(40.4)
(270.0)
(72.9)
(118.8)
(0.5)
(192.2)
(8.6)
(130.1)
(1.1)
(139.8)
(1,342.8)
(1,357.7)
(791.1)
(901.5)
(0.6)
(14.9)
(1,358.3)
(1,760.5)
707.7
30.5
270.7
35.6
370.9
707.7
(4.4)
(13.6)
(1,375.7)
(1,645.7)
613.0
30.3
268.3
19.0
295.4
613.0
(0.5)
(8.8)
(800.4)
(992.6)
1,106.3
30.5
270.7
633.8
171.3
(4.4)
(8.2)
(914.1)
(1,053.9)
1,077.4
30.3
268.3
629.6
149.2
1,106.3
1,077.4
The financial statements on pages 134 to 187 were approved and authorised for issue by the board of directors on 23 February 2016 and
signed on its behalf by:
Peter Crook
Chief Executive
Andrew Fisher
Finance Director
Company Number – 668987
Financial statements
136
Provident Financial plc
Annual Report and Financial Statements 2015
Statements of changes in shareholders’ equity
Group
At 1 January 2014
Profit for the year
Other comprehensive income:
– fair value movements on 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 on vesting of share awards
– dividends
At 31 December 2014
At 1 January 2015
Profit for the year
Other comprehensive income:
– fair value movement in available for sale investment
– fair value movements on 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 on vesting of share awards
– dividends
At 31 December 2015
Note
Share
capital
£m
28.9
Share
premium
£m
150.6
18
20
5
5
25
26
7
16
18
20
5
5
25
26
7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.4
117.7
–
–
–
–
–
–
–
–
–
–
30.3
30.3
268.3
268.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.2
2.4
–
–
–
–
–
–
–
–
–
–
30.5
270.7
Other
reserves
£m
Retained
earnings
£m
17.2
–
2.2
–
–
(0.4)
–
1.8
1.8
–
(0.1)
0.2
8.7
(8.8)
–
19.0
19.0
–
17.5
3.6
–
–
(4.5)
(1.1)
15.5
15.5
–
(0.3)
0.1
10.5
(9.2)
–
35.6
220.1
175.6
–
17.5
0.5
(3.8)
0.3
14.5
190.1
–
–
(0.2)
–
8.8
(123.4)
295.4
295.4
218.2
–
–
(5.7)
0.7
1.2
0.9
(2.9)
215.3
–
–
(0.1)
–
9.2
(148.9)
370.9
Total
£m
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
613.0
218.2
17.5
3.6
(5.7)
0.7
(3.3)
(0.2)
12.6
230.8
2.6
(0.3)
–
10.5
–
(148.9)
707.7
The movement of £117.7m in the share premium account in 2014 was 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 (2014: £1.6m). In addition,
cumulative goodwill of £2.3m (2014: £2.3m) has been written off against the merger reserve in previous years.
Other reserves are further analysed in note 27.
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
137
Company
At 1 January 2014
Profit for the year
Other comprehensive income:
– fair value movement on 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 on vesting of share awards
– dividends
At 31 December 2014
At 1 January 2015
Profit for the year
Other comprehensive income:
– fair value movements on 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
– transfer of share-based payment reserve on vesting of share awards
– dividends
At 31 December 2015
Other
reserves
£m
Retained
earnings
£m
Note
Share
capital
£m
28.9
Share
premium
£m
150.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.4
117.7
–
–
–
–
–
–
–
–
–
–
–
–
30.3
30.3
268.3
268.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.2
2.4
–
–
–
–
–
–
–
–
–
–
18
20
25
26
14
7
18
20
25
26
7
627.7
–
2.3
–
(0.5)
–
1.8
1.8
–
(0.1)
0.2
4.6
(0.4)
(4.2)
–
629.6
629.6
–
3.9
–
(0.8)
–
3.1
3.1
–
(0.3)
0.1
5.3
(4.0)
–
Total
£m
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
1,077.4
170.7
3.9
(5.7)
0.4
0.9
(0.5)
170.2
2.6
(0.3)
–
5.3
–
129.5
125.1
–
17.5
(3.8)
0.3
14.0
139.1
–
–
(0.2)
–
–
4.2
(123.4)
149.2
149.2
170.7
–
(5.7)
1.2
0.9
(3.6)
167.1
–
–
(0.1)
–
4.0
30.5
270.7
633.8
(148.9)
171.3
(148.9)
1,106.3
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 £170.7m (2014: £125.1m).
Other reserves are further analysed in note 27.
Financial statements
138
Provident Financial plc
Annual Report and Financial Statements 2015
Statements of cash flows
For the year ended 31 December
Cash flows from operating activities
Cash generated from/(used in) 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 repaid by/(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 (used in)/generated from financing activities
Net (decrease)/increase 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
31
12
13
13
10
7
25
27
10
22
23
2015
£m
202.0
(73.0)
–
(47.5)
81.5
(15.8)
(11.2)
1.4
–
–
–
Group
2014
£m
221.5
(72.3)
–
(44.9)
104.3
(7.4)
(11.6)
1.1
(120.0)
–
–
(25.6)
(137.9)
344.2
(254.9)
(148.9)
2.6
(0.3)
–
(57.3)
(1.4)
140.7
–
139.3
153.4
(14.1)
139.3
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
2015
£m
(48.0)
(59.2)
83.8
–
(23.4)
–
(2.3)
0.1
–
64.7
153.3
215.8
60.0
(116.8)
(148.9)
2.6
(0.3)
–
(203.4)
(11.0)
5.1
–
(5.9)
7.0
(12.9)
(5.9)
Company
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 £134.2m (2014: £121.4m) 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 22). 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 2015 on this basis was £189.9m (2014: £175.5m) compared with a dividend payable in respect of 2015 of £173.6m (2014: £141.3m).
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
139
Statement of accounting policies
General information
Basis of consolidation
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 and
Visa share holdings 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:
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
(eg employee contributions that are calculated according to
a fixed percentage of salary). 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 2015 and not early adopted:
‘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 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 the
standard and will adopt the standard in line with the mandatory
effective date of 1 January 2018, subject to endorsement by
the EU.
IFRS 16, ‘Leases’, replaces IAS 17, ‘Leases’ and provides a model for
the identification of lease arrangements and the treatment in the
financial statements of both lessees and lessors. The standard
distinguishes between leases and service contracts on the basis
of whether there is an identified asset controlled by the customer.
The standard requires the recognition of a lease liability, being
the present value of the lease payments, and a right-to-use asset
which will initially be recognised at the same value of the lease
liability. The group and company are in the process of assessing
the impact of the standard and will adopt from the expected
effective date of 1 January 2019, subject to endorsement by
the EU.
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;
> 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.
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.
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.
Financial statements
140
Provident Financial plc
Annual Report and Financial Statements 2015
Statement of accounting policies (continued)
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 which 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 with the higher of the net asset
value of the relevant subsidiary and its discounted expected future
cash flows.
Leases
Leases in which substantially all 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
was estimated by discounting the expected future cash flows from
Moneybarn’s core broker relationships over their estimated useful
economic life which was deemed to be 10 years. The asset is being
amortised on a straight-line basis over its estimated useful life.
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 three 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 up until the sale of the receivables book on 1 April
2015. 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.
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, Moneybarn and glo, 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 under that payment arrangement, used
to predict future expected cash flows which are discounted at the
original effective interest rate.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
141
Within the weekly home credit and Satsuma businesses 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
%
Nil
2½
Short leasehold buildings
Over the lease period
Method
–
Straight line
Straight line
Equipment (including computer
hardware)
Motor vehicles
10 to 331⁄3
Straight line
25
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 and 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.
Available for sale investments
Available for sale (AFS) financial assets relate to equity holdings which
are measured at fair value in the balance sheet as a reliable estimate
of the fair value can be determined. Fair value changes on AFS assets
are recognised directly in equity through other comprehensive
income, except for impairment losses and foreign exchange gains or
losses which are recognised through the income statement. The fair
value of AFS monetary assets denominated in foreign currency
are determined through translation at the spot rate at the balance
sheet date.
Dividends on AFS equity instruments are recognised in profit and loss
when the group’s right to receive the dividends is established.
The cumulative gain or loss that is recognised in equity is recycled to
the income statement on disposal of the equity holding.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand which
includes amounts invested in the Bank of England account 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.
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 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:
Financial statements 142
Provident Financial plc
Annual Report and Financial Statements 2015
Statement of accounting policies (continued)
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.
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.
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
> the derivative financial instrument expires, or is sold, terminated
or exercised; or
> the underlying hedged item matures or is sold or repaid.
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 18. Movements on the
hedging reserve in shareholders’ equity are shown in note 27. 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.
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.
> Interim dividend: when paid by the company.
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.
Borrowings
Share capital
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
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 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
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
143
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.
The cost of the award is charged to the income statement over
the vesting period and a corresponding credit is made within
liabilities. The value of the charge is adjusted at each balance
sheet date to reflect expected levels of vesting.
Share-based payments
(a) Equity-settled schemes:
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 these
schemes are equity-settled.
The cost of providing options and awards to group and company
employees is charged to the income statement of the 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 other than continued employment by the
company. 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 of the TSR component, 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.
(b) Cash-settled schemes:
The company also grants awards under the Provident Financial
Equity Plan (PFEP) to eligible employees based on a percentage of
their salary. The cost of the awards is based on the performance
conditions of either divisional profit before tax, EPS, TSR or share
price growth. The scheme is cash settled.
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 substantively 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.
Financial statements
144
Provident Financial plc
Annual Report and Financial Statements 2015
Statement of accounting policies (continued)
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 (£2,016.7m)
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, Moneybarn and glo are deemed
to be impaired when one contractual monthly payment has been
missed. In the weekly home credit business and Satsuma, 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 £20m (2014: £18m)
higher/lower.
Moneybarn goodwill (£71.2m) and acquisition intangible
(£65.0m)
The goodwill of £71.2m in respect of Moneybarn represents the
surplus of the fair value of consideration over the fair value of
identifiable assets and liabilities on the date of acquisition. The fair
value of identifiable assets included a valuation of an acquisition
intangible of £75.0m attaching to Moneybarn’s broker relationships
as the relationships are an important influence on the revenue
generating capacity of the business.
The broker relationships were valued using a dividend discount
model on the forecast surplus cash flows generated by Moneybarn’s
core broker relationships over their estimated useful life of 10 years.
In accordance with IFRS 3 ‘Business combinations’, the goodwill
arising on acquisition of Moneybarn is subject to an annual
impairment review. The impairment review is conducted by
comparing the discounted estimated future cash flows of
Moneybarn, including those derived from broker relationships,
with the carrying value of goodwill and the acquisition intangible
in the financial statements.
The impairment review conducted by management reflects a number
of key judgements and estimates, which have a material effect on the
outcome of the impairment review and therefore the carrying value
of goodwill and the acquisition intangible. These include:
> Cash flow forecasts have been extracted from the budget
produced by Moneybarn, which involves a number of judgements
and estimates, particularly in respect of new business volumes,
collections performance and the cost base of the business.
> 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 the group’s weighted average cost
of capital.
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 Moneybarn may
necessitate a material impairment charge to goodwill and/or the
acquisition intangible in future years.
Tax (current tax liabilities £50.5m, deferred tax
liabilities £14.9m)
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.
The group carries a current tax provision which is sufficient to cover
all legacy outstanding corporation tax matters which have not yet
been agreed with HMRC, as well as a provision for other possible tax
audit and enquiry issues based on an assessment of the probability
of such liabilities falling due.
If the probability assessment of uncertain tax liabilities was adjusted
by +/– 5%, it is estimated that the group’s tax liabilities would be
£0.5m (2014: £1.3m) higher/lower.
Retirement benefit asset (£62.3m)
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 20.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
145
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 in the
home credit business 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 typically visits the customer weekly,
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 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 99 to 101.
(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 2015 is the carrying value of
amounts receivable from customers of £2,016.7m (2014: £1,849.2m).
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.
Financial statements 146
Provident Financial plc
Annual Report and Financial Statements 2015
Financial and capital risk management (continued)
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 2015 was £32.4m (2014: £12.1m).
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 fully funded itself through retail deposits and repay its intercompany loan from Provident
Financial plc. As at 31 December 2015, the group’s committed borrowing facilities had a weighted average period to maturity of 2.6 years
(2014: 3.1 years) and the headroom on these committed facilities amounted to £222.3m (2014: £111.5m).
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 2015, the
liquid assets buffer, including other liquidity resources, held by Vanquis Bank amounted to £134.2m (2014: £121.4m).
In addition, from 1 October 2015 (with a transitional period extending to 1 January 2018), the group and Vanquis Bank have been 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 developed systems and controls to monitor and forecast the LCR and have been submitting regulatory reports
on the ratio since 1 January 2014. Both the group and Vanquis Bank continue to meet the LCR requirements.
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.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
147
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 2018.
Financial liabilities
2015 – group
Bank and other borrowings:
– bank facilities
– senior public bonds
– private placement loan notes
– retail bonds
– retail deposits
Total bank and other borrowings
Derivative financial instruments – settled net
Trade and other payables
Total
Financial assets
2015 – group
Derivative financial instruments – settled net
Trade and other receivables
Total
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
336.7
867.5
163.5
1,938.6
Repayable
on demand
£m
< 1 year
£m
1–2 years
£m
2–5 years
£m
14.1
–
–
–
–
14.1
–
–
14.1
161.1
20.0
16.1
71.0
189.5
457.7
0.8
98.3
556.8
–
20.0
16.1
137.3
163.3
336.7
–
–
–
290.0
92.2
50.9
434.4
867.5
–
–
Repayable
on demand
£m
< 1 year
£m
1–2 years
£m
2–5 years
£m
–
–
–
0.1
32.4
32.5
–
–
–
–
–
–
Repayable
on demand
£m
< 1 year
£m
1–2 years
£m
2–5 years
£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
–
–
Over
5 years
£m
–
–
25.4
138.1
–
163.5
–
–
Total
£m
175.2
330.0
149.8
397.3
787.2
1,839.5
0.8
98.3
Over
5 years
£m
–
–
–
Over
5 years
£m
–
–
51.6
–
98.9
–
150.5
–
–
Total
£m
0.1
32.4
32.5
Total
£m
293.9
350.0
153.8
6.3
330.5
629.6
1,764.1
3.9
94.3
887.7
150.5
1,862.3
Repayable
on demand
£m
–
–
–
< 1 year
£m
1–2 years
£m
2–5 years
£m
0.2
24.5
24.7
–
–
–
–
–
–
Over
5 years
£m
–
–
–
Total
£m
0.2
24.5
24.7
Financial statements
148
Provident Financial plc
Annual Report and Financial Statements 2015
Financial and capital risk management (continued)
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 2015 and 2014 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 2015 arose from: (i) the home credit operations in the Republic of Ireland which are
hedged by matching euro-denominated net assets with euro-denominated borrowings or forward contracts as closely as practicable; (ii) the
Vanquis Bank pilot operations in Poland, which was hedged by matching zloty-denominated net assets with zloty-denominated borrowings
or forward contracts as closely as practicable; and (iii) the available for sale investment related to Vanquis Bank’s interest in Visa Europe which
consists of upfront euro cash consideration, which has been hedged subsequent to the year end through matching the cash consideration
with euro-denominated borrowings, and deferred consideration of preferred stock which is convertible into US dollar-denominated Class A
common stock of Visa Inc on completion of the transaction. Due to the inherent uncertainty of the valuation and timing of completion, the
valuation of the common stock is not hedged.
As at 31 December 2015, a 2% movement in the sterling to euro exchange rate would have led to a £1.1m (2014: £1.1m) movement in customer
receivables with an opposite movement of £1.1m (2014: £1.1m) in external borrowings. Due to the natural hedging of matching euro-
denominated assets with euro-denominated liabilities, there would have been a minimal impact on reported profits and equity (2014: £nil).
As at 31 December 2015, a 2% movement in the sterling to euro exchange rate would have led to a £0.3m (2014: £nil) movement in the available
for sale investment and a £0.3m impact on reported profits and equity (2014: £nil). A hedge matching the asset with euro-denominated
borrowings was put in place subsequent to the year-end, which would have reduced the impact to a £0.2m (2014: £nil) movement in external
borrowings and a £0.1m impact on reported profits and equity (2014: £nil) related to the unhedged deferred consideration.
As at 31 December 2015, a 2% movement in the sterling to US dollar exchange rate would have led to a £0.1m (2014: £nil) movement in the
available for sale investment. Due to the US dollar element relating to the unhedged deferred consideration, there would have been a £0.1m
(2014: £nil) impact on reported profits and equity (2014: £nil).
As at 31 December 2015, a 2% movement in the sterling to zloty exchange rate would have led to a £nil (2014: £0.3m) movement in customer
receivables with an opposite movement of £nil (2014: £0.3m) in the borrowings. Due to the net investment hedge in place, there would have
been no impact on reported profits or equity in 2015 (2014: £nil). The cumulative foreign exchange differences which have been recognised
within other comprehensive income will be recycled to the income statement on liquidation of the Vanquis Bank pilot operation in Poland.
(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.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
149
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.
As at 31 December 2015, the gearing ratio stood at 2.2 times (2014: 2.4 times), calculated as follows:
Group
Borrowings
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
23
23
22
20
27
2015
£m
1,596.2
6.7
(134.2)
1,468.7
707.7
(62.3)
11.2
0.5
657.1
2.2
2014
£m
1,493.0
7.5
(121.4)
1,379.1
613.0
(56.0)
11.2
3.3
571.5
2.4
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 two years, particularly as a result of the capital
released from the reduction in the receivables book of the Provident 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.
(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.
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
20
27
2015
£m
707.7
(85.2)
(71.2)
11.7
(62.3)
11.2
0.5
(117.0)
395.4
–
395.4
2014
£m
613.0
(84.3)
(71.2)
14.2
(56.0)
11.2
3.3
(91.6)
338.6
0.5
339.1
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 2015, the group’s total regulatory capital was comfortably in excess of the ICG set by the PRA.
Financial statements
150
Provident Financial plc
Annual Report and Financial Statements 2015
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
2015
£m
540.4
517.4
55.3
–
Revenue
2014
£m
470.8
591.1
13.8
–
Total group before amortisation of acquisition intangibles and exceptional costs
1,113.1
1,075.7
Amortisation of acquisition intangibles
Exceptional costs
Total group
–
–
–
–
1,113.1
1,075.7
Profit/(loss)
before taxation
2015
£m
183.7
105.4
21.3
(17.5)
292.9
(7.5)
(11.8)
273.6
2014
£m
140.4
103.9
5.8
(15.7)
234.4
(2.5)
(7.3)
224.6
Exceptional costs in 2015 represent £11.8m of business restructuring costs in CCD comprising £14.4m of redundancy costs associated with
approximately 500 field managers and field administration employees as a result of the ongoing deployment of technology within CCD, net
of a £2.6m exceptional curtailment credit associated with those employees who were made redundant who were part of the group’s defined
benefit pension scheme (see note 20).
Exceptional costs in 2014 of £7.3m comprised: (i) £3.4m of business restructuring costs in CCD representing £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
curtailment credit associated with those employees made redundant who were part of the group’s defined benefit pension scheme
(see note 20); and (ii) £3.9m of expenses incurred in relation to the acquisition of Moneybarn (see note 10).
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
2015
£m
1,423.0
597.9
237.4
286.1
2,544.4
(76.2)
2,468.2
2014
£m
1,252.1
628.6
166.7
271.7
2,319.1
(60.4)
2,258.7
2015
£m
(1,067.9)
(463.3)
(221.1)
(84.4)
(1,836.7)
76.2
(1,760.5)
2014
£m
(961.7)
(500.3)
(163.7)
(80.4)
(1,706.1)
60.4
(1,645.7)
2015
£m
355.1
134.6
16.3
201.7
707.7
–
707.7
2014
£m
290.4
128.3
3.0
191.3
613.0
–
613.0
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
£76.2m (2014: £60.4m) 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.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
151
1 Segment reporting (continued)
The group’s businesses operate principally in the UK and Republic of Ireland. Vanquis Bank established a branch in Poland as part of a pilot
operation during the first half of 2012. A decision was taken to withdraw from the pilot operation in early 2015 and the receivables book was
sold to a third party with the economic interest transferring from 1 April 2015. The revenue in respect of the branch in 2015 up until the point
at which the economic interest was transferred amounted to £1.8m (2014: £5.2m) and the loss amounted to £1.8m (2014: £10.6m). The net
liabilities of the branch amounted to £nil at 31 December 2015 (2014: £18.7m), comprising assets of £nil (2014: £22.3m) and liabilities of £nil
(2014: £41.0m). These figures are included within the Vanquis Bank figures in the tables opposite.
Group
Vanquis Bank
CCD
Moneybarn
Central
Total group
Capital expenditure
Depreciation
Amortisation
2015
£m
3.4
20.5
0.8
2.3
27.0
2014
£m
6.1
12.0
0.2
0.7
19.0
2015
£m
1.5
4.5
0.3
1.4
7.7
2014
£m
1.5
3.9
0.1
1.1
6.6
2015
£m
1.4
5.6
0.4
7.5
14.9
2014
£m
0.5
4.1
0.1
2.5
7.2
Capital expenditure in 2015 comprises expenditure on intangible assets of £15.8m (2014: £7.4m) and property, plant and equipment of £11.2m (2014: £11.6m).
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 (eg aggregator/broker fees).
In addition, in CCD and Moneybarn the EIR takes account of customers repaying early.
Interest income
Fee income
Total revenue
All fee income earned relates to Vanquis Bank.
2015
£m
967.8
145.3
Group
2014
£m
942.0
133.7
1,113.1
1,075.7
Interest income relates to the interest charges on Vanquis Bank credit cards and Moneybarn conditional sale agreements and the service charge on home credit and Satsuma
loans. Fee income relates to Vanquis Bank and predominantly reflects default and over-limit fees as well as other ancillary income streams such as interchange income and
Repayment Option Plan (ROP) fees. Fee income in 2015 represented 26% (2014: 28%) 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
2015
£m
12.8
41.2
6.2
0.2
19.6
80.0
Group
2014
£m
15.4
38.9
6.7
0.3
16.2
77.5
The group’s blended funding rate in 2015 was 5.9%, down from 6.5% in 2014. This primarily reflects the development of the retail deposits programme in Vanquis Bank during
2015. Retail deposits represent approximately 46% of the group’s funding at the end of 2015 compared with approximately 38% in 2014. The all-in blended cost of taking retail
deposits in 2015, after the cost of holding a liquid assets buffer and other liquid resources in adherence with the PRA’s liquidity regime, was 3.1% (2014: 3.4%).
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 2015 was 4.8 times compared with 4.1 times in 2014.
Financial statements
152
Provident Financial plc
Annual Report and Financial Statements 2015
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)
– acquisition 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 20(a))
Exceptional redundancy costs (note 9(b))
Exceptional fees incurred on the acquisition of Moneybarn (note 10)
Impairment of amounts receivable from customers (note 15)
2015
£m
7.4
7.5
7.7
–
13.3
155.9
(2.6)
14.4
–
276.0
Group
2014
£m
4.7
2.5
6.6
0.2
12.6
155.0
(0.6)
4.0
3.9
327.8
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 21)
Impact of change in UK tax rate (note 21)
Total tax charge
2015
£m
0.1
0.3
0.5
0.9
2015
£m
(56.9)
(0.7)
(57.6)
(0.2)
2.4
(55.4)
Group
2014
£m
0.1
0.3
0.8
1.2
Group
2014
£m
(46.6)
(0.7)
(47.3)
(3.0)
1.3
(49.0)
The tax credit in respect of exceptional costs in 2015 amounted to £2.4m (2014: credit of £0.8m) and represents tax relief in respect of
the exceptional restructuring costs in CCD. The tax credit in respect of the amortisation of acquisition intangibles amounted to £1.5m
(2014: £0.6m).
The effective tax rate for 2015 prior to the amortisation of acquisition intangibles and exceptional costs, is 20.25% (2014: 21.5%) in line with the UK statutory corporation tax rate
which reduced from 21% to 20% with effect from 1 April 2015.
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
153
5 Tax charge (continued)
During 2015, further reductions in corporation tax rates were enacted, reducing the mainstream corporation tax rate from 20% to 19% with
effect from 1 April 2017 and from 19% to 18% from 1 April 2020. In addition, the Government introduced a bank corporation tax surcharge,
enacted in the 2015 Finance (No. 2) Act, which imposes, with effect from 1 January 2016, an additional 8% corporation tax on profits of banking
companies over £25m. Vanquis Bank is a banking company for these purposes. As the temporary differences on which deferred tax is
calculated are expected to largely reverse after 1 April 2020 (2014: 1 April 2015), deferred tax at 31 December 2015 has been re-measured at
18% (2014: 20%) and, in the case of Vanquis Bank, at the combined mainstream corporation tax and bank surcharge rate of 26% (2014: 20%).
In 2015, movements in the deferred tax balances have been measured at the mainstream corporation tax for the year of 20.25%. A tax credit
in 2015 of £2.4m (2014: credit of £1.3m) represents the income statement adjustment to deferred tax as a result of these changes and an
additional deferred tax charge of £0.2m (2014: credit of £0.3m) has been taken directly to other comprehensive income in respect of items
previously reflected directly in other comprehensive income.
Tax charge on items taken directly to other comprehensive income
Deferred tax charge on fair value movement in available for sale investment
Deferred tax charge on fair value movements on cash flow hedges
Deferred tax credit/(charge) on actuarial movements on retirement benefit asset
Tax charge 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 on items taken directly to other comprehensive income
2015
£m
(3.5)
(1.0)
1.2
(3.3)
(0.2)
(3.5)
Group
2014
£m
–
(0.4)
(3.8)
(4.2)
0.3
(3.9)
The deferred tax charge of £3.5m on the available for sale investment in 2015 represents the deferred tax on the revaluation of the group’s
interest in Visa Europe Limited of £17.5m which has been taken directly to other comprehensive income in the year (see note 16). Subject to
regulatory approvals, the group expects to sell its shareholding in Visa Europe Limited to Visa Inc. in exchange for upfront cash proceeds,
preferred stock and deferred cash consideration contingent on performance. Deferred tax has been measured initially at the statutory rate
for the year of 20.25%. Deferred tax has then been re-measured at the combined mainstream corporation tax and bank surcharge rates
of 28% on that element of the profit attributed to the upfront cash consideration which will be taxed in 2016. Deferred tax on the profit
attributable to the preferred stock has been re-measured at 26% as this is not expected to be taxed until the preferred stock or the shares
into which they convert are sold.
The rate of tax charge on the profit before taxation for the year is in line with (2014: higher than) the average standard rate of corporation tax
in the UK of 20.25% (2014: 21.50%). 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 20.25% (2014: 21.50%)
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
2015
£m
273.6
(55.4)
0.5
(2.6)
(0.3)
–
2.4
(55.4)
Group
2014
£m
224.6
(48.3)
0.6
(1.4)
(0.4)
(0.8)
1.3
(49.0)
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% (2014: 12.5%) rather than the UK
statutory tax rate of 20.25% (2014: 21.50%) giving rise to a beneficial impact on the group tax charge of £0.5m (2014: £0.6m).
The £2.6m charge (2014: £1.4m charge) 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.
The £2.4m credit in 2015 arises as a result of re-measuring deferred tax assets in Vanquis Bank (mainly provisions for costs which are tax deductible in future periods) at the
combined mainstream corporation tax and bank surcharge rate of 26%, having been previously measured at 20%, together with the impact of re-measuring net deferred tax
liabilities elsewhere in the group at 18% (2014: 20%). For 2014, the £1.3m credit arose primarily as a result of re-measuring the net deferred tax liabilities which arose in 2014
(mainly the deferred tax liability recognised on the fair value of Moneybarn’s broker relationships) at 20% having been originally measured at the 2014 statutory corporation
tax rate of 21.5%.
During 2014, the group incurred £3.9m of expenses in relation to the acquisition of Moneybarn which were included in exceptional costs. As it was considered tax deductions
may not be available for such costs, these gave rise to an increase in the tax charge of £0.8m in 2014.
Financial statements
154
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
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)
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.
(ii) 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
Weighted
average
number of
shares
m
2015
Per share
amount
pence
Earnings
£m
146.9
(3.2)
143.7
2.0
145.7
151.8
(2.0)
149.8
175.6
–
175.6
Weighted
average
number of
shares
m
142.3
(3.5)
138.8
2.2
141.0
2014
Per share
amount
pence
126.5
(2.0)
124.5
Earnings
£m
218.2
–
218.2
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 in 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
Weighted
average
number of
shares
m
143.7
–
–
143.7
145.7
–
–
145.7
Earnings
£m
218.2
6.0
9.4
233.6
218.2
6.0
9.4
233.6
2015
Per share
amount
pence
151.8
4.2
6.6
162.6
149.8
4.1
6.4
160.3
Weighted
average
number of
shares
m
138.8
–
–
138.8
141.0
–
–
141.0
Earnings
£m
175.6
1.9
6.5
184.0
175.6
1.9
6.5
184.0
2014
Per share
amount
pence
126.5
1.4
4.7
132.6
124.5
1.4
4.6
130.5
Adjusted basic EPS has grown by 22.6% in 2015 primarily due to the strong performance of Vanquis Bank. This growth is lower than the 25.0% 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 in August 2014, partly offset by the
reduction in the corporation tax rate from 21% to 20% on 1 April 2015.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
155
Group and company
2015
£m
–
–
92.3
56.6
148.9
2014
£m
74.4
49.0
–
–
123.4
7 Dividends
2013 final – 54.0p per share
2014 interim – 34.1p per share
2014 final – 63.9p per share
2015 interim – 39.2p per share
Dividends paid
The directors are recommending a final dividend in respect of the financial year ended 31 December 2015 of 80.9p per share (2014: 63.9p)
which will amount to an estimated dividend payment of £117.0m (2014: £92.3m). If approved by the shareholders at the annual general meeting
on 5 May 2016, this dividend will be paid on 24 June 2016 to shareholders who are on the register of members at 20 May 2016. This dividend is
not reflected in the balance sheet as at 31 December 2015 as it is subject to shareholder approval.
As a result of adjusted EPS growth of 22.6% in 2015, the directors have proposed an increase in the final dividend of 26.6% which, together with the 15.0% increase in the interim
dividend, makes a total full-year dividend increase of 22.6%. Accordingly, dividend cover, prior to the amortisation of acquisition intangibles and exceptional costs, in 2015 was
1.35 times (2014: 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
2015
£m
3.4
0.3
4.3
8.0
2014
£m
3.6
0.4
3.7
7.7
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 114 to 132 which does not include the share-based payment charge of £4.3m (2014: £3.7m) but includes the value
of LTIS and PSP share awards due to vest in 2016 of £9.0m (2014: £6.6m). 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
156
Provident Financial plc
Annual Report and Financial Statements 2015
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
2015
Number
Group
2014
Number
1,303
2,179
127
58
3,667
3,310
357
3,667
1,021
2,390
102
55
3,568
3,105
463
3,568
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 5,500 self-employed agents within CCD. The 9% reduction in CCD employee numbers reflects the impact of
the business restructuring which took place during 2014 and 2015 partly offset by additional headcount to support: (i) increased regulation and compliance; and (ii) the
development of Satsuma and glo. Vanquis Bank employee numbers have increased by 28% during 2015 due to the growth of the business, including the continued expansion
of the second contact centre in CCD’s head office in Bradford and resource to support collections activity for Satsuma. Moneybarn’s 25% increase in headcount reflects the
resource required to support the growth of the business and bring governance processes into line with the rest of the group.
(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 26)
Total employment cost prior to exceptional costs
Exceptional curtailment credit (note 20)
Exceptional redundancy costs (note 1)
Total employment costs
2015
£m
131.6
15.4
11.6
11.7
170.3
(2.6)
14.4
182.1
Group
2014
£m
123.2
14.4
8.7
8.7
155.0
(0.6)
4.0
158.4
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 £8.7m in 2014 to £10.5m in 2015 primarily reflects higher
expected vesting of LTIS schemes based on the group’s current performance.
The share-based payment charge of £11.7m (2014: £8.7m) relates to equity settled schemes of £10.5m (2014: £8.7m) and cash settled schemes of £1.2m (2014: £nil).
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
157
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 a 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.
Costs of £3.9m associated with the acquisition including due diligence, legal, advisory and tax fees were 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 were deducted from the share
premium account.
Prior to acquisition, Moneybarn reported under UK GAAP. A detailed conversion of Moneybarn’s financial statements to IFRS was 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 final 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 comprised:
(a) £75.0m was 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 was made to reflect the fair value of the receivables book at the acquisition date. This adjustment
principally related to the expected losses on those accounts which were not yet in arrears and therefore had not yet attracted an
impairment provision under IAS 39, ‘Financial instruments: Recognition and measurement’. Expected losses are currently only taken into
account 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 were 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 was 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 (see note 11). 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
158
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
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 was 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.
In 2014, 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 (note 10)
At 31 December
Accumulated amortisation
At 1 January and 31 December
Net book value at 31 December
Net book value at 1 January
2015
£m
73.3
–
73.3
2.1
71.2
71.2
Group
2014
£m
2.1
71.2
73.3
2.1
71.2
–
The goodwill arising on the acquisition of Moneybarn in August 2014 reflects the surplus of consideration over identifiable assets which
amounted to £71.2m (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.
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
159
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
–
7.5
–
10.0
65.0
72.5
44.5
–
15.8
(0.7)
59.6
32.7
–
7.4
(0.7)
39.4
20.2
11.8
2015
Total
£m
119.5
–
15.8
(0.7)
134.6
35.2
–
14.9
(0.7)
49.4
85.2
84.3
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 represents the fair value of the broker relationships arising on acquisition of Moneybarn in August 2014. The intangible
asset was 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 £15.8m (2014: £7.4m) of computer software expenditure principally relates to externally purchased and internally developed software in CCD supporting the deployment
of technology in the Provident home credit business and the systems to support the build-out of Satsuma and glo.
13 Property, plant and equipment
Group
Cost
At 1 January 2015
Additions
Disposals
At 31 December 2015
Accumulated depreciation
At 1 January 2015
Charged to the income statement
Disposals
At 31 December 2015
Net book value at 31 December 2015
Net book value at 1 January 2015
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
4.6
0.1
–
4.7
0.3
0.3
–
0.6
4.1
4.3
59.2
11.1
(4.2)
66.1
36.7
7.4
(2.8)
41.3
24.8
22.5
Total
£m
67.7
11.2
(4.2)
74.7
40.3
7.7
(2.8)
45.2
29.5
27.4
The loss on disposal of property, plant and equipment in 2015 amounted to £nil (2014: £0.2m) and represented proceeds received
of £1.4m (2014: £1.1m) less the net book value of disposals of £1.4m (2014: £1.3m).
Additions in 2015 principally comprises expenditure in respect of the cost of fitting out a second property in Bradford (Aldermanbury House) to accommodate the contact
centre for Provident home credit, the refit of the third floor at the head office in Bradford (No. 1 Godwin Street) to accommodate expansion of Vanquis Bank’s contact centre
onto the third floor in addition to their space on the second floor, fit out of new gym facility in the Bradford head office and the routine replacement of IT equipment in both
CCD and Vanquis Bank and motor vehicles for field employees within CCD.
Financial statements
160
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
13 Property, plant and equipment (continued)
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
Company
Cost
At 1 January 2015
Additions
Disposals
At 31 December 2015
Accumulated depreciation
At 1 January 2015
Charged to the income statement
Disposals
At 31 December 2015
Net book value at 31 December 2015
Net book value at 1 January 2015
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
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
10.8
2.3
(0.3)
12.8
4.5
1.4
(0.2)
5.7
7.1
6.3
The profit/(loss) on disposal of property, plant and equipment in 2015 amounted to £nil (2014: £nil) and represented proceeds received
of £0.1m (2014: £0.3m) less the net book value of disposals of £0.1m (2014: £0.3m).
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
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
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
Total
£m
14.9
2.3
(0.3)
16.9
7.9
1.4
(0.2)
9.1
7.8
7.0
Total
£m
15.0
0.7
(0.8)
14.9
7.3
1.1
(0.5)
7.9
7.0
7.7
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
161
2015
£m
528.2
–
–
528.2
31.9
–
31.9
496.3
496.3
Company
2014
£m
408.6
120.0
(0.4)
528.2
31.8
0.1
31.9
496.3
376.8
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
The directors consider the value of investments to be supported by their underlying assets.
The additions to investments in 2014 represented the gross consideration of £120.0m in respect of the acquisition of Moneybarn (see note
10). The disposal in 2014 of £0.4m represented the IFRIC 11 adjustment relating to share options/awards provided to subsidiary employees.
Under IFRIC 11, the fair value of the options/awards issued is required to be treated as a capital contribution and an investment in the relevant
subsidiary, net of any share options/award that have vested. The adjustment in respect of IFRIC 11 in 2014 amounted to a net credit of £0.4m
and was therefore treated as a disposal. The adjustment for IFRIC 11 in 2015 amounted to £nil.
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 (see note 32). All subsidiaries are consolidated and held directly by the company
except for those noted below, which are held by wholly owned intermediate companies.
Activity
Country of
incorporation
Class
of capital
%
holding
Vanquis Bank
Vanquis Bank Limited
Financial services
CCD
Provident Financial Management Services Limited
Management services
Provident Personal Credit Limited
Greenwood Personal Credit Limited
Moneybarn
Duncton Group Limited
Central
Moneybarn Group Limited
Moneybarn No. 1 Limited
Provident Investments plc
Financial services
Financial services
Financial services
Financial services
Financial services
Financial intermediary
England
England
England
England
England
England
England
England
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100*
100*
100
100*
100*
100
* Shares held by wholly owned intermediate companies.
The above companies operate principally in their country of incorporation.
Financial statements
162
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
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
1,252.0
484.6
62.1
1,798.7
Due in
more than
one year
£m
–
60.5
157.5
218.0
2015
Total
£m
1,252.0
545.1
219.6
2,016.7
Due within
one year
£m
1,109.4
532.8
51.4
1,693.6
Due in
more than
one year
£m
–
55.3
100.3
155.6
2014
Total
£m
1,109.4
588.1
151.7
1,849.2
Vanquis Bank’s receivables comprise £1,252.0m (2014: £1,093.9m) in respect of the UK business and £nil (2014: £15.5m) in respect of the Polish pilot operation. UK receivables
grew by 14.5% in 2015 as a result of growth in UK customer numbers of 9.9% together with the success of the credit line increase programme to good-quality existing customers
through the ‘low and grow’ approach to lending. The receivables in respect of the Polish pilot operation were derecognised on 1 April 2015 following the sale and transfer of
the economic interest to a third party. CCD receivables comprise £522.2m in respect of the Provident home credit business (2014: £582.5m), £12.1m in respect of Satsuma
(2014: £5.0m) and £10.8m in respect of glo (2014: £0.6m). Home credit receivables showed a 10.4% reduction in 2015 reflecting the continued impact of significantly tighter
credit standards which has restricted the recruitment of more marginal customers into the business.
The average effective interest rate for the year ended 31 December 2015 was 30% for Vanquis Bank (2014: 31%), 114% for CCD (2014: 112%)
and 28% for Moneybarn (2014: 29%). The average period to maturity of the amounts receivable from customers within CCD is 6.0 months
(2014: 6.0 months) and within Moneybarn is 37.0 months (2014: 32.0 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 £3.3 billion (2014: £2.9 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
1,168.4
–
83.6
1,252.0
Vanquis
Bank
%
93.3
–
6.7
100.0
CCD
£m
Moneybarn
£m
279.9
58.1
207.1
545.1
192.6
–
27.0
219.6
2015
Group
£m
1,640.9
58.1
317.7
2,016.7
2015
CCD
%
Moneybarn
%
Group
%
51.3
10.7
38.0
100.0
87.7
–
12.3
100.0
81.4
2.9
15.7
100.0
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
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. The significant reduction in the proportion of impaired accounts within Moneybarn during 2015 reflects
the sale of old, low value delinquent debtors to third party debt purchasers.
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
163
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 and Satsuma businesses 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
2015
£m
41.1
9.9
7.1
58.1
Group
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 accounts during the year are as follows:
Vanquis Bank allowance account
At 1 January
Charge for the year
Amounts written off during the year
Amounts recovered during the year
Sale of Polish receivables
At 31 December
Moneybarn allowance account
At 1 January/on acquisition
Charge for the period
Amounts written off during the period
Sale of delinquent receivables
At 31 December
2015
£m
178.6
160.5
(127.1)
23.5
(10.5)
225.0
2015
£m
27.1
8.9
(2.0)
(15.6)
18.4
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
2015
£m
160.5
106.6
8.9
276.0
Group
2014
£m
128.8
149.1
(123.3)
24.0
–
178.6
Group
2014
£m
27.0
1.2
(1.1)
–
27.1
Group
2014
£m
149.1
177.5
1.2
327.8
The impairment charge in Vanquis Bank comprises £158.9m (2014: £144.9m) in respect of the UK business and £1.6m (2014: £4.2m) in respect
of the Polish pilot operation prior to the transfer of the economic interest to a third party on 1 April 2015.
Financial statements
164
Provident Financial plc
Annual Report and Financial Statements 2015
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
2015
£m
35.4
249.9
6.7
292.0
Group
2014
£m
30.9
299.8
2.5
333.2
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 £1,477.0m
(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 £1,252.0m, which is stated after the deduction of the impairment allowance account of £225.0m. 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
2015
£m
1,961.6
55.1
–
Group
2014
£m
1,779.8
53.9
15.5
2,016.7
1,849.2
Euro receivables represent loans issued by the home credit business in the Republic of Ireland, and amount to 10% of CCD’s receivables (2014: 9%). Zloty receivables relate
to the Vanquis Bank pilot credit card operation in Poland prior to the transfer of the economic interest to a third party on 1 April 2015.
Under IFRS 13, ‘Fair Value Measurement’, receivables are classed as Level 3 as they are not traded on an active market and the fair value
is therefore determined through future cash flows.
16 Available for sale investment
Available for sale investment
Fair value of shares in Visa Europe Limited
2015
£m
17.5
Group
2014
£m
–
On 2 November 2015, Visa Inc. announced the proposed acquisition of Visa Europe Limited to create a single global payments business under
the VISA brand. Vanquis Bank is a member and shareholder of Visa Europe and in exchange for its one redeemable ordinary share (previously
held at par of €10) will receive upfront consideration in the form of cash (approximately €14.7m) and preferred stock (approximately €10.1m)
on completion of the transaction. The preferred stock is convertible into Class A common stock of Visa Inc, at a future date, subject to certain
conditions. In addition, Vanquis Bank may receive deferred cash consideration in 2020 which is contingent on certain performance thresholds
being met by Visa Europe Limited.
Following the announcement of the proposed transaction, Vanquis Bank’s interest in Visa Europe has been valued at fair value which reflects
the expected upfront cash proceeds and a number of factors and uncertainties relating to the other consideration. The valuation of the
preferred stock has been determined using the common stock’s value as an approximation as both classes of stock have similar dividend
rights. However, adjustments are made for: (i) illiquidity, as the preferred stock is not tradeable on an open market and can only be transferred
to other VISA principle members; and (ii) future litigation costs which could affect the valuation of the stock prior to conversion. No valuation
has been placed on the deferred element of the consideration due to its inherent uncertainty. Accordingly, the 2015 balance sheet reflects
an available for sale investment of £17.5m (2014: £nil) with the corresponding credit taken to equity. Subject to regulatory approvals, the
transaction is expected to complete in the second quarter of 2016. Following completion, the gain taken through equity in 2015 will be recycled
through the income statement as an exceptional gain in 2016.
Under IFRS 13, ‘Fair Value Measurement’, the investment is classified as Level 3 as the valuation is determined using a combination of
observable and unobservable inputs. As the cash valuation has been stated in the proposed sale documentation and the common stock share
price is readily available, these inputs are deemed to be observable. However, certain assumptions have been made in respect of the illiquidity
adjustment to the share price and the likelihood of litigation costs in the future. These inputs are therefore deemed to be unobservable.
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
165
17 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
Available for sale investment
Cash and cash equivalents
Amounts receivable from customers
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
–
132.7
2,016.7
32.4
–
–
–
–
17.5
20.7
–
–
–
–
–
–
2,181.8
38.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,596.2)
–
(98.3)
–
–
–
–
–
–
–
–
–
–
–
–
(0.6)
–
–
–
(1,694.5)
(0.6)
–
–
–
–
62.3
29.5
71.2
85.2
248.2
–
–
–
(50.5)
(14.9)
(65.4)
2015
Total
£m
17.5
153.4
2,016.7
32.4
62.3
29.5
71.2
85.2
2,468.2
(1,596.2)
(0.6)
(98.3)
(50.5)
(14.9)
(1,760.5)
Financial assets held as available for sale relate to UK government gilts held as part of Vanquis Bank’s liquid assets buffer and the Visa asset
(see note 22).
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
–
–
–
–
65.7
–
–
–
–
–
–
–
1,953.9
65.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,493.0)
–
(94.3)
–
–
–
–
0.2
–
–
–
–
–
0.2
–
(4.4)
–
–
–
(1,587.3)
(4.4)
–
–
–
–
56.0
27.4
71.2
84.3
238.9
–
–
–
(40.4)
(13.6)
(54.0)
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)
Financial statements
166
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
17 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:
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
7.0
–
1,525.5
–
–
1,532.5
–
–
–
–
–
–
–
–
–
–
–
–
(864.0)
–
(118.8)
–
–
–
–
–
–
–
–
–
(0.5)
–
–
–
(982.8)
(0.5)
–
496.3
–
62.3
7.8
566.4
–
–
–
(0.5)
(8.8)
(9.3)
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)
–
–
–
–
–
–
–
–
–
(4.4)
–
–
–
(1,040.2)
(4.4)
–
496.3
–
56.0
7.0
559.3
–
–
–
(1.1)
(8.2)
(9.3)
2015
Total
£m
7.0
496.3
1,525.5
62.3
7.8
2,098.9
(864.0)
(0.5)
(118.8)
(0.5)
(8.8)
(992.6)
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)
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
167
18 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:
Group
Interest rate 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
2015
2014
Contractual/
notional
amount
£m
120.0
9.0
129.0
Contractual/
notional
amount
£m
120.0
120.0
Contractual/
notional
amount
£m
120.0
6.5
126.5
Contractual/
notional
amount
£m
120.0
120.0
Assets
£m
Liabilities
£m
–
–
–
–
–
–
(0.5)
(0.1)
(0.6)
–
(0.6)
(0.6)
2015
Assets
£m
Liabilities
£m
–
–
–
–
–
(0.5)
(0.5)
–
(0.5)
(0.5)
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)
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
2015
£m
3.9
–
(0.3)
3.6
Group
2014
£m
2.3
(0.2)
0.1
2.2
2015
£m
3.9
–
–
3.9
Company
2014
£m
2.3
–
–
2.3
Under IFRS 13, ‘Fair value Measurement’, 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.
(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 (2014: £nil).
Financial statements
168
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
18 Derivative financial instruments (continued)
(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:
Group and company
Liability at 1 January
Credited to the hedging reserve
Liability at 31 December
2015
£m
(4.4)
3.9
(0.5)
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
Sterling
Weighted
average
interest
rate
%
3.2
Range of
interest
rates
%
3.1–3.3
2015
Weighted
average
period to
maturity
years
0.4
Weighted
average
interest
rate
%
3.2
Range of
interest
rates
%
3.1–3.3
2014
£m
(6.7)
2.3
(4.4)
2014
Weighted
average
period to
maturity
years
1.4
(d) Cross-currency swaps
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.
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. 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.
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
2015
£m
–
–
–
–
Group
2014
£m
5.4
(5.2)
(0.2)
–
(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 up until its closure during 2015. A liability of £0.1m is held in the group balance sheet
as at 31 December 2015 in respect of foreign exchange contracts (2014: asset of £0.2m).
The group’s foreign exchange contracts comprise forward foreign exchange contracts to buy sterling and sell euros for a total notional amount
of £9.0m (2014: £6.5m). These contracts have a range of maturity dates from 18 January 2016 to 13 December 2016 (2014: 20 January 2015 to
20 October 2015). These contracts were designated as cash flow hedges and were effective under IAS 39. Accordingly, the movement in fair
value of £0.3m has been charged to the hedging reserve within equity (2014: credit of £0.1m).
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
169
2015
£m
919.1
Company
2014
£m
983.8
19 Trade and other receivables
Non-current assets
Amounts owed by group undertakings
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 (2014: £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
2015
£m
0.1
12.6
–
19.7
32.4
Group
2014
£m
0.1
8.5
–
15.9
24.5
2015
£m
–
–
604.4
2.0
606.4
Company
2014
£m
–
–
578.1
2.4
580.5
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 (2014: £nil). Within the company, an
impairment provision of £123.1m (2014: £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 a £0.6m charge to the company income statement in 2015
(2014: £nil) in respect of the increased provision.
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 (2014: carrying value) set out above.
There is no collateral held in respect of trade and other receivables (2014: £nil).
20 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 2015, 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 16% 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
2015 by a qualified independent actuary. The valuation used for the purposes of IAS 19 ‘Employee benefits’, has been based on results of the
2015 valuation, updated by the actuary 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.
Financial statements 170
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
20 Retirement benefit asset (continued)
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 has increased 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
2015
%
11
10
20
31
28
–
100
£m
74.7
67.5
133.0
208.3
181.7
1.2
666.4
(604.1)
62.3
£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
As part of a de-risking strategy agreed between the company and the pension trustees to hedge the inflation and interest rate risks associated with the liabilities of the pension
scheme, a substantial amount of more volatile growth funds (equities) were reinvested in liability protection assets (fixed interest and index-linked gilts) in January 2015.
The valuation of the pension scheme has increased from £56.0m at 31 December 2014 to £62.3m at 31 December 2015. A high level reconciliation of the movement is as follows:
Group and company
Pension asset as at 31 December 2014
Cash contributions made by the group
Actuarially based cost of new benefits
Reduction in future liabilities due to CCD business restructuring
Return on assets being held to meet pension obligations
Increase in discount rate used to discount future liabilities
Reduction in inflation rate used to forecast pensions
Changes to align mortality assumptions to latest mortality tables
2015 valuation alignments in relation to deaths, leavers and benefits
Lower inflationary pension increases from 1 January 2016
Pension asset as at 31 December 2015
The amounts recognised in the income statement were as follows:
£m
56
12
(3)
3
(50)
6
6
8
14
10
62
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
2015
£m
(5.0)
(23.5)
25.7
–
(2.8)
2.6
(0.2)
2014
£m
(5.8)
(25.5)
26.9
–
(4.4)
0.6
(3.8)
2015
£m
(5.0)
(23.5)
25.7
11.6
8.8
2.6
11.4
2014
£m
(5.8)
(25.5)
26.9
12.4
8.0
0.6
8.6
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
171
20 Retirement benefit asset (continued)
The exceptional curtailment credit of £2.6m (2014: £0.6m) relates to the reduction in headcount of 500 (2014: 225) 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
Group
Company
2015
£m
700.1
25.7
–
(52.4)
12.2
(19.2)
666.4
2014
£m
613.8
26.9
–
77.9
13.1
(31.6)
700.1
2015
£m
700.1
25.7
11.6
(52.4)
0.6
(19.2)
666.4
2014
£m
613.8
26.9
12.4
77.9
0.7
(31.6)
700.1
The group contributions to the defined benefit pension scheme in the year ending 31 December 2016 are expected to be approximately £11m.
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
Group and company
2015
£m
(644.1)
(5.0)
(23.5)
2.6
46.7
19.2
2014
£m
(584.6)
(5.8)
(25.5)
0.6
(60.4)
31.6
Present value of the defined benefit obligation at 31 December
(604.1)
(644.1)
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 18 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
2015
%
3.00
2.00
2.80
2.00
3.75
2014
%
3.10
2.10
2.90
2.10
3.70
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 are based on the self-administered pension scheme (SAPS) series 1 tables, with multipliers of 105% and 115%
respectively for males and females. The 5% upwards adjustment to mortality rates for males and a 15% upwards adjustment for females
reflects the lower life expectancies within the scheme compared to average pension schemes, which was concluded following a study of
the scheme’s membership. Future improvements in mortality are based on the Continuous Mortality Investigation (CMI) 2015 model with
a long-term improvement trend of 1.25% per annum. Under these mortality assumptions, the life expectancies of members are as follows:
Group and company
Current pensioner aged 65
Current member aged 45 from age 65
2015
years
21.7
23.4
Male
2014
years
22.0
23.7
2015
years
23.3
25.1
Female
2014
years
23.5
25.4
Financial statements
172
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
20 Retirement benefit asset (continued)
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 1 year
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
Group and company
2015
£m
11
5
18
2014
£m
14
9
19
Group and company
2015
£m
25.7
(52.4)
(26.7)
2014
£m
26.9
77.9
104.8
Group and company
2015
£m
(52.4)
46.7
(5.7)
(81.9)
2014
£m
77.9
(60.4)
17.5
(76.2)
The history of the net retirement benefit asset recognised in the balance sheet and experience adjustments for the group is as follows:
Fair value of scheme assets
Present value of funded defined benefit obligation
Retirement benefit asset recognised in the balance sheet
Experience (losses)/gains on scheme assets:
– amount (£m)
– percentage of scheme assets (%)
Experience gains/(losses) on scheme liabilities:
– amount (£m)
– percentage of scheme liabilities (%)
2015
£m
666.4
(604.1)
62.3
(52.4)
(7.9)
25.9
4.3
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)
Group and company
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)
(b) Pension schemes – defined contribution
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 £5.5m for the year ended 31 December 2015 (2014: £4.5m). Contributions made by the company amounted to £0.4m
(2014: £0.4m). No contributions were payable to the fund at the year-end (2014: £nil).
The group contributed £0.2m to personal pension plans in the year (2014: £0.1m), £0.5m into the Undefined, Unapproved Retirement Benefit
Scheme (UURBS) (2014: £0.4m) and £0.2m into cash supplements (2014: £nil).
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
173
21 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, property, plant and equipment which is depreciated on a different basis for tax purposes, certain cost provisions for which tax
deductions are only available when the costs are paid and available for sale assets which are taxed only on disposal. 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. During 2015, further reductions in
corporation tax rates were enacted, reducing the corporation tax rate from 20% to 19% with effect from 1 April 2017 and from 19% to 18% with
effect from 1 April 2020. In addition, the Government introduced a bank corporation tax surcharge, enacted in the 2015 Finance (No.2) Act,
which imposes, with effect from 1 January 2016, an additional 8% corporation tax on profits of banking companies over £25m. Vanquis Bank
is a banking company for these purposes . As the temporary differences on which deferred tax is calculated as at 31 December 2015 are
expected to largely reverse after 1 April 2020 (2014: 1 April 2015), deferred tax at 31 December 2015 has been re-measured at 18% (2014: 20%)
and, in the case of Vanquis Bank, at the combined mainstream corporation tax and bank surcharge rate of 26% (2014: 20%). In 2015,
movements in the deferred tax balances have been measured at the mainstream corporation tax rate for the year of 20.25% (2014: 21.5%).
A tax credit in 2015 of £2.4m (2014: credit of £1.3m) represents the income statement adjustment to deferred tax as a result of these changes
and an additional deferred tax charge of £0.2m (2014: credit of £0.3m) has been taken directly to other comprehensive income in respect of
items previously 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 to the income statement
– (charge)/credit to other comprehensive income
At 31 December
An analysis of the deferred tax liability for the group is set out below:
2015
£m
(13.6)
(0.2)
–
(3.3)
2.4
(0.2)
(14.9)
Group
2014
£m
3.5
(3.0)
(11.5)
(4.2)
1.3
0.3
(13.6)
2015
£m
(8.2)
(1.9)
–
0.4
–
0.9
(8.8)
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:
– (charge)/credit to the income statement
– (charge)/credit to other comprehensive income
At 31 December
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
2.0
0.5
–
–
(0.1)
–
2.4
(4.7)
1.7
–
(4.5)
2.3
(1.1)
(6.3)
(10.9)
(2.4)
–
1.2
0.2
0.9
(11.0)
2015
Total
£m
(13.6)
(0.2)
–
(3.3)
2.4
(0.2)
(14.9)
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)
(13.6)
Company
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
Financial statements
174
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
21 Deferred tax (continued)
An analysis of the deferred tax liability for the company is set out below:
Company – (liability)/asset
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:
– (charge)/credit to the income statement
– credit to other comprehensive income
At 31 December
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
(0.3)
0.1
–
–
–
(0.2)
3.0
0.4
(0.8)
(0.2)
–
2.4
(10.9)
(2.4)
1.2
0.2
0.9
(11.0)
2015
Total
£m
(8.2)
(1.9)
0.4
–
0.9
(8.8)
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
(0.4)
0.1
–
–
–
(0.3)
3.4
0.1
(0.5)
–
–
3.0
(5.8)
(1.7)
(3.8)
0.1
0.3
(10.9)
2014
Total
£m
(2.8)
(1.5)
(4.3)
0.1
0.3
(8.2)
Deferred tax assets have been recognised in respect of all temporary differences because it is probable that these assets will be recovered.
22 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 Process (ILAAP) 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 £134.2m
at 31 December 2015 (2014: £121.4m) and is held in a combination of UK government gilts of £20.7m (2014: £65.7m) and a Bank of England reserves account of £113.5m
(2014: £55.7m).
Cash at bank and in hand
2015
£m
153.4
Group
2014
£m
145.9
2015
£m
7.0
Company
2014
£m
7.7
In addition to cash and cash equivalents, the group had £14.1m of bank overdrafts at 31 December 2015 (2014: £5.2m) and the company had
£12.9m of bank overdrafts (2014: £2.6m) both of which are disclosed within bank and other borrowings (see note 23).
The currency profile of cash and cash equivalents is as follows:
Sterling
Euro
Zloty
Total cash and cash equivalents
2015
£m
153.2
0.1
0.1
153.4
Group
2014
£m
143.5
0.2
2.2
145.9
2015
£m
7.0
–
–
7.0
Company
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 and the
Bank of England base rate.
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
175
23 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 23(d)), loan notes privately placed with UK institutions (see note 23(e)), retail bonds (see note 23(f)), retail deposits
issued by Vanquis Bank (see note 23(g)) and subordinated loan notes (see note 23(h)). As at 31 December 2015, borrowings under these facilities amounted to £1,596.2m
(2014: £1,493.0m).
(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
2015
2014
Borrowing
facilities
available
£m
Borrowings
£m
Borrowing
facilities
available
£m
Borrowings
£m
23.7
239.3
263.0
279.8
1,142.0
150.0
1,571.8
1,834.8
14.1
239.3
253.4
279.0
918.9
144.9
1,342.8
1,596.2
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
Borrowings are stated after deducting £6.7m of unamortised arrangement fees (2014: £7.5m).
In order to reconcile the borrowings shown in the table above and the headroom on committed facilities shown in 23(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 as follows:
Group
Total group facilities and borrowings
Repayable on demand
Unamortised arrangement fees
Total group committed facilities and borrowings
Headroom on committed facilities
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
2015
Facilities
£m
Borrowings
£m
1,834.8
(23.7)
–
1,811.1
1,596.2
(14.1)
6.7
1,588.8
222.3
2015
Facilities
£m
1,630.7
(23.9)
–
1,606.8
2014
Borrowings
£m
1,493.0
(5.2)
7.5
1,495.3
111.5
2014
Borrowing
facilities
available
£m
Borrowings
£m
Borrowing
facilities
available
£m
Borrowings
£m
23.7
60.0
83.7
130.0
740.1
150.0
1,020.1
1,103.8
12.9
60.0
72.9
129.1
517.1
144.9
791.1
864.0
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
Financial statements
176
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
23 Bank and other borrowings (continued)
(b) Maturity profile of bank and other borrowings (continued)
As at 31 December 2015, the weighted average period to maturity of the group’s committed facilities, including retail deposits, was 2.8 years
(2014: 3.1 years) and for the company’s committed facilities was 3.2 years (2014: 3.5 years). Excluding retail deposits, the weighted average
period to maturity of the group’s committed facilities was 3.2 years (2014: 3.5 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
Euro
Zloty
Total group
Company
Sterling
Euro
Zloty
Total company
Fixed
£m
1,295.0
–
–
1,295.0
Fixed
£m
564.0
–
–
564.0
Floating
£m
245.4
55.8
–
301.2
Floating
£m
244.2
55.8
–
300.0
2015
Total
£m
1,540.4
55.8
–
1,596.2
2015
Total
£m
808.2
55.8
–
864.0
Fixed
£m
1,089.6
–
–
1,089.6
Fixed
£m
509.3
–
–
509.3
Floating
£m
331.5
54.5
17.4
403.4
Floating
£m
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
As detailed in note 18, 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 £1,415.0m (2014: £1,209.6m) and the company’s fixed rate borrowings are £684.0m
(2014: £629.3m).
(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 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.
All US dollar-denominated loan notes matured and were repaid in 2014.
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 with the second repayment of £10.0m due on 13 January 2017. The facility bears interest at rates linked to LIBOR.
The company has also 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, repaid on 27 May 2014.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
177
23 Bank and other borrowings (continued)
(f) Retail bonds
The company has issued five 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
9 April 2015
Total group and company
Amount
£m
25.2
50.0
120.0
65.0
60.0
320.2
Rate
%
7.5%*
7.5%
7.0%
6.0%
Maturity date
14 April 2020
30 September 2016
4 October 2017
27 September 2021
5.125%
9 October 2023
* 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 2015, £731.0m (2014: £580.3m)
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 2015 have
been issued at rates of between 1.51% and 3.02%.
A reconciliation of the movement in retail deposits is set out below:
Group
At 1 January
New funds received
Maturities
Retentions
Cancellations
Capitalised interest
At 31 December
2015
£m
580.3
225.7
(121.6)
58.5
(19.4)
7.5
731.0
2014
£m
435.1
190.7
(69.7)
26.6
(8.9)
6.5
580.3
(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 and the remaining £6.0m was settled on maturity. The rights of repayment to holders of the loan notes were 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 fully fund itself through
retail deposits and repay its intercompany loan to Provident Financial plc.
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
Group and company
2015
£m
–
–
222.3
222.3
2014
£m
–
–
111.5
111.5
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 £283.0m as
at 31 December 2015. Accordingly, Vanquis Bank’s retail deposits capacity at 31 December 2015 amounts to £283.0m. The group’s total funding capacity at the end of 2015
therefore amounts to £505.3m, being the group’s headroom on undrawn committed borrowing facilities of £222.3m plus the amount of Vanquis Bank’s intercompany loan
of £283.0m.
Financial statements
178
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
23 Bank and other borrowings (continued)
(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
Company
Sterling
Weighted
average
interest
rate
%
4.80
Weighted
average
interest
rate
%
7.19
2015
Weighted
average
period to
maturity
years
2.94
2015
Weighted
average
period to
maturity
years
3.77
Weighted
average
interest
rate
%
5.18
Weighted
average
interest
rate
%
7.41
2014
Weighted
average
period to
maturity
years
3.27
2014
Weighted
average
period to
maturity
years
4.26
After taking account of interest rate swaps and cross-currency swaps, the sterling-weighted average fixed interest rate for the group was 4.67%
(2014: 4.98%) and for the company was 6.50% (2014: 6.62%). The sterling-weighted average period to maturity on the same basis is 2.9 years
(2014: 3.3 years) for the group and 3.6 years (2014: 4.3 years) for the company.
(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
Euro private placement loan notes
Retail bonds
Retail deposits
Subordinated loan notes
Total group
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
Book value
£m
2015
Fair value
£m
Book value
£m
2014
Fair value
£m
167.6
250.0
120.0
7.4
320.2
731.0
–
167.6
283.4
134.7
8.1
333.0
746.4
–
268.7
250.0
120.0
7.8
260.2
580.3
6.0
268.7
284.8
138.5
8.6
278.2
607.1
6.3
1,596.2
1,673.2
1,493.0
1,592.2
Book value
£m
2015
Fair value
£m
Book value
£m
2014
Fair value
£m
166.4
250.0
120.0
7.4
320.2
–
864.0
166.4
283.4
134.7
8.1
333.0
–
925.6
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
The fair value of the sterling 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.
Financial statements
Provident Financial plc
Annual Report and Financial Statements 2015
179
24 Trade and other payables
Current liabilities
Trade payables
Amounts owed to group undertakings
Other payables including taxation and social security
Accruals
Total
2015
£m
2.1
–
9.1
87.1
98.3
Group
2014
£m
3.3
–
11.0
80.0
94.3
2015
£m
–
89.5
1.5
27.8
118.8
Company
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 contributions
accrued in respect of share-based payments. The increase during 2015 principally reflects the growth of Moneybarn and interest accruals relating to retail deposits.
25 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
2015
Issued and
fully paid
30.5
147.2
Authorised
40.0
193.0
2014
Issued and
fully paid
30.3
146.4
Authorised
40.0
193.0
2015
m
146.4
0.8
–
147.2
2014
m
139.6
0.9
5.9
146.4
The shares issued pursuant to the exercise/vesting of options and awards comprised 760,488 ordinary shares (2014: 886,497) with a nominal
value of £104,482 (2014: £183,746) and an aggregate consideration of £2.6m (2014: £2.2m). In addition, in 2014 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, were 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 2015, the EBT held 2,556,478 (2014: 2,535,307)
shares in the company with a cost of £0.4m (2014: £0.6m) and a market value of £80.1m (2014: £76.3m). 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 2015, awards under the PSP, held in the name of the individual subject to the award, were 966,020
(2014: 942,626) ordinary shares with a cost of £0.2m (2014: £0.2m) and a market value of £33.5m (2014: £23.2m).
Financial statements
180
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
26 Share-based payments
The group issues share options and awards to employees as part of its employee remuneration packages. The group operates three equity settled 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).
In 2015 the group introduced a cash-settled share incentive scheme, the Provident Financial Equity Plan (PFEP) for eligible employees based on a percentage of salary. The group
also previously operated senior executive share option schemes (ESOS/SESO), although no options have been granted under these schemes since 2006.
When an equity settled share option or award is granted, a fair value is calculated based on the share price at grant date, probability of the option/award vesting, the group’s
recent share price volatility, and the risk associated with the option/award. A fair value is calculated based on the value of awards granted and adjusted at each balance sheet
date for the probability of vesting against performance conditions.
The fair value of all options/awards are charged to the income statement on a straight-line basis over the vesting period of the underlying option/award.
During 2015, awards/options have been granted under the LTIS, PSP, SAYE and PFEP schemes (2014: awards/options granted under the LTIS, PSP and SAYE schemes).
The increase in the equity-settled share-based payment charge from £8.7m in 2014 to £10.5m in 2015, principally reflects higher expected levels of vesting of LTIS schemes
based on the group’s current performance.
(a) Equity-settled schemes
The charge to the income statement in 2015 for equity settled schemes was £10.5m for the group (2014: £8.7m) and £5.3m for the
company (2014: £4.6m).
The fair value per award/option granted and the assumptions used in the calculation of the equity settled share-based payment charges
for the group and company are as follows:
Group
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 (£)
Company
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 (£)
PSP
LTIS
2015
SAYE
PSP
LTIS
2014
SAYE
25 Feb 2015
25 Feb 2015
18 Sep 2015
8 April 2014
8 April 2014
5 Sep 2014
£27.26
–
179,008
3
20.0%
3
3
1.19%
n/a
27.26
£27.26
–
319,478
3
£30.90
£21.58
233,006
3 and 5
20.0% 20.8%–22.7%
3
3
Up to 5
Up to 5
1.19% 1.21%–1.53%
n/a
3.0%
20.39–27.26
6.57–7.41
2015
18.99
–
202,689
3
21.8%
3
3
1.41%
n/a
18.99
18.99
–
413,853
3
21.31
16.44
269,202
3 and 5
21.8%
21.2%–22.2%
3
3
Up to 5
Up to 5
1.41%
1.23%–1.75%
n/a
4.4%
13.97–18.99
4.16–4.27
PSP
25 Feb 2015
LTIS
25 Feb 2015
SAYE
18 Sep 2015
PSP
8 April 2014
LTIS
8 April 2014
£27.26
–
105,922
3
20.0%
3
3
1.19%
n/a
27.26
£27.26
–
126,494
3
£30.90
£21.58
8,678
3 and 5
20.0% 20.8%–22.7%
3
3
Up to 5
Up to 5
1.19% 1.21%–1.53%
n/a
20.39
3.0%
6.57–7.41
18.99
–
132,316
3
21.8%
3
3
1.41%
n/a
18.99
2014
SAYE
5 Sep 2014
21.31
16.44
15,290
3 and 5
18.99
–
175,366
3
21.8%
21.2%–22.2%
3
3
Up to 5
Up to 5
1.41%
1.23%–1.75%
n/a
13.97
4.4%
4.16–4.27
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 of a similar duration to the life of the share option.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
181
26 Share-based payments (continued)
A reconciliation of award/share option movements during the year is shown below:
Group
Outstanding at 1 January 2015
Awarded/granted
Lapsed
Exercised
Outstanding at
31 December 2015
Exercisable at 31 December 2015
Number
719,525
179,008
–
(249,507)
649,026
–
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
–
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
Number
1,356,343
319,478
(108,178)
(383,226)
1,184,417
–
Number
1,938,223
413,853
(265,058)
(730,675)
1,356,343
–
SAYE
Weighted
average
exercise
price
£
12.25
21.65
14.02
9.39
16.35
9.67
SAYE
Weighted
average
exercise
price
£
9.56
16.44
10.56
7.91
12.25
8.12
Number
814,660
233,006
(90,407)
(256,410)
700,849
20,851
Number
902,784
269,202
(86,737)
(270,589)
814,660
22,650
ESOS/SESO
Weighted
average
exercise
price
£
5.77
–
–
–
5.77
5.77
ESOS/SESO
Weighted
average
exercise
price
£
5.77
–
–
–
5.77
5.77
Number
10,820
–
–
–
10,820
10,820
Number
10,820
–
–
–
10,820
10.820
Share awards outstanding under the LTIS scheme at 31 December 2015 had an exercise price of £nil (2014: £nil) and a weighted average
remaining contractual life of 1.1 years (2014: 1.2 years). Share options outstanding under the ESOS/SESO schemes at 31 December 2015 had
an exercise price of 577p (2014: 577p) and a weighted average remaining contractual life of nil years (2014: nil years). Share options outstanding
under the SAYE schemes at 31 December 2015 had exercise prices ranging from 656p to 2,158p (2014: 656p to 1,644p) and a weighted average
remaining contractual life of 2.0 years (2014: 2.0 years). Share awards outstanding under the PSP schemes at 31 December 2015 had an
exercise price of £nil (2014: £nil) and a weighted average remaining contractual life of 1.1 years (2014: 1.2 years).
Financial statements
182
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
26 Share-based payments (continued)
Company
Outstanding at 1 January 2015
Awarded/granted
Lapsed
Exercised
Outstanding at 31 December 2015
Exercisable at 31 December 2015
Company
Outstanding at 1 January 2014
Awarded/granted
Lapsed
Exercised
Outstanding at 31 December 2014
Exercisable at 31 December 2014
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
PSP
Weighted
average
exercise
price
£
–
–
–
–
–
–
Number
473,980
105,922
–
(169,455)
410,447
–
Number
505,134
132,316
–
(163,470)
473,980
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
LTIS
Weighted
average
exercise
price
£
–
–
–
–
–
–
Number
664,481
126,494
(7,788)
(261,370)
521,817
–
Number
1,050,358
175,366
(235,799)
(325,444)
664,481
–
SAYE
Weighted
average
exercise
price
£
13.79
21.58
15.60
10.58
16.56
–
SAYE
Weighted
average
exercise
price
£
9.90
16.44
8.88
7.71
13.79
–
Number
30,845
8,678
(878)
(5,830)
32,815
–
Number
25,508
15,290
(1,591)
(8,362)
30,845
–
Share awards outstanding under the LTIS scheme at 31 December 2015 had an exercise price of £nil (2014: £nil) and a weighted average
remaining contractual life of 1.0 years (2014: 1.1 years). Share options outstanding under the SAYE schemes at 31 December 2015 had exercise
prices ranging from 868p to 2,158p (2014: 662p to 1,644p) and a weighted average remaining contractual life of 2.7 years (2014: 2.3 years).
Share awards outstanding under the PSP schemes at 31 December 2015 had an exercise price of £nil (2014: £nil) and a weighted average
remaining contractual life of 1.1 years (2014: 1.2 years). There were no share options outstanding under the ESOS/SESO schemes at
31 December 2015.
(b) Cash-settled schemes
During 2015 cash awards were granted under the PFEP to eligible employees that require the group and company to pay amounts linked to
a combination of salary, financial performance and share price performance of Provident Financial plc. The charge to the income statement
in 2015 was £1.2m for the group (2014: £nil) and £0.1m for the company (2014: £nil). The group has a liability of £1.2m as at 31 December 2015
(2014: £nil) and £0.1m for the company (2014: £nil).
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
183
27 Other reserves
Group
At 1 January 2014
Other comprehensive income:
– fair value movements on cash flow hedges (note 18)
– 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 26)
– transfer of share-based payment reserve on vesting
of share awards
At 31 December 2014
At 1 January 2015
Other comprehensive income:
– fair value movements in available for sale investment
(note 16)
– fair value movements on cash flow hedges (note 18)
– tax on items taken directly to other comprehensive
income (note 5)
– impact of change in UK tax rate (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 26)
– transfer of share-based payment reserve on vesting
of share awards
At 31 December 2015
Profit
retained by
subsidiary
£m
0.8
Capital
redemption
reserve
£m
3.6
Hedging
reserve
£m
(5.1)
Treasury
shares
reserve
£m
(0.9)
Share-based
payment
reserve
£m
18.8
Available
for sale
reserve
£m
–
Total
other
reserves
£m
17.2
–
–
–
–
–
–
–
0.8
0.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3.6
3.6
–
–
–
–
–
–
–
–
–
2.2
(0.4)
1.8
–
–
–
–
(3.3)
(3.3)
–
3.6
(1.0)
0.2
2.8
–
–
–
–
–
–
–
(0.1)
0.2
–
–
(0.8)
(0.8)
–
–
–
–
–
(0.3)
0.1
–
–
0.8
3.6
(0.5)
(1.0)
–
–
–
–
–
8.7
(8.8)
18.7
18.7
–
–
–
–
–
–
–
10.5
(9.2)
20.0
–
–
–
–
–
–
–
–
–
17.5
–
(3.5)
(1.3)
12.7
–
–
–
–
12.7
2.2
(0.4)
1.8
(0.1)
0.2
8.7
(8.8)
19.0
19.0
17.5
3.6
(4.5)
(1.1)
15.5
(0.3)
0.1
10.5
(9.2)
35.6
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, net of deferred tax
(see note 18).
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 25). 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.
The available for sale reserve reflects the fair value movements in the available for sale investment, net of deferred tax (see note 16).
Financial statements
184
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
27 Other reserves (continued)
Company
At 1 January 2014
Other comprehensive income:
– fair value movements on cash flow hedges (note 18)
– tax on items taken directly to other
comprehensive income
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 26)
– share-based payment movement in investment in
subsidiaries (note 14)
– transfer of share-based payment reserve on vesting
of share awards
At 31 December 2014
At 1 January 2015
Other comprehensive income:
– fair value movements on cash flow hedges (note 18)
– tax on items taken directly to other
comprehensive income
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 26)
– transfer of share-based payment reserve on vesting
of share awards
At 31 December 2015
Non-
distributable
reserve
£m
609.2
Merger
reserve
£m
2.3
Capital
redemption
reserve
£m
3.6
Hedging
reserve
£m
(5.3)
Treasury
shares
reserve
£m
(0.9)
Share-based
payment
reserve
£m
18.8
Total
other
reserves
£m
627.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
609.2
609.2
2.3
2.3
3.6
3.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.3
(0.5)
1.8
–
–
–
–
–
(3.5)
(3.5)
3.9
(0.8)
3.1
–
–
–
–
609.2
2.3
3.6
(0.4)
–
–
–
(0.1)
0.2
–
–
–
(0.8)
(0.8)
–
–
–
(0.3)
0.1
–
(1.0)
–
–
–
–
–
4.6
(0.4)
(4.2)
18.8
18.8
–
–
–
–
–
–
5.3
(4.0)
20.1
2.3
(0.5)
1.8
(0.1)
0.2
4.6
(0.4)
(4.2)
629.6
629.6
3.9
(0.8)
3.1
(0.3)
0.1
5.3
(4.0)
633.8
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
Provident Financial plc
Annual Report and Financial Statements 2015
185
28 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
2015
£m
12.6
28.9
54.0
95.5
Group
2014
£m
13.8
30.7
59.7
104.2
2015
£m
3.0
472.3
17.1
492.4
Company
2014
£m
2.5
397.0
20.3
419.8
Operating lease commitments principally relate to the future rental payments until the first break on: (i) the CCD head office property in Bradford; (ii) the 214 CCD branches
nationwide; and (iii) the Vanquis Bank head office in London and contact centre in Chatham.
The company provides its subsidiary, Vanquis Bank, with a committed intercompany loan facility which is used to fund growth in the business alongside retail deposits.
The facility is renewed annually. At 31 December 2015, the facility of £460m (2014: £385m), had a maturity date of 30 June 2018 (2014: 31 December 2017).
Other group commitments are as follows:
Unutilised credit card facilities at 31 December
The company has £nil unutilised credit card facilities at 31 December 2015 (2014: £nil).
29 Related party transactions
2015
£m
619.0
Group
2014
£m
505.2
The company recharges the pension scheme referred to in note 20 with a proportion of the costs of administration and professional fees
incurred by the company. The total amount recharged during the year was £0.4m (2014: £0.6m) and the amount due from the pension scheme
at 31 December 2015 was £0.2m (2014: £0.2m).
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
Interest
(credit)/charge
£m
Outstanding
balance
£m
Management
recharge
£m
Interest
(credit)/charge
£m
Outstanding
balance
£m
2015
2014
4.1
7.4
0.7
–
12.2
(20.8)
(48.8)
(14.2)
–
(83.8)
275.1
951.9
220.2
109.9
1,557.1
3.2
7.3
–
–
10.5
(23.5)
(55.5)
(4.4)
0.5
(82.9)
339.8
969.1
161.5
109.5
1,579.9
The outstanding balance represents the gross intercompany balance receivable by the company, against which a provision of £123.1m
(2014: £122.5m) is held.
During 2015, the company received a dividend of £55.0m from Provident Financial Management Services Limited, the holding company
of the companies forming CCD (2014: £70.0m) and dividends of £98.3m from Vanquis Bank Limited (2014: £42.5m).
There are no transactions with directors other than those disclosed in the directors’ remuneration report.
Financial statements
186
Provident Financial plc
Annual Report and Financial Statements 2015
Notes to the financial statements (continued)
30 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 £223.4m
(2014: £114.1m). At 31 December 2015, the fixed and floating rate borrowings in respect of these guarantees amounted to £1.1m (2014: £2.6m).
No loss is expected to arise. These guarantees are defined as financial guarantees under IAS 39 and their fair value at 31 December 2015 was
not deemed to be material (2014: not material).
A floating charge is held over CCD’s receivables of up to £15m in respect of the unfunded pension benefit promises made to executive
directors and certain members of senior management affected by the reduced annual allowance to pension schemes introduced in 2011
under the UURBS. No loss is expected to arise.
31 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
29
26
20
20
12
13
13
14
20
2015
£m
218.2
55.4
80.0
–
–
10.5
2.8
(2.6)
14.9
7.7
–
–
(167.5)
(8.1)
2.9
(12.2)
202.0
Group
2014
£m
175.6
49.0
77.5
–
–
8.7
4.4
(0.6)
7.2
6.6
0.2
–
(111.4)
(4.4)
21.8
(13.1)
221.5
2015
£m
170.7
2.1
60.4
(83.8)
(153.3)
5.3
(8.8)
(2.6)
–
1.4
–
–
–
(26.5)
(12.3)
(0.6)
(48.0)
Company
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
Provident Financial plc
Annual Report and Financial Statements 2015
187
32 Details of subsidiary undertakings
The subsidiary undertakings of the group at 31 December 2015 are shown below. The company is the parent or ultimate parent of all
subsidiaries and they are all 100% owned by the group. All companies are incorporated within the UK with the exception of Erringham Holdings
Limited which is incorporated in Jersey.
Company
Vanquis Bank Limited
Provident Financial Management Services Limited
Provident Personal Credit Limited
Greenwood Personal Credit Limited
Moneybarn No.1 Limited
Duncton Group Limited
Moneybarn Group Limited
N&N Simple Financial Solution Limited
Cheque Exchange Limited
Provident Investments plc
Provident Financial Investments Limited
Direct Auto Finance Insurance Services Limited
Direct Auto Finance Limited
Direct Auto Financial Services Limited
First Tower LP(1) Limited
First Tower LP(2) Limited
First Tower LP(3) Limited
First Tower LP(4) Limited
First Tower LP(5) Limited
First Tower LP(6) Limited
First Tower LP(7) Limited
First Tower LP(8) Limited
First Tower LP(9) Limited
First Tower LP(10) Limited
First Tower LP(11) Limited
First Tower LP(12) Limited
Moneybarn Limited
Moneybarn No. 4 Limited
Moneybarn Vehicle Finance Limited
Provfin Limited
Provident Limited
Provident Print Limited
Provident Yes Car Credit Limited
Yes Car Credit (Holdings) Limited
Yes Car Credit Limited
Accepted Car Credit Limited
Aquis Bank Limited
Company
Arden Insurance Services
Bridgesun (1) Limited
Colonnade Insurance Services Limited
Ellaf Limited
Envoyhead Limited
Erringham Holdings Limited
Express Car Credit Limited
HT Greenwood Limited
I for Insurance Services Limited
Lawson Fisher Limited
Money Transfers International Limited
Motorplus Insurance Services Limited
Peoples Motor Finance Limited
Policyline Limited
Provfin Investments Limited
Provident balance Limited
Provident Car Credit Limited
Provident Car Finance Limited
Provident Check Traders Limited
Provident Family Finance Limited
Provident Finance Limited
Provident Financial Group Limited
Provident Financial Trust Limited
Provident Financial Trustees (Performance Share Plan) Limited
Provident Financial Trustees Limited
Provident Home Shopping Limited
Provident Motor Finance Limited
Provident Personal Credit (Ireland) Limited
Provident Personal Credit (London) Limited
Provident Personal Credit (Midlands) Limited
Provident Personal Credit (North) Limited
Provident Personal Credit (South) Limited
Provident Yes Finance Limited
The Provident Clothing and Supply Company Limited
Yes Car Finance Limited
Yes Express Car Credit Limited
Yes Finance Limited
Financial statements 188
Provident Financial plc
Annual Report and Financial Statements 2015
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 2015 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 32. 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 and the directors’ assessment
of the principal risks that would threaten the
solvency or liquidity of the company
As required by the Listing Rules we have reviewed the directors’ statement regarding
the appropriateness of the going concern basis of accounting set out on pages 111 and
112 to the financial statements and the directors’ statement on the longer-term viability
of the company contained within the strategic report.
We have nothing material to add or draw attention to in relation to:
> the directors’ confirmation on page 59 that they have carried out a robust assessment
of the principal risks facing the company, including those that would threaten its
business model, future performance, solvency or liquidity;
> the disclosures on pages 62–65 that describe those risks and explain how they are being
managed or mitigated;
> the directors’ statement within the directors’ report on pages 111 and 112 to the
financial statements about whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them and their identification of any material
uncertainties to the company’s ability to continue to do so over a period of at least
12 months from the date of approval of the financial statements; and
> the directors’ explanation within the director’s report on page 59 as to how they have
assessed the prospects of the company, over what period they have done so and why
they consider that period to be appropriate, and their statement as to whether they
have a reasonable expectation that the company will be able to continue in operation
and meet its liabilities as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications or assumptions.
We agreed with the directors’ adoption of the going concern basis of accounting and we
did not identify any such material uncertainties. However, because not all future events or
conditions can be predicted, this statement is not a guarantee as to the company’s ability
to continue as a going concern.
We are required to comply with the Financial Reporting Council’s Ethical Standards for
Auditors and we confirm that we are independent of the company and we have fulfilled our
other ethical responsibilities in accordance with those standards. We also confirm we have
not provided any of the prohibited non-audit services referred to in those standards.
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.
Independence
Our assessment of risks
of material misstatement
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
189
Risk
How the scope of our audit responded to the risk
Provision for impairment losses against loans and
receivables (Consumer Credit Division and Vanquis Bank)
The provision for impairment losses is calculated by modelling
portfolios of receivables within the group. The assessment
of the group’s calculation of the £317.7m (2014: £385.0m) of
impairment provisions is complex and requires management
to make significant judgements regarding the level and timing
of expected future cash flows from loans that have reached
the impairment trigger. Further detail in respect of these
assumptions is set out in the key assumptions and estimates
section of the accounting policies on page 144 and note 15 of
the financial statements.
Within CCD, management uses historical collection curves
to determine expected future cash flows which are formally
assessed bi-annually by management with reference to current
collections experience and future expectations in order to
determine their ongoing accuracy.
Within Vanquis Bank, the impairment provision methodology
reflects timely portfolio data and takes into account current
economic conditions (eg unemployment levels), product mix
and recent customer behaviour. Whilst there are a number of
different elements to the provision, the key judgement areas are
the determination of the impairment trigger and the estimate of
the expected future cash flows which are generated using data
sourcing techniques and SAS scripts (computer programming
code) to extract data from the underlying lending system.
Revenue recognition
(Consumer Credit Division and Vanquis Bank)
Management maintains a number of Effective Interest Rate
(‘EIR’) models to determine revenue recognition in accordance
with the requirements of IAS 39. Interest revenue recognised
in the year amounted to £970.3m (2014: £942.0m). The EIR
method spreads directly attributable revenues and costs over
the behavioural life of the loan. These models are complex
and heavily reliant on the quality of the underlying data flowing
into the models. We have identified revenue recognition as
a significant risk as the amount of revenue recognised in any
period is dependent on a number of significant assumptions
applied to the models. These include the expected behavioural
life of each loan and the timing of expected future cash flows.
These could have a material effect on the financial statements.
Further detail in respect of these assumptions are set out in the
critical judgements and uncertainties section of the accounting
policies note on page 144 and note 2 of the financial statements.
We tested the operating effectiveness of key controls across CCD relating
to the identification and recording of impairment provisions and the
arithmetical accuracy of the models used to calculate impairment.
This included using our IT specialists to test the data flows from source
systems to spreadsheet-based models to test their completeness
and accuracy. Within Vanquis Bank, particular focus was given to the
adequacy of change controls over SAS scripts used to generate the
impairment models.
We challenged the key assumptions in the CCD model including the
impairment trigger, the projected future cash flows based on the actual
collections and risk grade stability.
We tested the key controls relating to the recording of revenue which
focused on the flow of data from source systems into the EIR models.
This included an assessment by our IT specialists of automated controls
and SAS scripts to determine whether the data within the EIR models
were complete and accurate. We also tested the arithmetical accuracy
of the models to assess whether they were working as intended and in
compliance with the requirements of IAS 39.
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 IAS39.
We considered the assumptions applied to determine the future
expected cash flows by reference to the group’s historical experience
and macroeconomic factors.
Financial statements 190
Provident Financial plc
Annual Report and Financial Statements 2015
Independent auditor’s report (continued)
Defined benefit pension scheme valuation
Determining the key assumptions used to calculate the present
value of the £62.3m (2014: £56.0m) retirement benefit obligation
requires significant management judgement in relation to
inflation rates, discount rates and mortality rates. We note that
the selection of the discount rate has a large impact on the
overall valuation as set out in the sensitivity analysis in note 20.
We used our 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 20.
This involved benchmarking management’s assumptions against those
used by a range of organisations as at 31 December 2015 and considering
the consistency of those judgements compared to prior year.
Last year our report included two other risks which are not included in this year’s report:
> Moneybarn fair value adjustments (the fair value exercise has been concluded with no significant adjustments in the
current year); and
> Tax provisions (there have been no significant new tax provisions).
The description of risks above should be read in conjunction with the significant issues considered by the audit committee discussed
on pages 102 and 103.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Financial statements Our application of materiality
An overview of the scope of our audit
Provident Financial plc
Annual Report and Financial Statements 2015
191
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 £16.4m (2014: £16.8m),
which is 6% (2014: 7.5%), of pre-tax profit. The decrease in the percentage
used is to align more closely with comparable companies in the FTSE 100.
We agreed with the audit committee that we would report to the
committee all audit differences in excess of £340,000 (2014: £336,000),
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 £450,000 to £11.0m. (2014: £300,000 to £15.0m).
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, and, as in the prior year, 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.
Consumer Credit Division and Moneybarn have the same engagement
partner as the group audit and Vanquis Bank is audited by a separate
component team, under the supervision of the group team who have
maintained regular 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.
Financial statements 192
Provident Financial plc
Annual Report and Financial Statements 2015
Independent auditor’s report (continued)
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, 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 part of the Corporate Governance
Statement relating to the company’s compliance with certain 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.
Financial statements Provident Financial plc
Annual Report and Financial Statements 2015
193
Matters on which we are required to report by exception (continued)
Respective responsibilities
of directors and auditor
Scope of the audit
of the financial statements
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). 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 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.
Peter Birch FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Manchester, United Kingdom
23 February 2016
Financial statements 194
Provident Financial plc
Annual Report and Financial Statements 2015
shareholder
information
Provident Financial plc
Annual Report and Financial Statements 2015
195
Calls cost 12p per minute plus your phone
company’s access charge. Calls outside
the UK will be charged at the applicable
international rate. Lines are open between
9.00am-5.30pm, Monday to Friday excluding
public holidays in England and Wales.
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.
Dividends received on or before
5 April 2016
A UK tax resident individual shareholder who
receives a dividend prior to 5 April 2016 will
be subject to tax on the dividend as follows:
> The cash dividend you receive (the amount
paid into your bank account) is grossed up
for a notional 10% tax credit so that you
are taxed on a gross dividend of 10/9ths
of the cash dividend you receive.
> The gross dividend is then taxed as follows:
– 10% for basic rate taxpayers
– 32.5% for higher rate taxpayers
– 37.5% for additional rate taxpayers
> You can then deduct the notional 10%
tax credit.
> The overall result, after deducting the
notional tax credit, is that you will have
suffered an effective rate of tax on the
cash dividend you receive of:
– 0% for basic rate taxpayers
– 25% for higher rate taxpayers
– 30.56% for additional rate taxpayers
Dividends received on or after
6 April 2016
For dividends received after 6 April 2016,
the notional tax credit is abolished.
Instead, a UK tax resident individual
shareholder will be taxed on the total cash
dividends you receive (the amount paid into
your bank account) above the new £5,000
annual tax free dividend allowance at the
following rates:
> 7.5% for basic rate taxpayers
> 32.5% for higher rate taxpayers
> 38.1% for additional rate taxpayers
The dividend allowance means that you can
receive up to £5,000 of dividends tax free no
matter what other non-dividend income you
have in the tax year.
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)
Shareholder information
Information for shareholders
Financial calendar –
2015 final dividend
Dividend announced
23 February 2016
Annual general meeting
Ex-dividend date for
ordinary shares
5 May 2016
19 May 2016
Record date for the dividend
20 May 2016
Payment date for the dividend
24 June 2016
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.
For UK resident individuals, the tax treatment
of dividends depends on whether the
dividends are received before or after
5 April 2016.
Shareholder information 196
Provident Financial plc
Annual Report and Financial Statements 2015
Provident Financial plc
Company details
Registered office and contact details:
Provident Financial plc
No. 1 Godwin Street
Bradford
West Yorkshire
BD1 2SU
Company number
668987
Telephone:
Fax:
Website:
+44 (0)1274 351 351
+44 (0)1274 730 606
www.providentfinancial.com
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
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Provident Financial plc
No.1 Godwin Street
Bradford
BD1 2SU
United Kingdom
+44 (0)1274 351351
www.providentfinancial.com
Company number 668987