Purpose &
progress
Provident Financial plc
Annual Report and
Financial Statements 2019
CProvident Financial plcAnnual Report and Financial Statements 2019 Purpose
We help put people on a path to a better everyday life.
We are a specialist lender, here to provide financial inclusion
to the 1 in 5 UK adults who are not well served by mainstream
lenders. This unifies us and is something we can get behind
both practically and emotionally.
Read more on page 13
Progress
The Strategic Blueprint provides guidance to make the
right decisions to deliver our strategy on a daily basis.
This entitles us to drive the business forward to deliver
our Vision for the Future.
Read more on page 12
To find out more visit:
providentfinancial.com
View our Corporate
Responsibility Report online:
providentfinancial.com/
corporate-responsibility/
CPAGE TITLEUnderheadProvident Financial plcAnnual Report and Financial Statements 2019 H I G H L I G H T S
Customer numbers
2,319k
(2018: 2,395k)
Adjusted basic earnings per share
47.3p
(2018: 48.7p)
Adjusted profit before tax
£162.6m
(2018: £160.1m)
Amounts receivable from customers
£2,212.6m
(2018: £2,204.0m)
Basic earnings per share
33.3p
(2018: 27.3p)
Statutory profit before tax
£128.8m
(2018: £97.3m)
Certain alternative performance measures (APMs) have been used in this report.
See page 237 for an explanation of relevance as well as their definition.
Strategic report
Governance
Directors’ remuneration report
Risk management and principal risks
114 Division of responsibilities
1
2
4
6
12
13
14
22
Highlights
Group overview
Chairman’s statement
Chief Executive Officer’s review
The Blueprint
Business model
Strategic drivers
Behaviours
24 Our market
30 Credit Card Division
34
Vehicle Finance Division
38 Consumer Credit Division
42
54
56
Relations with regulators
Financial review
65 Corporate responsibility
83
Section 172
88
Board leadership and Company purpose
146 Annual statement by the Chairman
88 Chairman’s introduction
92 Our Board
98
How the Board has promoted
long-term sustainable success
103
The Board: driving culture
106
Customer, Culture
and Ethics Committee
107 Shareholder and investor relations
107
Effective engagement
with shareholders and
other stakeholders
112
IR Programme
119 Composition, succession and evaluation
119 Board composition
120
Induction for new directors
121 Board evaluation
125 Nomination Committee report
129 Audit, risk and internal control
129 Audit Committee report
of the Remuneration Committee
149 Annual report on remuneration
162 Directors’ remuneration policy
Financial statements
170 Consolidated income statement
170 Consolidated statement
of comprehensive income
170 Earnings per share
170 Dividends per share
171 Balance sheets
172 Statements of changes
in shareholders’ equity
174 Statements of cash flows
175 Statement of accounting policies
183 Financial and capital risk management
188 Notes to the financial statements
226
Independent auditor’s report
237 Alternative performance measures
Shareholder information
135 Group Risk Committee report
240
Information for Shareholders
138 Directors’ report
Provident Financial plc
Annual Report and Financial Statements 2019
1
Strategic report
G R O U P O V E R V I E W
Our businesses
We help put people on a path to a better everyday life
through our market-leading businesses.
Founded in Bradford in 1880 by Sir Joshua Kelley Waddilove,
we have been providing financial inclusion for consumers
whose needs are not well met by mainstream lenders for nearly
140 years. We are a responsible lender providing tailored product
and service propositions for 2.3 million customers throughout
the UK and the Republic of Ireland.
range of credit card products, unsecured personal loans for its
existing customers and savings products. Moneybarn offers
secured motor finance on a range of asset classes, including
cars, motorbikes and light commercial vehicles. The Consumer
Credit Division offers unsecured personal loans through
Provident home credit and Satsuma online loans.
We are the leader in our chosen market segments and today
we meet the needs of our customers through our three divisions:
Vanquis Bank, Moneybarn and our Consumer Credit Division (CCD),
supported by a central corporate office. Vanquis Bank offers a
Our customers are served by our 4,900 colleagues based in
Bradford, London, Chatham, Petersfield and in nearly 100 area
offices across the UK and the Republic of Ireland. We are united
by our purpose of ‘helping to put people on a path to a better
everyday life’.
Read more on our business model on page 13
Credit cards
Vehicle finance
Home credit and online loans
Credit cards and personal loans
Vehicle finance
Customers:
1.7m
Customers:
77,000
Home credit
Customers:
386,000
Online lending
Customers:
136,000
Credit card limits:
£250–£4,000
Loan range:
£1,000–£5,000
Loan range:
£4,000–£25,000
Loan range:
£100–£2,500
Loan range:
£100–£1,000
Loan terms:
1–3 years
Loan terms:
3–5 years
Loan terms:
13–104 weeks
Loan terms:
3–12 months
Read more on page 25
Read more on page 27
Read more on page 28
Read more on page 29
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Provident Financial plc
Annual Report and Financial Statements 2019
Our customers
We are a specialist lender here to serve the 1 in 5 UK
adults who are not well served by mainstream lenders.
We feel consumers may not be well served by mainstream providers for a number of reasons:
Experienced a significant life event,
e.g. divorce or loss of a job
Managing everyday life on low, irregular
or average incomes with limited or no savings
New to credit in the UK and therefore
have little or no credit history
Have variable incomes, e.g. self-employed
or a number of part-time jobs
Looking to build or rebuild their
credit rating
Value a more tailored product
and service
The customers we specialise in serving have many similarities to mainstream credit customers. However, there are important
differences due to their specific circumstances, requiring a tailored approach and a wider range of suitable and sustainable
credit solutions to best serve their more varied needs and circumstances. These needs and circumstances also tend to
change more over time, requiring us to provide a more flexible approach.
Our customers’ typical characteristics
Not working/benefits/part time and casual
Income source
Full-time salaried/15–20% self-employed
Below national average (£10–15k)
Income levels
Around national average (£20–30k)
Rented accommodation/social housing
Housing
Renters/c.20% mortgages
35–64 years
18–34 years
Typical age
25–44 years
35–54 years
>80%
100%
Bank account
100%
100%
Limited or no savings
Savings
Some savings for specific goals
Provident Financial plc
Annual Report and Financial Statements 2019
3
Strategic report C H A I R M A N ’ S S TAT E M E N T
Delivering our Vision
for the Future
Introduction
2019 has been my first full year as the Chairman of the Group.
As I set out last year, I joined the Board in the second half of 2018
as I felt I could provide support and assistance to the Chief Executive
Officer in delivering on the commitments provided at the time of
the rights issue. To recall, these were stabilising the home credit
business, rebuilding trust with our regulators, strengthening the
governance and culture across the Group, and refinancing the
Group’s bonds to ensure we had a robust funding and capital
position to take the Group forward. We made good progress on
these matters in 2018 and our objectives for 2019 were to build on
this momentum by substantially completing the turnaround of
the Group, clearly establishing our Vision for the Future and ensuring
that we are well placed to begin to grow the business in 2020.
Despite the significant challenges we faced in 2019, particularly
from the unsolicited bid from Non-Standard Finance plc (NSF)
in the first half of the year and the ongoing economic uncertainty
in the UK, I am very pleased to report that we have delivered on
our 2019 objectives. I am confident that going forward we are well
placed to continue to serve our customers with the products and
services they need whilst delivering attractive returns
to shareholders.
Unsolicited approach from NSF
The unsolicited approach for the Group, made by NSF in
February 2019, was highly opportunistic. The Board did not
believe the bid was in the best interests of the Group and its
stakeholders. The lapse in June was therefore a relief. Despite
being clearly in the best interests of all stakeholders, I deeply
regret the unnecessary distraction, cost and impact of the
uncertainty on the Group’s customers and employees caused
by NSF pursuing a poorly thought through bid.
The Board has carefully reflected on the terms of the offer and,
having done so, clearly communicated the Group’s strategy
through our Vision for the Future. We remain focused on this
strategy and committed to maximising value for all of the
stakeholders in fulfilling the Group’s potential.
Dividends
As a result of the Group’s ongoing recovery and good performance
in 2019, the Board has declared a final dividend of 16p per share
(2018: 10p) which, together with the interim dividend of 9p per
share (2018: £nil), results in a total dividend of 25p per share
for 2019 (2018: 10p), a 150% increase on 2018.
As previously stated, the Board’s policy is to maintain a dividend
cover of at least 1.4 times as the home credit business recovers
and moves into profitability. The resumption of dividend payments
has led to a more diversified shareholder register through 2019.
I look forward to meeting with many of our new shareholders, as
well as those who have supported us in recent years, in 2020.
At the end of my first full year
as Chairman of the Group, I am
delighted with the progress that has
been made by the Chief Executive
Officer, the wider management team
and all employees under extremely
challenging circumstances. We have
strengthened the business, continued
to rebuild trust with regulators and
defended an unsolicited takeover
bid from NSF.
Patrick Snowball
Chairman
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Provident Financial plc
Annual Report and Financial Statements 2019
Our Vision for the Future
We recognise that operating in our market comes with extra
responsibility, particularly as we are the market leader. For over
140 years, the Group has played a very important role in the
financial services sector and in society more generally. We have
a social purpose to provide financial inclusion to the 10 to 12 million
adults in the UK and Ireland who are not well served by mainstream
lenders. We help our 2.3 million customers build better financial
futures by providing them with access to credit, which they may
otherwise be unable to gain, and helping them to develop their
credit profile.
The Board and Group Executive Committee (ExCo) will continue
to deliver on the Group’s purpose to help put people on the path
to a better everyday life. We will continue to provide customers
with a broad product range appropriate for their circumstances
through our wide distribution capabilities to deliver good customer
outcomes. We aim to deliver attractive and sustainable returns for
our shareholders by making sure that we appropriately balance
the needs of all our stakeholders – customers, regulators, equity
and debt investors and employees. Operating within our sector
is quite rightly the focus of considerable external attention from
regulators and politicians. We have learned that good governance,
adherence to regulatory best practice and putting the customer at
the forefront are absolutely fundamental to our ongoing success.
These principles are clearly non-negotiable. The cost of not
complying has been demonstrated in the past; the direction
of travel for the whole industry is now very clear.
I was pleased that the Chief Executive Officer and wider
management team were able to clearly communicate the detail
as to how we intend to deliver the Group’s strategy over the medium
term at the Capital Markets Day presentation in November.
Further detail is provided in the Chief Executive’s Review.
Our shareholders
Our focus over the last two years has been on ensuring we
maintain a regular dialogue with our existing major shareholders
whilst we recovered from the events of 2017 and adapted our
businesses to the emerging regulatory environment. The Capital
Markets Day marked an important event in recent history in drawing
a line on the past and clearly setting out our Vision for the Future.
We have a clear financial model and we have communicated our
medium-term financial targets, further detail on which is provided
in the Chief Executive’s Review.
By doing the right thing by our customers and our regulators we
are confident we can deliver on these commitments and deliver
attractive, sustainable returns to shareholders.
Our investor relations programme in 2020 will be more active,
including overseas roadshows and greater attendance at broker
conferences, as we seek to attract new investors into PFG and
diversify the Group’s share register.
Our governance
The Board is responsible for the effective oversight of the Group.
We determine the strategic direction and objectives, the viability
of the business and the governance structure. We remain committed
to the highest standards of corporate governance when delivering
in these areas and in delivering long-term, sustainable value to
our stakeholders.
This has been a key area of focus and development over the past
two years and a significant improvement of the governance and
culture across the Group is already evident through the delivery
of the Strategic Blueprint and associated behaviours. We must
ensure that the governance and culture continue to develop and
remain a focus of both the Board and all employees.
I am delighted that we have appointed two new members to the
Board in 2019. Graham Lindsay joined as Non-Executive Director
in April 2019 and Robert East as Chairman of Vanquis Bank and
Non-Executive Director of the Group from June 2019. This role on
both the Group and the bank’s boards will help improve decision
making and coordination between the listed Group and Vanquis
Bank boards.
I would like to thank Simon Thomas who joined the Board in 2018
as Chief Finance Officer (CFO), but who will retire in March due
to personal health reasons. Simon has made a valuable contribution
to the Group, and I would like to thank him for everything he has
achieved and wish him all the best for the future. Simon will be
replaced by Neeraj Kapur, an experienced CFO. Neeraj Kapur is
the Group Chief Financial Officer of Secure Trust Bank plc, a UK
retail and SME bank. He has a strong retail banking background,
including consumer finance and savings products expertise.
We now have a strong Board with the right skills, experience and
balance to run the Group centred around a PRA authorised and
regulated bank, coordinated with smaller complementary consumer
finance businesses authorised and regulated by the FCA and CBI.
Read our Corporate Governance Report on pages 88 to 106
Our people
The Board and I would like to thank Malcolm and the wider
management team for their hard work this year in defending the
hostile takeover bid and continuing to deliver the Group’s objectives
during a very difficult time. I would also like to thank all of our
nearly 4,900 employees for their continuing diligence and hard
work in the face of many months of uncertainty through 2019.
The new Cultural Blueprint was rolled out throughout the
organisation in 2019. This is based on a renewed purpose and
a defined set of behaviours which give employees the strategic
direction and guidance to help them make the right decisions for
our customers on a daily basis. It has continued to be embedded
through management-led workshops and the development of
an initial key performance indicator (KPI) dashboard which is
monitored by our newly formed Customer, Culture and Ethics
(CCE) Committee.
We have strong Group and divisional Executive Committees
and strong divisional management teams that we have built
and maintained. Key appointments made in the year include
Neil Chandler as Managing Director of Vanquis Bank, Charlotte
Davies as General Counsel of both the Group and Vanquis Bank,
Gareth Cronin as Chief Internal Auditor of both the Group and
Vanquis Bank and Cheryl Ball as Group HR Director. We will
continue to fill key roles within the Group in 2020. The focus
on divisional collaboration will create a more streamlined
and efficient Group.
I am very much looking forward to working with the whole team
to deliver our strategy to ensure that PFG is a strong and successful
business to deliver for all of our stakeholders going forward.
Patrick Snowball
Chairman
27 February 2020
Provident Financial plc
Annual Report and Financial Statements 2019
5
Strategic report C H I E F E X E C U T I V E O F F I C E R ’ S R E V I E W
A turning point
for the Group
Introduction
Provident Financial is the market leader in helping the underserved
access finance, as we have been for the past 140 years. We are
excited about using our market-leading proposition as a platform
for growth to provide more and better customer propositions.
Growth can, and will, be achieved by attracting new customers,
by launching new products as demanded by our customers, and
by expanding into new markets. This is our Vision for the Future as
we set out at our Capital Markets Day (CMD) in November 2019.
Our market
There are approximately 10 to 12 million adults in the UK, or 1 in 5
of the adult population, who are not well served by mainstream
lenders. The market is reasonably dynamic with 1.5 to 2 million
consumers moving in and out of it each year and it is often
counter-cyclical with the number of consumers increasing
during and immediately following a downturn as prime lenders
tighten their risk appetite. Provident Financial is the biggest
provider of consumer finance in this market and has
2.3 million customers.
There are no high street banks in our market, nor do we believe
the more established banks have any desire to enter the space
with a material presence. The more stringent regulatory
environment requires companies to operate at much higher
standards of compliance with positive customer outcomes a
priority, which we fully support. To operate at these standards
requires scale and smaller companies find this environment
tougher to operate within. With our market-leading position,
Provident Financial has a platform to deliver attractive and
sustainable growth.
Provident Financial is the market leader
in a large market, where there are clear
opportunities to grow customers,
market share, product, distribution,
and move into new market segments.
Malcolm Le May
Chief Executive Officer
Our customers’ core needs
Access and
acceptance
Affordability
Empathy and
flexibility
Ease and
convenience
Reward
I need someone
to say yes and give
me credit
I need my
repayments to be
manageable
and affordable
Recognise that
my circumstances
can change
I need dealing
with you to be
quick and easy
I need to improve
my credit score
(build and re-build)
I need to trust you
It’s the cost per
month/week that is
important to me
I need to not
feel judged
or patronised
I need simplicity
I need the cost
of credit to reduce
over time
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Provident Financial plc
Annual Report and Financial Statements 2019
1 in 5
adults in the UK are not well-served
by mainstream lenders
Our businesses, products and customers
We operate through three divisions: Vanquis Bank, which provides
credit cards, loans and savings products; Moneybarn, which
provides vehicle finance; and CCD, which comprises Provident
home credit and Satsuma digital loans. Each of our businesses
seeks to lend responsibly and has a tailored business model and
product suite for underserved customers.
Though served by different products from different divisions, our
customers have common traits. They manage their everyday lives
on low to average incomes; they may have irregular or variable
earnings; they are often new to credit in the UK and have little or
no credit history; or they may have experienced a significant life
event, for example divorce or loss of a job. Our customers are also
typically less sensitive to changes in economic conditions as they
are more used to managing on tight budgets and they have lower
levels of debt than prime customers. They are, therefore, often
better placed to manage a recession than prime customers which
is why our businesses have proven to be resilient during a downturn
in economic conditions. Nevertheless, we have progressively
tightened underwriting over the last two years to alleviate the
impact of any weakening in the UK economy.
Given their circumstances, it is not surprising our customers need
a lender to deliver them the tailored products and service they
need. Provident Financial is the largest specialist credit provider
to this segment of society, and, if companies like us did not exist,
alternative customer options would be severely limited.
Our customer quotes are set out opposite.
Adapting to regulation
Regulators have quite rightly had a more intensive focus on
customer outcomes recently, which has led to increased
regulatory standards. To do business in our markets, and have a
sustainable business, stakeholders need to know we operate to
both the highest customer conduct rules and with prudence.
Since early 2018, Provident Financial has been at the forefront
of changing its business model and approach to evolving
sector-wide regulation. We see this as a competitive
advantage for us going forward.
There have been a significant number of changes within the
Group over the last two years in response to the change in
regulation and our focus on delivering the right customer
outcomes. Provident home credit has changed and adapted
to its employed business model, became Financial Conduct
Authority (FCA) authorised in late 2018 and implemented the
home credit part of the high-cost credit review earlier in 2019.
Satsuma has continued to adapt its business model to reflect
evolving FCA guidance following the high-cost, short-term credit
review. Vanquis Bank has completed its Repayment Option Plan
(ROP) remediation programme following the FCA investigation in
2017/2018, has introduced new affordability criteria at the end of
2018, and is on track in implementing measures to meet the new
FCA persistent debt requirements.
Moneybarn has now completed its customer redress programme
and received the final notice following the FCA investigation into
affordability, forbearance and termination options. It also does not
pay variable commission so will not be impacted by the FCA review
into motor finance that came out in the third quarter of 2019.
Regulation will of course continue to evolve in our sector, as it does
in all financial sectors. We continue to work with the Financial
Ombudsman Service (FOS), particularly in CCD, in respect of any
customer complaints referred to them. In addition, we also continue
to assist HM Revenue & Customs (HMRC) on its market-wide
review of the self-employed status of agents prior to the change
in the home credit operating model in 2017.
We believe we are well prepared given the changes we have made
and the improved relationships we have with our regulators.
Customer outcomes are now front and centre at Provident Financial,
which benefits all stakeholders and will help to deliver long-term
attractive sustainable growth.
View our 2019 Corporate Responsibility Report
at providentfinancial.com
Our Blueprint
Linked closely to regulatory attitudes, we launched a new Blueprint
in early 2019 to define our purpose and create a stronger culture
across the Group. Our purpose sets out what we do for our
customers and why we need to exist. A strong purpose running
through the organisation improves the culture and helps deliver
the right outcome for customers, and is increasingly an important
consideration for all stakeholders.
Our purpose at Provident Financial is: “We help put customers on a
path to a better everyday life.” This purpose is the guiding principle
for everything we do, and we have continued to successfully embed
our purpose throughout the Group in 2019. Initial key performance
indicators have been devised for the Blueprint, are being monitored
by the Culture, Customer and Ethics Board Committee and are
embedded in employee performance objectives.
Our purpose is supported by strategic business drivers and
behaviours. These, in combination with our purpose and new
culture, help to deliver more sustainable business models,
increase customer centricity and unify colleagues, thereby
creating a business advantage for Provident Financial.
Certain alternative performance measures (APMs) have been used
in this report. See page 237 for an explanation of relevance as well
as their definition.
Our performance in 2019
Despite the distractions of the hostile NSF bid, we have made
good operational and financial progress over the last 12 months.
Adjusted profit before tax, prior to the impact of the amortisation
of acquisition intangibles and exceptional items, of £162.6m was
up 1.6% on 2018 (2018 (restated): £160.1m). Statutory profit before
tax increased by 32.4% to £128.8m (2018 (restated): £97.3m) due
to a reduction in exceptional costs from £55.3m in 2018 to £26.3m
in 2019, of which £23.8m related to defending the NSF hostile bid.
Adjusted basic earnings per share, prior to the impact of the
amortisation of acquisition intangibles and exceptional items,
reduced by 2.9% to 47.3p (2018 (restated): 48.7p) due to the
impact of the rights issue shares issued in April 2018. Basic
earnings per share of 33.3p increased by 22.0% (2018 (restated):
27.3p) due to lower exceptional costs.
Divisional performance
Vanquis Bank
Vanquis Bank has continued to successfully evolve its business
model in 2019, increasing its customer centricity and responding
to the regulatory direction of travel. It introduced new measures
in relation to the FCA’s new persistent debt regime, which are
designed to help customers pay debt off faster, pay less in total,
and prevent customers getting into persistent debt.
Provident Financial plc
Annual Report and Financial Statements 2019
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Strategic report C H I E F E X E C U T I V E O F F I C E R ’ S R E V I E W C O N T I N U E D
Vanquis Bank continued
We have also made changes to our interest and fees structure,
including downwards repricing for around 100,000 customers,
and reduced late and over-limit fees. The ROP settlement was
successfully completed in the year and we have been able to
release, as an exceptional credit, £14.2m of the provisions
originally established in 2017.
As expected, the transition to the new regulatory and
customer-focused measures has impacted receivables and
customer growth in 2019, but puts us in a strong position going
forward. The receivables book ended the year 2.2% down on 2018,
with customer numbers down 3.0% to 1.7 million. Vanquis Bank
continues to proactively support customers meeting the definition
of persistent debt and we are on track with our plans set out at
the CMD to reduce the level of customers meeting the persistent
debt definition as we approach the first 36-month checkpoint
in March 2020.
Vanquis Bank’s adjusted profit before tax, prior to the impact of
exceptional items, of £173.5m was, as expected, 9.1% lower than
last year (2018 (restated): £190.9m), mainly due to the £20m
reduction in ROP income and 2018 benefiting from the release
of £10m of remuneration-related accruals. Statutory profit
before tax reduced by a lower amount of 2.6% to £185.9m
(2018 (restated): £190.9m), principally due to the impact of
the aforementioned exceptional provision release of £14.2m
in respect of the ROP refund programme.
The business has already started delivering on the strategic
objectives outlined at the CMD which focus on growth, cost
efficiency and a number of funding and capital opportunities.
Significant progress on these objectives is planned for 2020.
The bank came under new leadership with the appointment of
Neil Chandler as Managing Director in the first half of 2019. Neil
has made a number of management changes during the second
half of 2019 and the business has a stronger leadership team to
develop a broader bank offering for the underserved and return
the business to profitable growth over the medium term.
Moneybarn
Moneybarn delivered a 10.0% increase in adjusted profit
before tax, prior to the impact of exceptional items, to £30.9m
(2018: £28.1m). The business has grown its customer numbers,
receivables and profits for five consecutive years since its
acquisition and the business now serves 77,000 customers with
a receivables book of just over £500m. Statutory profit before
tax increased by a higher rate of 19.2% to £33.5m (2018: £28.1m),
due to an exceptional provision release of £2.6m following
completion of the FCA investigation.
The strong growth in 2019 led to a modest pick-up in impairment.
However, underwriting standards were quickly tightened and
collections processes enhanced early in the fourth quarter
and we expect impairments to stabilise in 2020.
Moneybarn successfully moved into a new office in Petersfield
which will facilitate the growth plans of the business in the
attractive and growing used-car finance sector.
The customer redress in respect of the FCA investigation into
affordability, forbearance and termination was completed in 2019
and the final notice was received from the FCA in February 2020.
The total cost of the investigation has come in below the £20m
provision originally established in 2017 leading to the release, as
an exceptional credit, of £2.6m of the provision as noted above.
After 12 years with the business, Moneybarn’s Managing Director,
Shamus Hodgson, will be stepping down from his role at the end
of the first quarter of 2020 to pursue other career opportunities.
I would like to thank Shamus for his leadership of Moneybarn
over the last three years and for building a strong team to take
8
Provident Financial plc
Annual Report and Financial Statements 2019
the business forward as it continues its growth and becomes a
larger part of the Group. A search for his successor is well underway.
Consumer Credit Division
CCD has made significant operational and financial progress in
2019. The customer base has now started to stabilise at just over
500,000 and the receivables book ended the year at nearly
£250m. The adjusted loss before tax, prior to the impact of
exceptional items, was significantly reduced by 46.3% to £20.8m
(2018: loss before tax of £38.7m) as the business has successfully
introduced a new performance management framework and
delivered on its cost efficiency programme. The business enters
2020 with an annual run rate cost base of around £200m, down
from £260m in late 2017. CCD’s statutory loss before tax reduced
by 48.7% to £35.2m (2018: loss before tax of £68.6m), after
taking account of exceptional costs in respect of the ongoing
turnaround of the business.
CCD has successfully tested Provident Direct, which leverages
the capabilities in both home credit and Satsuma, with the
relationship managed in the home by a Customer Experience
Manager (CEM) and payments collected remotely via Continuous
Payment Authority (CPA). This product enhancement allows CCD
to attract new and former customers of suitable quality who
value the face-to-face home relationship but who either do not
wish to have a weekly collections visit by a CEM or for whom it is
simply inconvenient. The test has demonstrated that there is
strong demand for Provident Direct from both the customer and
the field force. I am excited about the potential of Provident Direct
and it will be rolled out nationally in the UK during 2020.
Satsuma, CCD’s online digital lending platform, took the decision
to temporarily reduce volumes towards the end of the year as it
continues to adapt its business model in line with the evolving
dialogue with the FCA. A number of competitors have exited the
market and we expect home credit and Satsuma to work more
closely together going forward, especially with the roll-out of
Provident Direct in 2020.
CCD remains the market leader in the UK and Republic of Ireland
home credit markets and is now also a leading player in digital
loans within the high-cost, short-term credit market through
Satsuma. Our actions over the last two years and our ongoing
strategic initiatives mean that we are well placed to return the
business to breakeven in 2020 and profitable growth in the
medium term.
Our significant growth opportunities
The work on reshaping the Group over the last two years under
increased regulatory standards means we are well-placed to
continue to evolve going forward. Indeed, we see our ability to
adapt to the regulatory environment as a competitive advantage
and a key underpin of the delivery of sustainable shareholder
returns. We now also believe that, following our evolution, we are
in a strong position to focus on growth in 2020 and beyond
through a number of areas.
Firstly, we firmly believe that we can deliver organic growth in
each of our key markets and gain market share, particularly as
competitors find it difficult to adapt to increased regulatory
standards and scrutiny.
Secondly, our businesses have the opportunity to expand their
product range and distribution and increase their digitisation.
For example, we will be rolling out Provident Direct in home
credit in 2020 as well as launching a pilot of longer, larger digital
personal loans in Satsuma towards the end of 2020 as we continue
to develop a pathway to cheaper credit for our customers. We are
also expanding into other non-mainstream segments, with digital
personal loans in Vanquis Bank and near-prime motor sector
in Moneybarn.
Thirdly, we are ensuring that Vanquis Bank and Moneybarn work
much more closely together in developing a number of these
areas to deliver increased synergies.
Provident Financial is the market leader in a large market, where
there are clear opportunities to grow customers, market share,
product, distribution, and move into new market segments. There
are very few financial services companies out there that have this
opportunity set, and we have built a management team with the
appropriate skills which is committed to delivering our vision.
Capital, funding and cost efficiency
Capital, funding and cost efficiency will also play a part in delivering
better customer propositions and sustainable returns for shareholders.
The composition of our returns is changing due to lower revenue
yields across our sector. Our response has been to tighten
underwriting to improve quality and lower impairment, and we
have also taken action to reduce the cost base by 7.5% in 2019.
In addition, the Group has historically focused primarily on the
assets side of the balance sheet and we see an opportunity on
the liability side which will support delivery of our target returns
to shareholders.
The Group’s CET1 ratio at the end of 2019 was 30.7% which
provides headroom of approximately £117m compared with the
fully loaded minimum regulatory capital requirement of 25.5%.
The headroom reduced to approximately £90m on 1 January 2020
following the third-year transitional impact of IFRS 9 and this level
is consistent with the Board’s risk appetite of maintaining regulatory
capital headroom in excess of £50m and progressively absorbing
the remaining transitional impact of IFRS 9 on regulatory capital
by 1 January 2023. The Group’s next capital review (C-SREP) with
the Prudential Regulation Authority (PRA) is scheduled for March
2020 with the results expected in the second quarter of the year.
The Group has a strong capital base and we continue to review
options to improve our capital efficiency.
We have made excellent progress in strengthening the Group’s
funding position. In January 2020, the Group successfully
completed a bilateral securitisation facility to fund Moneybarn
business flows. This new facility provides up to £100m of initial
funding and is anticipated to grow to £275m over the next
18 months. After taking account of this securitisation and the
ongoing retail deposit programme in Vanquis Bank, the Group
has sufficient facilities to fund contractual debt maturities
and projected growth in the Group until mid-2022.
Looking ahead, we have identified a programme of further funding
opportunities to diversify our funding sources and ultimately
reduce the cost of funding, including potentially funding some
of Moneybarn’s receivables through retail deposits. By operating
an efficient capital and funding structure, we are confident in
delivering attractive and sustainable returns for shareholders.
Our medium-term vision to be a broader bank
Our aim in the medium term is to create a bank for the underserved.
A market of 12 million customers needs a bank that can cater for
all their financial needs.
Growth opportunities and efficiencies
Now
Medium term
Growth – core cards innovations, loans, partnerships, self-employed
Cost and digital focus
Evolving model to new regulation
Continued core market growth
Core market asset class, distribution and digital development
Funding improvement – retail deposits
Near prime market
Provident recovery to breakeven
Provident efficiency/IT
Digitising customer proposition
Provident Direct
Satsuma personal loan
Cost efficiency
Capital efficiency
Structure and target operating model
Organic growth/sector consolidation
Provident Financial plc
Annual Report and Financial Statements 2019
9
Strategic report C H I E F E X E C U T I V E O F F I C E R ’ S R E V I E W C O N T I N U E D
Our medium-term vision to be a broader bank continued
To do this we are working towards bringing the Provident Financial
Group and Vanquis Bank closer together. This will take time and will
need regulatory approval and could potentially involve bringing
Moneybarn into the bank structure. This would allow Moneybarn
to be funded in part through retail deposits which would deliver
further funding synergies. CCD remains an important part of the
Group, but would not naturally sit under a bank umbrella.
Importantly, the returns that we generate will allow us to evolve
our dividend cover to at least 1.4 times as the home credit business
recovers and returns to profitability.
Sustainable, attractive shareholder returns based
on medium-term targets
Loan book c.5–10% growth p.a.
over next 5 years (2019: £2.2bn)
Evolve Vanquis Bank to become a broader
bank for the underserved
Funded through:
• Retail deposits (fixed term and instant access)
• Securitisation
Product offering:
• Revolving credit (Vanquis Bank)
• Secured finance (Moneybarn)
• Loans (Vanquis Bank)
• Financial Fitness
• Helping customers save
The role of CCD
CCD remains an important part of the Group,
but would not naturally sit under a bank umbrella
Funded through:
• Revolving credit facility
• Wholesale
Product offering:
Provident:
Satsuma:
• Home credit
• High-cost short-term credit
• Provident Direct
• Personal loans
This potential new Group structure would be optimal for all
stakeholders – customers, employees, regulators and shareholders
– allowing us to serve more customers with the products and
services they need in the most efficient manner.
Our financial targets
As part of our Vision for the Future, we have developed a clear
set of financial targets to measure our success. The outcome
for our shareholders will be sustainable attractive returns based
upon two very clear pillars.
Firstly, we plan to deliver receivables growth within a range of
between 5% and 10% per annum over the next five years from a
loan book which is currently £2.2 billion. We expect growth to be
weighted more towards years three, four and five as our growth
initiatives gain traction.
Secondly, through a series of management actions we plan to
deliver a reduction in the cost income ratio from 43% in 2019
to 38% by 2022 as previously guided.
As a result, from the current return on equity (ROE) of approximately
18%, we expect to be delivering an ROE within our target range
of 20% to 25% in 2021, sooner than the timeframes for the
receivables and cost income targets.
10
Provident Financial plc
Annual Report and Financial Statements 2019
ROE c.20–25%
in 2021
(2019: 18%)
Cost income ratio 38%
in 2022
(2019: 43%)
Dividend cover ≥ 1.4x
Evolving cover as CCD returns to profitability
(2019: 1.9x)
Chief Finance Officer (CFO)
As we announced in July 2019, Simon Thomas, CFO, informed
the Board he was stepping down from the role for personal
health reasons following the 2019 preliminary results announcement.
Simon has been a great CFO and I would like to thank him for
everything he has achieved and wish him all the best for the future.
In December 2019, we announced that Neeraj Kapur will join
the Board and replace Simon as CFO on 1 April 2020. Neeraj has
deep retail banking, consumer finance and savings experience
and expertise, and will be an excellent addition to the senior
leadership team as we continue to re-establish Provident Financial
as the market-leading lender for the underserved.
Outlook
Our good performance in 2019 means that, despite continuing
regulatory headwinds, we are well placed both operationally
and financially as we enter 2020.
I am pleased to report that collections performance and impairment
trends have remained stable in the important post-Christmas period.
Our focus in 2020 will be on progressing our strategic initiatives
outlined in the CMD, in particular rolling out Provident Direct,
developing Vanquis Bank loans, delivering funding and capital
opportunities, and continuing to improve our cost efficiency
through digitisation.
We will be relentless in adapting our businesses to evolving
customer needs and working closely with the regulator to ensure
that our businesses lead the way in our sector and provide us
with a competitive advantage to deliver sustainable returns for
our shareholders.
The economic outlook post-Brexit remains uncertain and we
need to see the full impact of persistent debt regulation on
receivables and impairment in Vanquis Bank. However, our
actions in 2019, and our strong funding and capital positions,
give me confidence that we will continue to make good progress
towards our medium-term financial targets in 2020.
I would like to thank everyone in the Group for their hard work
throughout 2019 and their continued efforts in helping put our
customers on a path to a better everyday life.
Malcolm Le May
Chief Executive Officer
27 February 2020
Reasons to invest
Our investment case is based on five fundamental areas:
1
2
3
4
5
Market leader in a specialist and
substantial market
• Specialist lender for the 1 in 5 UK adults not well served
by the mainstream
• Market leader with 2.3m customers across the Group
A purpose-driven Blueprint
for sustainable growth
• New Blueprint supports sustainable market leadership
• Successfully managing through tougher regulation
Read more on page 24
Read more on page 12
A customer-centric and responsible culture
• Clear strategic focus to deliver our Vision for the Future
Read more on page 5
Financial resilience and a strong capital base
• Medium-term direction to evolve Vanquis Bank
to become a broader bank for the underserved
• Resilient customers and business with counter
cyclical opportunity
• Substantial opportunities to take the Group forward:
• Markets, products and digital
• Costs, funding and capital
Read more on page 9
Medium-term targets for attractive,
sustainable growth
Read more on page 56
• Receivables growth 5–10% p.a.
(2019: £2.2bn)
• ROE 20–25% (2019: 18%)
• Cost income ratio 38% (2019: 44%)
• Dividend cover ≥ 1.4x (2019: 1.9x)
Provident Financial plc
Annual Report and Financial Statements 2019
11
Strategic report T H E B L U E P R I N T
Setting out
the Blueprint
Our Blueprint brings together why the Group exists
as an organisation, framed in the context of the role
that our business plays in the lives of our customers.
It also sets out the strategic drivers of focus and the key
priorities that will drive both competitive advantage
and commercial success for the whole Group.
The Group began to embed the Blueprint, to develop
its culture through 2019. These strategic drivers
are beginning to drive the right behaviours on a
daily basis, putting the customer in mind with each
decision. Each division has begun to define KPIs to
evidence how they have progressed with each of the
strategic drivers in the year. This will feed into Group
metrics in future, allowing the development to be
evidenced and reported.
12
Provident Financial plc
Annual Report and Financial Statements 2019
Purpose
We help to put people on the path
to a better everyday life.
Read more on page 13
Strategic drivers
Our purpose is built upon a number
of strategic drivers. They will help drive
our competitive advantage and provide a
framework for our decision making, including
how we prioritise our investment, set the
strategic direction of our Group and operate
to keep us true to our purpose and creating
conditions for our collective success.
Read more on pages 14 to 21
Behaviours
Create a culture where we think ‘customer’
all the time; we constantly innovate and
make things better for all our stakeholders;
and we hold ourselves and each other
personally accountable for success.
Read more on pages 22 and 23
B U S I N E S S M O D E L
Driven by
our purpose
Our key relationships
Customers
Our 2.3 million customers are at the heart of what
we do; they are the 20% of UK adults who at any
one time are looking for something that mainstream
lenders do not offer. We specialise in serving
their needs and have adapted our business
model to do so.
Colleagues
Our 4,900 colleagues are critical to delivering
our tailored and understanding business model,
balancing the personal touch with the use of
technology where customers increasingly want
and expect it.
Regulators and
government
The nature of our customer base and the market
we specialise in makes the building and maintaining
of open and trusting dialogue with policy makers
and our key regulators (the Prudential Regulation
Authority (PRA), Financial Conduct Authority
(FCA) and Central Bank of Ireland (CBI)) critical
to a sustainable business model.
Equity and
debt investors
We secure long-term, lower-rate funding through
strong relationships with our lending banks,
depositors and investors. We generate capital
to deploy in growing our business and serving
more customers as well as delivering returns
to shareholders.
Suppliers
Our suppliers are essential to provide our divisions
with the goods and services required to enable us to
continue to meet our customers’ needs. They play
a vital role in our operations so it is important that
we develop strong supplier relationships with them.
Communities
Our community investment strategy is aligned to
our social purpose and seeks to invest in activities
and initiatives which address the key factors that
tend to reduce somebody’s access to credit.
How we create value
We develop tailored products
to meet customers’ needs
We focus on the credit market in the UK and ROI,
developing simple, transparent products with
flexibility to help customers not well served by
mainstream lenders manage life.
We attract customers who we can serve
We use many ways to reach consumers including
increasingly digital methods, as well as face-to-face
and partners such as agents and brokers.
We carefully assess customer
affordability and creditworthiness
We use internal and external data, including
face-to-face interactions, taking into account both
the current situation and the likely future.
We lend responsibly
We tend to lend smaller amounts over shorter
periods and take a ‘low and grow’ approach
as customers demonstrate suitability
and sustainability.
We collect payments due
We offer many ways to pay in
cash and remotely, maintaining
frequent customer contact.
We stay close to customers
through call centres, digital
communications and
face-to-face meetings
in the home.
We manage arrears and
customer difficulties
We establish early contact
and an ongoing dialogue
with customers who have
difficulties, with a sympathetic
approach, to understand their
circumstances and
offer forbearance.
Provident Financial plc
Annual Report and Financial Statements 2019
13
Strategic report S T R AT E G I C D R I V E R S
Customer
progression
We will build products, services and
partnerships that change the game
for our customers.
Vanquis Bank
Vanquis Bank credit cards can act as credit builder cards to help
customers who are new to credit, or have had a life event, to build,
or rebuild, their credit score. An improved credit score can provide
access to cheaper borrowing, which can help to put people on a
path to a better everyday life. 84% of Vanquis Bank customers felt that
their card helped them to improve their credit rating. In 2019, Vanquis Bank
began tracking ‘Customer Progression’ across the customer lifecycle,
understanding more than 50 customer metrics. As customer progression
is key for Vanquis Bank, it has reviewed when fees and charges
are applied, and, most significantly, reduced the APRs for around
100,000 customers who, by using a Vanquis Bank credit card, have
demonstrated responsible use of credit and therefore can access
cheaper credit. In 2020, it plans to continue to deliver lower APRs for
many more customers, launch a new loan proposition suitable for its
target audience, and develop a proposition for the self-employed.
Targets have also been established against over 20 of the customer
metrics identified, with a particular focus on credit score improvement,
downward re-pricing, and speed of complaint resolution.
Moneybarn
Moneybarn has listened to its customers and responded by increasing
its product range. Unsurprisingly its customers did not want to just
access credit for cars, but also for commercial vehicles and motorbikes.
The commercial vehicles enable sole traders, plumbers, electricians, etc.
to access work and support their local economies. In 2020, Moneybarn
will develop its offering further in the near-prime space, allowing
customers to move more easily up and down the credit spectrum,
and develop a customer re-solicitation programme that will support
customer access to cheaper credit should their loan end early.
CCD
Home credit traditionally has been based upon cash being lent and
repaid on the doorstep. This model is clearly still appropriate for some
customers, although others want and need a different service: a service
with flexibility over how they apply, how they receive the loan and how
they make repayments. In response, management has developed
Provident Direct, a hybrid product which is originated in the home,
but the collection is digital through CPA. This modernisation improves
the customers’ experience by freeing up their time, by no longer requiring
routine collection visits, and by removing the necessity of cash by
enabling the loan to be repaid online through a bank account. The
hybrid product was successfully tested in 2019, and will be rolled out
to all customers in the UK in 2020, where there is demand. In 2020,
home credit will also roll out electronic card readers, which will
enable customers who choose to pay via a collections visit, to have
the choice to repay electronically or by using cash. Satsuma, our digital
loans platform, will also launch a pilot of a personal loan product
with APRs of less than 100% towards the end of 2020. This should
enable customer progression to cheaper credit by creating a
pathway from one Provident credit product to another.
14
Provident Financial plc
Annual Report and Financial Statements 2019
KPIs
Vanquis Bank customers who were satisfied
with their Vanquis Bank credit card
90%
(2018: 86%)
Home credit customers who believe that
the product ‘clearly meets their needs’
91%
(2018: 88%)
Moneybarn customer satisfaction
(Feefo score)
4.6
(2018: 4.7)
Employee engagement scores which are
aligned to the Group’s purpose and culture
70%
Number of employee volunteering hours
2,224
(2018: 2,415)
The Vanquis card
is giving me lots
of opportunities
I otherwise would
not have had.
I also used a Vanquis loan to buy a car
to enable me to find work and take my
dogs to shows, which they love!
J A N E
15Provident Financial plcAnnual Report and Financial Statements 2019 S T R AT E G I C D R I V E R S C O N T I N U E D
Human
experiences
We will build enduring relationships by
delivering experiences that seamlessly
integrate the latest technology with
our brilliant people.
Vanquis Bank
The internet has and is changing how we do business and interact
with our customers. Change, though, only works for our customers
if they see it as helpful and provides them with something they need
and can use. Therefore Vanquis Bank has formed partnerships with
aggregators and affiliates to aid the onboarding process for its
customers. By rolling out soft search pre-application for all channels
and the pre-approval and pre-population for all affiliate channels, it
has made it easier and quicker for customers to apply for a credit card.
Vanquis Bank uses an app, chatbot and SMS to communicate with
its customers. Customers can use these innovations if they want,
or can interact with Vanquis through the more traditional routes
of postal or telecoms. Customers have, though, embraced these
new options with over 1 million registered to the app and over
300,000 customers opting for electronic statements, and the
chatbot is enhancing the SMS customer response rates.
Moneybarn
Moneybarn has teamed up with the Vanquis Bank through the
bank’s app and made car finance available to Vanquis customers.
Moneybarn has continued to develop its digital proposition with 200k
views through its self-serve Portal and 500k visits to its website.
CCD
In home credit, we build relationships on a weekly basis through the
Customer Experience Manager (CEM) collecting repayments from
the home on a weekly basis. However, we have voice recordings of
all our lending conversations, therefore providing our customers
with clear and good conduct outcomes. Satsuma forms an important
part of future strategy, particularly as Satsuma and home credit are
expected to work more closely together as Provident Direct is rolled
out through 2020. This combines face to face origination with digital
collections, and in 2020 we will roll out digital card readers. Both of
these developments combine human interaction and digital to better
serve our customers.
Satsuma is enhancing its onboarding process for its customers by
increasing the human decision process in deciding if they can have
the credit they are applying for. This enhancement will help to ensure
customers get the right credit decision from us, again combining
digital and human experiences to provide better outcomes for
our customers.
16
Provident Financial plc
Annual Report and Financial Statements 2019
KPIs
58%
of Vanquis Bank customers engage
with the app or online service
55%
increase in adoption of online statements
by Vanquis Bank customers over the last
6 months
76%
increase in 2019 in Moneybarn customer
visits to the website to 527,065 sessions
109%
increase in 2019 in applications through
the Moneybarn website to become a
new customer
16.8m
collection visits made by home credit
CEMs in 2019
The Vanquis credit
card gave me
financial freedom.
I initially had a low credit rating but the card
allowed me to build my credit score and,
following regular repayments and the building
of trust, I now have a higher credit limit.
N AV
17Provident Financial plcAnnual Report and Financial Statements 2019 S T R AT E G I C D R I V E R S C O N T I N U E D
Head AND
heart decisions
We will deliver for our stakeholders
by balancing: (i) data and insight;
(ii) financial return and doing the right
things; and (iii) customer need and
customer want, in order to build a
long-term sustainable business.
Customers need credit to live their everyday lives; try using public
transport or shopping online without it. As a company we have to
make the decision whether it is appropriate for a customer to have
the credit they have applied for or not. We need to use our head and
heart to decide whether a person should have credit and, if they get
into financial difficulty, how we help them to pay off their debt.
The biggest decision we make is to give credit to someone. We need
to get the decision right, and to do this we use strict affordability
and creditworthiness criteria to ensure we do. For Vanquis Bank,
Moneybarn, home credit and Satsuma, we only accept 27%, 48%,
45% and 4% respectively of customers who have applied for credit.
Of course we do not get all our decisions right, and in those cases
we apply forbearance. All these decisions are head and heart,
balancing customer need against customer want, whilst challenging
our data and insight to ensure we are delivering the right outcome
for the customer.
In Vanquis Bank we no longer offer the 69% APR rate for new credit card
customers, and Moneybarn has removed the bottom tier of lending
within its 48.9% APR. In Vanquis Bank we have also increased the
minimum payment due on credit cards and introduced a recommended
payment for credit card users. These changes are designed to help
customers repay their balances quicker and therefore save them
money. We took these decisions as we believed they were the right
thing to do for our customers.
Home credit and Satsuma also do not charge any additional fees
or charges to their customers. They are told what they need to pay
back at the start of the loan, and that does not change. In 2020,
the Group will continue to balance head and heart decisions when
helping its customers, by putting people on a path to a better
everyday life.
Read more about how we are lending responsibly to our customers
in our 2019 CR Report at providentfinancial.com
KPIs
Vanquis customer satisfaction score
90%
(2018: 86%)
Provident (UKHC) customer satisfaction
89%
(2018: 87%)
Satsuma customer satisfaction
82%
(2018: 80%)
Moneybarn Feefo Score
4.6
(2018: 4.7)
18
Provident Financial plc
Annual Report and Financial Statements 2019
I would have been
stuck without my
Moneybarn car.
Moneybarn was my last shot as I couldn’t
get finance anywhere else. I trust them
and would definitely go back. I feel like they
are understanding and would try to help
with any issues.
K E L LY
19Provident Financial plcAnnual Report and Financial Statements 2019 S T R AT E G I C D R I V E R S C O N T I N U E D
Fighting fit
We will continually challenge our cost
base, efficiency and effectiveness, and
change our capability to ensure we remain
the most competitive player in the market.
Progress in the year
As part of our Vision for the Future, we have developed a clear set
of financial targets to measure our success. The outcome for our
shareholders will be sustainable attractive returns.
Returns
Through our clear strategy and complementary, synergistic and
industry-leading businesses, we will deliver an attractive investment for
shareholders. As communicated at the Capital Markets Day in November,
we will target a return on equity of between 20% and 25%. We expect
to be delivering an ROE within our target range of 20% to 25% in 2021.
There are two key areas management currently focuses on as part
of the Vision for the Future.
Costs culture
We are focused on realising synergies which arise from common
processes across the Group. We will target a 500 basis point
reduction in the cost income ratio from 43% in 2018 to
approximately 38% in 2022. These plans include leveraging:
• capabilities and best practice in distribution, credit, collections
and digital throughout the Group to improve efficiency; and
• the migration of customers towards their preferred digital application
and servicing channels, such as the Vanquis Bank app, to reduce
the need for capacity in high-cost human contact centres.
Both the Group synergies and digital options available for our customers
will continue to reduce the cost income ratio below 43% in 2020.
Funding efficiencies
The Group refinanced its revolving syndicated bank facility in July 2019
and successfully signed a bilateral securitisation facility with NatWest
Markets to fund Moneybarn business flows in January 2020. Together
with the ongoing retail deposits programme, this is sufficient to fund
contractual debt maturities and projected growth in the non-bank
group until mid-2022, when the Group’s syndicated revolving bank
facility matures.
The Group is currently exploring a number of potential structures to
enable Moneybarn to access Vanquis Bank’s retail deposits capability
and the Group is aiming to provide a formal proposal to the PRA in
the first quarter of 2020.
The Group also continues to actively consider issuing further senior
bonds, private placements and potentially a tier 2 instrument. In
addition, the Group is also assessing ways in which to manage the
Vanquis Bank balance sheet more efficiently. In respect of funding
this would be through diversifying the funding mix into instant access
deposits or into wholesale markets through further securitisation. In
respect of liquidity, this would be in respect of revisiting the mix of
the assets held in the liquid assets buffer rather than solely relying
on the Bank of England Reserve Account. The Group aims to make
further progress on these areas through 2020.
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Provident Financial plc
Annual Report and Financial Statements 2019
KPIs
Cost-to-income ratio
43.8%
(2018: 43.0%)
Return on equity (PFG)
18.2%
(2018: 19.2%)
Regulatory capital in excess of £50m
£117m
(2018: £96m)
Funding headroom committed maturities
May 2022
(2018: May 2020)
Moneybarn gave
us a chance to get
a nice car that ticks
all the boxes.
We were declined by other lenders, but the
process with Moneybarn was simple and really
easy. We would use again and are already
looking for our next car!
A D A M
B E H A V I O U R S
Our behaviours
To make sure we deliver on our purpose, it is essential we
create a culture where: 1) we think ‘customer’ all the time;
2) we constantly innovate and make things better for all
our stakeholders; and 3) we hold ourselves and each other
personally accountable for success. As a result, we have
developed a set of behaviours we are now beginning
to embed in our overall culture.
Be hungry
for better
This is seeking out opportunities for
constant improvement, as well as having
conversations that will help us move
the dial, even when it is tough.
During the year, we launched the ‘Better Everyday’
recognition scheme with the dual purpose of encouraging
colleagues to consider the Blueprint behaviours in all they
do to be hungry for better and giving them the means to
recognise others when they see the behaviours in action.
Better Everyday is a Group-wide colleague recognition scheme
which will help to create a culture where we can all say ‘well done’
to colleagues who are showing the Blueprint spirit by living
our Group behaviours. Through the scheme, anyone can send
a colleague an eCard to say thank you, and nominate them
for an award. Everyone has the power to say thank you,
and senior leaders can award colleagues with vouchers.
Read more about how we are supporting colleagues in our
workplace in our 2019 CR Report at providentfinancial.com
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Provident Financial plc
Annual Report and Financial Statements 2019
Put the
customer on
the team
This is making every decision with our
customers in mind, as well as owning the
trade-off between commercial and
customer impact.
Feedback from the colleague survey showed that colleagues
did not connect enough to the customer and felt a lack of
clarity around what our customer proposition is. The results
indicated that colleagues want more opportunity to engage
with leadership and more visibility of them.
To achieve this, Tom Allder, Customer Director at Vanquis Bank,
hosted and delivered nine Customer Cafés – a forum to explore
the customer proposition and collect a broad range of viewpoints.
Cafés were held in London, Chatham and Bradford with over
200 colleagues attending.
It was really good to refocus the customer-centric heart
of our roles and re-motivate why we are working on all
of the initiatives that we are. It was also great to see that
we are already heading in the right direction with many
of our actions due for 2020. I thought it was great to look
at what ‘good’ looks like and different great experiences
people have had with other companies and why.
Act like
it’s yours
This is using resources with the same
respect and consideration you would your
own, as well as doing your bit to
step-change our performance and
maximise value.
Simon Thomas, Chief Finance Officer, created a Strategic
Cost forum in 2019 which brought together the divisional
Finance Directors, senior Group Finance leaders and the
Group Chief Information Officer. The objective of the forum
is to support and continue to drive the reduction in the cost
base across the Group and share thoughts on how savings
have been delivered in each division.
The forum’s aim is to deliver the externally stated target of a
cost income ratio of 38% by 2022. This target will be delivered
by a three stage project. Stage 1 was a detailed cost reduction
exercise by each division. Stage 2 is a full review, including
a detailed cost/benefit exercise, of the support areas which
could be centralised to reduce cost. Stage 3 is a wider strategic
review to assess the Group’s target operating model and the
potential to consolidate operational activities.
Provident Financial plc
Annual Report and Financial Statements 2019
23
Strategic report O U R M A R K E T
Our marketplace
The market we serve is large, with c.1 in 5 adults (10 to 12 million people)
in the UK not well served by mainstream lenders. Because consumers’
participation in our market is typically driven by their circumstances,
the market is relatively fluid over time, with c.1 to 2 million consumers
moving in and out of the market each year, as their personal
or household circumstances change.
The three main categories of products in our market are
revolving credit accounts including credit cards; secured loans,
where an asset is used as security for the loan; and unsecured
loans of various forms including home collected credit and
online lending.
In 2020, Vanquis will develop and expand its unsecured personal
loan offering to the open market (from existing customers only at
present). We will also look to pilot a Satsuma unsecured personal
loan offering, leveraging the capability we have developed in
online short-term loans.
We have market-leading positions in revolving credit, unsecured
loans and secured loans, with product and service propositions
that are tailored for our customers’ differing borrowing needs and
varied risk profiles. We continue to explore options to evolve our
product offerings to meet the needs of more consumers in the
market and existing customers of the Group.
Our market is highly regulated, primarily by the FCA, PRA and
CBI (in the Republic of Ireland), with regulation subject to ongoing
evolution and change. As a customer-centric and specialist lender
operating across the broadest range of product categories in our
market, we feel that we are well placed to respond to the ongoing
regulatory challenge inherent in operating in our market.
Revolving credit
Unsecured loans
Secured loans
Prime/mainstream
APR >20%
Overdrafts
Credit card
and store
card, and
retail credit
accounts
Personal
loans
and retail
point-of-sale
finance
APR >50%
Guarantor
loans
Lines of credit
1st and 2nd
charge
mortgages
Motor
finance
APR >100%
Rent-to-own
i
s
R
P
A
g
n
s
a
e
r
c
e
D
Home credit
High-cost
short-term
credit
Pawnbroking
Decline/unable to lend
24
Provident Financial plc
Annual Report and Financial Statements 2019
A leading specialist player
in a large, established
cards market
Non-standard credit card market (stock)
Debt outstanding up
22% year on year
Debt outstanding down
6% year on year
n
b
6
5
£
.
%
9
2
March
19
%
7
2
March
17
%
0
3
March
18
Vanquis Bank share
• Debt outstanding in the credit card market
grew at a compound annual growth rate of
7% in the two years to March 2019, driven
by new account openings.
• Vanquis Bank has around a third of the
non-standard credit card sector.
Credit card
Vanquis Bank has been active in the credit card market in the
UK since 2003 and has grown to become the largest part of
the Group and the largest player in the credit card market for
consumers not well served by mainstream lenders. Vanquis Bank
offers a range of card products at differing price points to
reflect consumers’ varied risk profiles.
Market attraction
• Credit cards have high cultural adoption
and acceptance in the UK, meaning a large
domestic market.
• Credit cards have everyday utility as a
means of transacting, providing an ongoing
customer relationship.
• The importance of credit cards as a means
of transacting is growing given the continuing
and rapid move in consumer preferences
to digital.
Market features
Market
• The credit card market is large and stable.
• Competition in the market is also relatively stable.
Key competitors include Capital One, NewDay own
brand cards and the Barclaycard Foundation card.
• Vanquis is the only specialist, covering the broadest
range of risk categories in the market.
Model
• Credit card providers typically offer low initial limits and
responsibly grow these through credit line increases.
• Consumers are increasingly acquired online. Account
management has also moved online due to changing
consumer preferences, typically through mobile apps.
Provident Financial plc
Annual Report and Financial Statements 2019
25
Strategic report O U R M A R K E T C O N T I N U E D
Only available to existing
customers, with open market
launch in H2 2020
Non-standard personal loan market (flow)
Credit issued up 14%
year on year
n
b
1
.
1
£
1.4%
2017
2.5%
2018
Vanquis Bank share
• Credit issued rose 14% year on year in 2018,
driven by a 20% increase in account openings.
• Average credit issued per new loan fell slightly
from £3,300 in 2017 to £3,100 in 2018.
26
Provident Financial plc
Annual Report and Financial Statements 2019
Personal loan
Vanquis Bank began piloting unsecured personal loans in late
2016 for existing credit card customers. In H2 2020 we will begin
to offer loans to consumers in the open market.
Market attraction
• The non-standard personal loans market
is substantial in size and growing at a
strong pace.
• High cultural adoption and acceptance
in the UK.
• Offering personal loans provides the
opportunity to leverage core skills in loans
and allows Vanquis Bank to meet more of
its existing customer needs with a large
opportunity in the open market.
Market features
Market
• The market is of a substantial size (>£1bn) and growing.
• Providers operate at a range of price points (c.15–100% APR).
• There have been a number of new near prime entrants
(e.g. Monzo, Starling and Chetwood Financial).
Model
• One to five-year loans at a range of APRs.
• Personal loans are typically taken to meet a specific
one-off need, with some potential top-ups.
• Customers are acquired increasingly through internet
affiliates, with customers then typically managing their
account through a mobile app.
A leading player in secure
vehicle finance
Non-standard motor finance market (flow)
10%
Credit issued
in 2018
£3.6bn
10+
Moneybarn share
• The car finance market for customers
underserved by mainstream lenders is large,
with opportunity for Moneybarn to continue
to grow.
• Moneybarn has a 10% market share in
the non-standard motor finance market,
an increase from the prior year (9%).
Motor finance
Moneybarn was acquired by the Group in 2014 enabling us to
broaden our offering into secured motor finance. Moneybarn
has since grown at a compound annual growth rate of 27%
to become a leading player in the market.
Market attraction
• Motor finance is a secured product.
• Secured finance is a well-established and
culturally accepted way to purchase big
ticket items, such as a car, with opportunity
for further growth in used car acquisition.
• Customers have an incentive to maintain
their repayments due to the utility of the
vehicle (e.g. a car is needed to get to work).
Market features
Market
• The non-standard motor finance market is large
and growing.
• There are numerous providers that span over a range
of risk appetites (e.g. Advantage, MoneyWay and
Close Brothers).
• Moneybarn has the broadest coverage of APRs
in the non-prime and near-prime market.
Model
• Motor finance is typically on three to five-year secured
hire purchase.
• Consumers in this market are not accessing finance
with the manufacturer or with their bank and are
typically acquired through intermediaries.
• There are typically small levels of repeat loans
with the same lender.
• The technology in this market is evolving from a manual
process to increased digitisation and smoother customer
onboarding (e.g. auto-affordability and ID verification).
Provident Financial plc
Annual Report and Financial Statements 2019
27
Strategic report90
+
N
O U R M A R K E T C O N T I N U E D
The no. 1 player in the home
credit market
Home credit market (flow)
Credit issued down
17% year on year
%
0
5
n
b
7
.
0
£
%
2
4
2017
2018
Provident share
• Despite operational disruption in the UK,
Provident still issued 42% of the credit in
the market in 2018; this proportion remained
stable through Q1 2019.
• The rest of the market was stable in 2017
and 2018.
28
Provident Financial plc
Annual Report and Financial Statements 2019
Home credit
Provident home credit remains the market leader and is the only
home credit provider with a truly national footprint, operating
throughout the UK and also the Republic of Ireland. The home
credit market remains an important source of financial inclusion
and has stabilised following the disruption caused by Provident’s
move to a new fully employed operating model in the UK in 2017.
Market attraction
• Some customers prefer to manage
their day-to-day finances in cash,
so a cash-based loan suits them.
• Online/purely remote lending is not
appropriate for everyone. Some customers
need the face-to-face service, structure
and product flexibility provided by home
credit to serve their needs responsibly.
• We are well placed to modernise the
proposition to keep pace with changing
consumer preferences.
Market features
Market
• The market has stabilised following the disruption
caused by the change in the Provident operating
model in the UK.
• There are few key competitors nationally (e.g. Morses
and Loans at Home), a number of regional providers
and a large number of small local providers.
Model
• 13–104-week cash loans are typically delivered
and collected in the home by employed Customer
Experience Managers or self-employed agents
(depending on the lender’s operating model).
• Technology has improved operating efficiency and
compliance with the regulator (e.g. lending apps).
• Lenders are modernising their propositions to provide
customers with more choice (e.g. remote repayment
options and online portals).
A leading player in the digital
loans sector
High-cost short-term credit market (flow)
Credit issued up 18%
year on year
n
b
1
.
1
£
10%
2018
7%
2017
Satsuma share
• Large, growing market driven by volume.
• New accounts grew 10% in 2017 and 2018.
• Market size and growth illustrate strong
consumer demand for digital loans.
• Satsuma’s market share rose further
to 15% in Q1 2019.
Digital loans
Satsuma was launched in 2013 in response to consumers’ growing
appetite to transact their financial business online. Satsuma has
since grown to secure a top 3 position in the high-cost short-term
credit market. The market has experienced a significant amount
of disruption due to the evolution of the regulatory environment.
Market attraction
• There is strong and growing consumer
demand for short-term digital loans.
• In general, consumer preferences are
moving towards managing their finances
online, particularly for younger generations.
• Significantly increased regulation
is impacting operating models and
reducing competition.
Market features
Market
• Relatively large market with high levels of
consumer demand.
• Supply in the market has been impacted by the exit of
a number of former payday lenders, a number of which
have gone into administration due to historical lending
practices (e.g. Wonga and Quick Quid).
Model
• 1–12-month fixed repayment loans managed
and repaid digitally.
• Technological advancements have been focused around
customer experience enhancements (e.g. the increasing
availability of mobile apps and eligibility tools such
as soft search).
Provident Financial plc
Annual Report and Financial Statements 2019
29
Strategic report C R E D I T C A R D D I V I S I O N
Vanquis Bank is a leading specialist in the
large and established credit card market.
It has a strong capital base and has access
to liquid funds through the resilient retail
deposits markets.
Executive summary
Who we are
• A well-capitalised, liquid bank with further capital
and funding opportunities
• A leading specialist player in a large, established
and growing card market
Current position
• We are better at understanding our customers and what
they need
• Well progressed through the recalibration of the model:
• Persistent debt
• ROP income attrition
• Customer and culture
Growth ambitions
• Delivering profitable growth while recalibrating our model:
• Strong new customer origination engine
• Credit line increase (CLI) balance growth on strong
upward recovery track
• Credit card innovation (white label partnerships/
self-employed card)
• Digital programme
• Cost programme
• Unsecured personal loans opportunity
• Leveraging core capabilities in credit risk and data
and analytics
Neil Chandler
Vanquis Bank Managing Director
1,587
Colleagues
1.7m
Customers
£173.5m
Adjusted profit before tax
£1,461.5m
Year-end receivables
Certain alternative performance measures (APMs) have
been used in this report. See page 237 for an explanation
of relevance as well as their definition.
Financial targets
• Targeting c.£2bn receivables and c.20%–25% ROE
in the medium term
30
Provident Financial plc
Annual Report and Financial Statements 2019
1.1m
active users and 87%
of new customers
register on the
Vanquis Bank app
The continuing development of digital
capability is an essential driver in
delivering good customer outcomes
and maintaining the returns of Vanquis
Bank in the context of a moderating
revenue yield.
Neil Chandler
Vanquis Bank – financial performance
Vanquis Bank is a leading specialist in the large and established credit card market. It has a strong capital base and has access to
liquid funds through the resilient retail deposit markets. During 2019, Vanquis Bank has continued to make good progress in adapting
and changing its business model to changes in regulation and a better understanding of customer needs. As a result, the shape of
the income statement is changing, with lower revenue yields being mitigated by lower impairment, increased cost efficiency and
managing the balance sheet more effectively to reduce interest costs. Management is making good progress in developing and
executing plans to return the business to profitable growth in the medium term with a number of strategic initiatives underway.
Year ended 31 December
1
2019
£m
2018
(restated) 1
£m
Customer numbers (‘000)
1,720
1,773
Year-end receivables
Average receivables2
1,461.5
1,459.9
1,495.1
1,507.4
Revenue
Impairment
Revenue less impairment
Revenue yield3
Impairment rate4
Risk-adjusted margin5
Costs
Interest
580.9
(198.9)
382.0
39.8%
13.6%
26.2%
(177.1)
(31.4)
644.9
(241.6)
403.3
42.8%
16.0%
26.8%
(176.4)
(36.0)
Adjusted profit before tax
173.5
190.9
Exceptional items6
12.4
—
Statutory profit before tax
185.9
190.9
Cost income ratio7
Return on assets8
Return on equity9
30.5%
10.4%
32.4%
27.4%
11.1%
44.0%
Change
%
(3.0)
(2.2)
(3.2)
(9.9)
17.7
(5.3)
(0.4)
12.8
(9.1)
n/a
(2.6)
2018 comparatives have been restated for the change in treatment of
directly attributable acquisition costs following a refresh of contractual
terms with affiliates in 2019 – this has resulted in a £6.6m increase in
2018 profit before tax, a benefit of £10.5m to 2019 profit before tax and
is expected to result in a reduction of approximately £6m in 2020 profit
before tax compared with previous plans.
2 Average of month-end receivables for the 12 months ended 31 December.
3 Revenue as a percentage of average receivables for the 12 months
ended 31 December.
4 Impairment as a percentage of average receivables for the 12 months
ended 31 December.
5 Revenue less impairment as a percentage of average receivables
for the 12 months ended 31 December.
6 Represents a net exceptional credit of £12.4m (2018: £nil) comprising:
(i) an exceptional credit of £14.2m (2018: £nil) in respect of the release
of provisions established in 2017 following completion of the refund
programme in respect of ROP and a re-evaluation of the forward flow
of claims that may arise in respect of ROP complaints more generally;
and (ii) exceptional restructuring costs of £1.8m (2018: £nil).
7 Costs, before exceptional items, as a percentage of revenue
for the 12 months ended 31 December.
8 Profit before interest after tax as a percentage of average receivables
for the 12 months ended 31 December.
9 Adjusted profit after tax as a percentage of average equity for the
12 months ended 31 December. 2018 average equity has been restated
as though the £50m of rights issue proceeds injected into Vanquis Bank
in April 2018 had occurred on 1 January 2018.
Provident Financial plc
Annual Report and Financial Statements 2019
31
Strategic report
C R E D I T C A R D D I V I S I O N C O N T I N U E D
Vanquis Bank – financial performance continued
Vanquis Bank’s adjusted profit before tax reduced by 9.1% to
£173.5m in 2019 (2018 (restated): £190.9m). The reduction in
adjusted profits mainly reflects the continued moderation in ROP
income of approximately £20m and 2018 benefiting from the
release of £10m of remuneration-related accruals as a result of
the business performing below expectations throughout 2017 and
2018. These adverse variances were partly offset by an improved
impairment rate, tight control of costs and a reduction in interest
costs. Vanquis Bank’s statutory profit before tax reduced by 2.6%
to £185.9m (2018 (restated): £190.9m), a lower rate of reduction
than adjusted profits. This reflects the benefit of an exceptional
provision release of £14.2m (2018: £nil) in respect of the ROP
refund programme partly offset by exceptional restructuring
costs of £1.8m (2018: £nil).
Demand for Vanquis Bank’s credit cards continues to be strong.
Despite tighter underwriting standards, including the withdrawal
of the 69.9% APR product, and the implementation of revised
affordability processes which have reduced new booking volumes
by approximately 25%, new customer bookings of 369,000 were
3,000 higher than last year and ahead of management’s plans.
This reflects the benefit from the implementation of the new
underwriting engine towards the end of 2018 which has enabled
Vanquis Bank to enhance the customer onboarding journey.
This includes the full roll-out of soft search pre-application for all
channels and the pre-approval and pre-population for all affiliate
channels, both of which have resulted in an improvement in
application completion rates.
Despite strong booking volumes, customer numbers ended
2019 at 1,720,000, 3.0% lower than last year (2018: 1,773,000).
The year-on-year reduction reflects the closure of approximately
65,000 inactive customer accounts in the fourth quarter in order
to manage contingent risk if there is any deterioration in the
economic environment and the sale of 56,000 customers
on payment arrangements during the year.
Receivables ended 2019 at £1,461.5m, a 2.2% reduction on
December 2018 (2018 (restated): £1,495.1m), and compares with
management’s internal plan of delivering broadly flat receivables
in 2019. The reduction is consistent with recent Bank of England
industry data showing that credit card customers repaid more
than they borrowed in November and December 2019 and, in the
case of Vanquis Bank, includes the greater than expected impact
of changes in regulation in respect of persistent debt remedies
and revised affordability processes.
In response to the FCA’s definition of persistent debt within the
Credit Card Market Study (CCMS), Vanquis Bank has introduced
a number of measures including: (i) increasing minimum payments
due in the last quarter of 2018 and communicating higher
recommended payments in early 2019; (ii) placing restrictions on
the credit line increase programme; and (iii) implementing a number
of communication strategies during 2019. At September 2018,
approximately 11% of active Vanquis Bank customers were up to
date but met the definition of being in persistent debt (including
customers in arrears and in payment arrangements this increases
to 15% of active customers). The business has been actively
working with these customers with a view to removing them
from this position in advance of March 2020, which is the first
36-month checkpoint after which customers who still meet the
definition of being in persistent debt will be offered a way to
repay their balance in a reasonable period of no more than four
years. Management anticipates that approximately 2% of the
September 2018 cohort of customers will still meet the definition
of persistent debt at March 2020. Vanquis Bank continues to
proactively work with the remaining customers in advance of
March 2020 as well as those customers who have met the
definition of being in persistent debt after September 2018.
32
Provident Financial plc
Annual Report and Financial Statements 2019
Year-end receivables
£1,461.5m
m
2
.
5
0
4
,
1
£
m
1
.
5
9
4
,
1
£
m
5
.
1
6
4
,
1
£
17
18
19
Vanquis Bank, consistent with the rest of the Group, implemented
revised affordability processes in November 2018. Together with
the impact of not extending credit to those customers meeting
the definition of persistent debt, this has resulted in a reduction
in the level of further credit extended to existing customers under
the credit line increase programme. Credit line increases in 2019
were approximately 35% lower than in 2018.
Revenue has shown a 9.9% reduction to £580.9m in 2019
(2018 (restated): £644.9m) compared with the 3.2% reduction
in average receivables. The revenue yield has moderated from
42.8% (restated) in 2018 to 39.8% in 2019 due to three factors.
Firstly, there was a further decline in the penetration of ROP
within the customer base following the voluntary suspension of
sales from April 2016. This resulted in a year-on-year reduction in
ROP income of approximately £20m. Secondly, there has been
some further moderation in the interest yield from: (i) a modest
increase in the mix of nearer-prime customers; (ii) downwards
repricing of higher APR accounts where the customer has improved
their credit standing; and (iii) balance reductions applied to accounts
as part of the ROP refund programme were typically at higher
APRs. Finally, there have been some changes to the basis for
charging late and over-limit fees to customer accounts.
The ROP refund programme was completed during March 2019
and the FCA has confirmed that the programme is now closed.
There has been no material change in the level of complaints
arising in relation to ROP following the announcement of the
settlement in February 2018. Accordingly, following completion
of the refund programme and a re-evaluation of the forward flow
of claims that may arise in respect of ROP more generally, £14.2m
of the provision originally established in 2017 has been released
as an exceptional credit in 2019. The remaining provision held in
the balance sheet of £11.7m (2018: £45.7m) reflects management’s
revised expectation of future claims which may arise in respect
of ROP more generally together with sundry costs of dealing
with those claims.
Delinquency trends showed a favourable movement compared
with last year due to a shift in mix towards better quality customers.
In addition, the second half of 2018 was adversely impacted by the
impact of enhanced forbearance and an increase in minimum
payments due in response to persistent debt regulation which
resulted in a step-up in payment arrangements which has not
been repeated in 2019. Accordingly, the impairment rate in 2019
has reduced to 13.6% of average receivables compared with
16.0% in 2018. Underwriting standards have been progressively
tightened over the last two years which, together with the
historical resilience of the business model, means that Vanquis
Bank is well positioned if there is any deterioration in the UK
economic environment.
The risk-adjusted margin has moderated from 26.8% (restated)
in 2018 to 26.2% in 2019, reflecting the reduction in the revenue
yield substantially offset by the improvement in the impairment
rate discussed above.
Costs have shown a modest 0.4% increase to £177.1m in 2019
(2018 (restated): £176.4m) with cost efficiency remaining a strong
focus for Vanquis Bank. The stable cost base has been delivered
despite 2018 benefiting from the release of approximately £10m
in respect of share-based payment, incentive and bonus
arrangements as a result of the business performing below
expectations throughout 2017 and 2018.
Interest costs of £31.4m have reduced by 12.8% during 2019
(2018: £36.0m) due to the reduction in Vanquis Bank’s blended
funding rate, after taking account of the cost of holding a liquid
assets buffer, from 3.5% in 2018 to 3.0% in 2019. This reflects the
impact of Vanquis Bank repaying its intercompany loan from
Provident Financial and becoming fully funded with retail deposits
in November 2018. The intercompany loan represented a higher
cost of funding for Vanquis Bank.
Vanquis Bank’s return on assets has reduced to 10.4% in 2019
(2018 (restated): 11.1%) due to the moderation in the risk-adjusted
margin partly offset by cost efficiency. Return on equity has reduced
from 44.0% (restated) in 2018 to 32.4% in 2019. This primarily reflects
the rebuilding of the equity base following the implementation of
IFRS 9 on 1 January 2018 (which resulted in a £111.4m reduction in
equity) and the ROP refund provision reflected at the end of 2017
(which resulted in a £178.0m reduction in equity). Vanquis Bank’s
return on equity is expected to moderate to the Group’s target
range of between 20% to 25% over the medium term reflecting:
(i) the average equity base stabilising; and (ii) the risk-adjusted
margin reducing to between 23% to 25% due to the ongoing
reduction in ROP income and the impact of downwards
repricing and fee changes implemented in 2019.
Vanquis Bank paid a dividend to Provident Financial of £80m
in February 2020.
Vanquis Bank – growth initiatives
Vanquis Bank’s medium-term target is to deliver £2bn receivables
(currently £1.5bn) and an ROE of between 20% to 25%. In addition
to growing and developing the core credit cards proposition, the
business is pursuing a number of strategic initiatives to deliver
these targets.
Loans
The focus of the Vanquis Bank loans proposition has so far
remained on providing unsecured loans to existing credit card
customers and the loans receivables book ended 2019 at £28.9m
(2018: £26.0m). Volumes have been kept at modest levels during
2019 as Vanquis Bank has been preparing for a relaunch of the
loans proposition, leveraging the capabilities of both Vanquis Bank
and Satsuma, in order to provide a joined-up range of online
unsecured lending products. The unsecured loans market remains
attractive for Vanquis Bank to expand into with over £1bn of credit
issued each year and approximately 12% of Vanquis Bank customers
already having a loan from another provider. To capitalise on this
opportunity, a new Director of Loans has been appointed and a
new business and financial plan has been developed based on
price points up to 59.9%. The medium-term aim is to grow to a
receivables book of £150m, based on serving both Vanquis Bank
customers and the open market.
White-label credit card partnerships
The way in which customers are researching and applying
for credit cards is evolving mainly due to digitisation. Growth
in traditional direct marketing channels has slowed as more
customers are choosing to source credit cards through affiliates
and aggregators. Vanquis Bank is very active in this area and has
formed strategic distribution partnerships with key players,
widening distribution reach and obtaining attractive acquisition
costs. There is the opportunity for Vanquis Bank to develop this
further by establishing white-label credit card partnerships with
affiliates, leveraging the affiliates brand and digital marketing
specialism with Vanquis Bank’s balance sheet, credit decisioning
and customer servicing capabilities. Vanquis Bank is working
toward launching a new white label partnership in the first
half of 2020.
Self-employed ecosystem
Developing a tailored proposition for self-employed consumers
also represents an attractive opportunity. There are approximately
5 million adults (and growing) in the UK who are self-employed and
Vanquis Bank serves approximately 250,000 of those consumers.
Providing the self-employed segment with a distinct card, with
attractive and tailored features, represents a good fit with Vanquis
Bank’s core competencies. The business plans to undertake a
test in 2020 and then, subject to satisfactory progress, build out the
proposition through 2021 with product enhancements, including
the potential to establish a broader, multi-product, self-employed
ecosystem, leveraging wider group and third-party partners.
Digitisation
The continuing development of digital capability is an essential
driver in delivering good customer outcomes and maintaining
the returns of Vanquis Bank in the context of a moderating
revenue yield. Vanquis Bank has continued to make good
progress in its digitisation programme during 2019. There are
now over 1.1 million active users and 85% of new customers
register on the Vanquis Bank app. Customers are actively using
the app to engage with the business with over 200,000 push
notifications being sent out per month and almost £100m of
payments being processed via the app. In addition, over 300,000
customers have taken up the option to receive statements via
the app rather than receiving the traditional paper copy. Vanquis
Bank also successfully introduced a chatbot in March 2019.
Historically, one of the most effective channels to contact
customers who may be about to miss, or have just missed,
payments was via SMS. The chatbot provides a much more
interactive way to automate these SMS conversations and now
instigates approximately 70% of SMS conversations which has
led to improved customer response rates. Both the app and the
chatbot are examples of scalable, customer-led concepts that
can be developed for wider application and deliver benefits for
both the customer, through a better experience, and Vanquis
Bank, through cost efficiency. Vanquis Bank’s medium-term aim
is to deliver operational leverage by maintaining a stable cost
base whilst growing the business.
Vanquis Bank – management changes
Neil Chandler joined Vanquis Bank as Managing Director in
April 2019 having previously been the Chief Executive Officer of
Shop Direct Financial Services and prior to that the Chief Executive
Officer of Sainsbury’s Bank. The Vanquis Bank Executive Team
has been significantly refreshed and strengthened under Neil’s
leadership with the appointments of a new Operations Director,
Chief Risk Officer, Customer Director, Product Director and
a Digital Transformation Director.
Robert East joined as Chairman of Vanquis Bank and a member
of the group board in June 2019. Robert is also Chairman of
Skipton Building Society.
Oliver White, Finance Director of Vanquis Bank, will be leaving the
business to pursue other career opportunities. The Board would
like to thank Oliver for his efforts over the last three years in
helping reshape Vanquis Bank, commencing the cost efficiency
programme and the completion of the ROP refund programme,
and wish him all the best in his new role. A search for his
successor is underway.
Provident Financial plc
Annual Report and Financial Statements 2019
33
Strategic report V E H I C L E F I N A N C E D I V I S I O N
Shamus Hodgson
Moneybarn Managing Director
320
Colleagues
77k
Customers
£30.9m
Adjusted profit before tax
£502.1m
Year-end receivables
Certain alternative performance measures (APMs) have
been used in this report. See page 237 for an explanation
of relevance as well as their definition.
34
Provident Financial plc
Annual Report and Financial Statements 2019
In the five years since acquisition by PFG,
Moneybarn has become one of the largest
suppliers of vehicle finance to underserved
customers in the UK.
Executive summary
Who we are
• A leading player in vehicle finance for those underserved
by mainstream lenders
Current position
• Strong consistent growth and ROA record
• No impact from FCA review of motor finance market
and no known regulatory headwinds on the horizon
Growth ambitions
• Positioned for strong growth over the medium term
in current markets
• Longer term, well positioned for move into adjacent
near prime, expanding our addressable market
Financial targets
• Resilient business model (only secured hire purchase)
and customers
• Funding opportunities
• Targeting c.£750m receivables and c.10% ROA
in the medium term
Introduction and
development of new asset
classes that resonate with
Moneybarn’s target
customer base
The business has a strong track record,
delivering high levels of growth and
strong returns, and is in an excellent
position to continue to deliver profitable
growth in the medium term from
existing and adjacent markets.
Shamus Hodgson
Moneybarn – financial performance
In the five years since acquisition by Provident Financial, Moneybarn has become one of the largest suppliers of vehicle finance
to underserved customers in the UK. The business has a strong track record, delivering high levels of growth and strong returns,
and is in an excellent position to continue to deliver profitable growth in the medium term from existing and adjacent markets.
Year ended 31 December
1
Customer numbers (‘000)
Year-end receivables
Average receivables2
Revenue
Impairment
Revenue less impairment
Revenue yield3
Impairment rate4
Risk-adjusted margin5
Costs
Interest
Adjusted profit before tax
Exceptional items6
Statutory profit before tax
2019
£m
77
502.1
481.5
122.0
(41.8)
80.2
25.3%
8.6%
16.7%
(20.9)
(28.4)
30.9
2.6
33.5
2018
(restated) 1
£m
62
416.4
395.1
104.3
(34.4)
69.9
26.4%
8.7%
17.7%
(19.9)
(21.9)
28.1
—
Change
%
24.2
20.6
21.9
17.0
(21.5)
14.7
(5.0)
(29.7)
10.0
n/a
28.1
19.2
Cost income ratio7
Return on assets8
17.1%
10.0%
19.1%
10.3%
2018 comparatives have been restated for the changes in recognition
of revenue on credit impaired receivables and treatment of directly
attributable acquisition costs which have resulted in a reduction in
revenue, impairment and costs but have had no impact on
Moneybarn’s profits.
2 Average of month-end receivables for the 12 months ended 31 December.
3 Revenue as a percentage of average receivables for the 12 months
ended 31 December.
4 Impairment as a percentage of average receivables for the 12 months
ended 31 December.
5 Revenue less impairment as a percentage of average receivables
for the 12 months ended 31 December.
6 Represents an exceptional credit of £2.6m (2018: £nil) in respect
of the release of provisions established in 2017 following completion
of the FCA investigation into affordability, forbearance and termination
options at Moneybarn.
7 Costs, before exceptional items, as a percentage of revenue
for the 12 months ended 31 December.
8 Adjusted profit before interest after tax as a percentage of average
receivables for the 12 months ended 31 December.
Provident Financial plc
Annual Report and Financial Statements 2019
35
Strategic report
Year-end receivables
£502.1m
m
1
.
2
0
5
£
.
m
4
6
1
4
£
18
19
m
7
.
8
1
3
£
17
deterioration in impairment trends reflecting (i) the flow through
of higher-risk customers prior to the tightening of underwriting
early in the fourth quarter; and (ii) the impact of stronger than
forecast growth in new business volumes earlier in the year as
Moneybarn’s peak in defaults is approximately nine to 12 months
following inception of a loan. Accordingly, Moneybarn’s impairment
rate of 8.6% in 2019 was in line with last year (2018 (restated): 8.7%),
having tracked at a lower rate of around 8.0% earlier in the year.
The tighter underwriting standards being applied throughout
the fourth quarter together with improvements in collections
processes are expected to stabilise impairment trends in 2020.
The modest fall in the revenue yield and the stable impairment
rate has resulted in Moneybarn’s risk-adjusted margin reducing
from 17.7% (restated) in 2018 to 16.7% in 2019.
Cost growth of 5.0% in 2019 is stated after the benefit from an
estimated VAT recovery of £2.0m. Excluding the VAT recovery,
cost growth was 15.0%, lower than the growth in revenue of
17.0%, as the business has delivered some operational leverage.
Due to the strong growth in the business over recent years,
Moneybarn has recently moved into new premises, very close to
the existing site in Petersfield. The new office will accommodate
up to 420 employees, compared with headcount of 320 currently,
and will support growth well into the medium term.
V E H I C L E F I N A N C E D I V I S I O N C O N T I N U E D
Moneybarn – financial performance continued
Moneybarn’s adjusted profit before tax increased by 10.0% to
£30.9m in 2019 (2018: £28.1m). The business has continued to
deliver strong new business volumes and receivables growth
although profits growth has been impacted by a modest reduction
in margins and increased funding costs as Moneybarn has been
allocated a more appropriate share of Group funding costs in
2019. Moneybarn’s statutory profit before tax increased by 19.2%
to £33.5m (2018: £28.1m), a higher rate of increase than adjusted
profits. This reflects the benefit of an exceptional provision release
of £2.6m (2018: £nil) following finalisation of the FCA investigation
into affordability, forbearance and termination options.
The non-standard vehicle finance market remains competitive.
However, demand for used cars has remained robust and new
business volumes have been very strong. Continued development
of core broker-introduced distribution channels, including
revising affordability processes and a number of other operational
developments, has resulted in a better customer experience and
reinforced Moneybarn’s position amongst its broker network. As
a result, new business volumes in 2019 were 30% higher than last
year. Due to the particularly strong growth in new business volumes
in the first three quarters of the year and the emergence of a modest
deterioration in impairment trends, underwriting was tightened
early in the fourth quarter to remove the bottom tier of higher
risk customers. Accordingly, fourth quarter volumes showed a
lower year-on-year growth rate of 14%. Customer numbers ended
the year at 77,000, up from 62,000 at the end of 2018 and
showing growth of 24.2%.
Receivables showed strong growth of 20.6% to £502.1m
(2018 (restated): £416.4m). This was a lower rate of growth than
the 24.2% increase in customer numbers, reflecting the sale of
delinquent debt with a modest carrying value in December.
This was the first sale of delinquent debt since the
commencement of the FCA investigation in 2017.
The redress required to resolve the issues arising in respect of the
FCA investigation into affordability, forbearance and termination
options was completed in the third quarter of 2019 and Moneybarn
received the final notice from the FCA in February 2020. The
total cost of the investigation is lower than the original £20m set
aside at the end of 2017, and, accordingly, £2.6m of the provision
has been released as an exceptional credit in 2019. The remaining
provision held in the balance sheet of £2.8m (2018: £7.5m) reflects
the cost of the fine based on the final FCA notice.
Revenue has increased by 17.0% to £122.0m (2018 (restated):
£104.3m) compared with the growth in average receivables of
21.9%. The revenue yield has reduced from 26.4% (restated) in
2018 to 25.3% in 2019 reflecting the impact of the tightening of
underwriting which has removed higher-yielding, lower-quality
business and the cessation of charging default fees during 2018.
Default rates and arrears levels were stable in the first three quarters
of 2019, continuing the trend experienced since the end of the first
quarter of 2018. However, the final quarter of 2019 showed a modest
36
Provident Financial plc
Annual Report and Financial Statements 2019
Interest costs have shown growth of 29.7% in 2019, higher than
the 21.9% growth in average receivables. This reflects an increase
in Moneybarn’s Group funding rate as the cost of funding the
non-bank segment of the Group has increased following Vanquis
Bank becoming fully funded through retail deposits during the
second half of 2018. Moneybarn’s funding rate in 2020 will benefit
from the recently signed securitisation of its receivables book.
Moneybarn has delivered a return on assets of 10.0% in 2019,
marginally lower than 10.3% (restated) in 2018, but in line with
the Group’s target of 10%.
Moneybarn – growth initiatives
Moneybarn’s medium-term target is to deliver £750m receivables
(currently £502m) whilst maintaining an ROA of approximately
10%. The business continues to expect continued growth in its
core products as the use of car finance on used car purchases
continues to rise from relatively modest penetration levels.
In addition, the business is pursuing a number of strategic initiatives
to support delivery of its targets. In particular, Moneybarn continues
to explore opportunities to extend its product offering and
distribution channels through:
• expansion of relationships with lead generators and quotation
search partners such as ClearScore, Confused.com and Totally
Money, leveraging Moneybarn’s quotation search and digital
onboarding capabilities;
•
introduction of a re-solicitation programme to retain high-quality
customers who currently settle early and move to other lenders;
• continuing to develop the B2C proposition, including using the
Vanquis Bank app to offer bespoke Moneybarn products to
Vanquis Bank customers which is now live; and
•
introduction and development of new asset classes that
resonate with Moneybarn’s target customer base, such as light
commercial vehicles, motorbikes and touring caravans as well
as products tailored to the self-employed.
In addition, Moneybarn is developing plans to move further into
the near prime segment, leveraging its scalable platform and the
Group’s funding base. This would significantly increase the size
of Moneybarn’s addressable customer base.
Moneybarn – management changes
After 12 years with the business, Shamus Hodgson, Managing
Director of Moneybarn, will step down from his role at the end of
March 2020 to pursue other career opportunities. Malcolm Le May,
the Group’s Chief Executive Officer, will become Managing Director
of Moneybarn on an interim basis. The search for a successor has
already commenced. The Board would like to thank Shamus for
his leadership of Moneybarn since taking over as Managing Director
three years ago and his role in establishing Moneybarn as the UK’s
leading provider of vehicle finance to the underserved.
Provident Financial plc
Annual Report and Financial Statements 2019
37
Strategic report C O N S U M E R C R E D I T D I V I S I O N
Chris Gillespie
CCD Managing Director
2,800
Colleagues
522k
Customers
£20.8m
Adjusted loss before tax
£249.0m
Year-end receivables
Certain alternative performance measures (APMs) have
been used in this report. See page 237 for an explanation
of relevance as well as their definition.
38
Provident Financial plc
Annual Report and Financial Statements 2019
CCD is the market leader in the UK and
Republic of Ireland home credit markets
and is now also a leading player in digital
loans within the high-cost, short-term
credit market through Satsuma.
Executive summary
Who we are
• Market leader in UK and ROI home credit and now a leading
player in digital loans (high-cost, short-term credit market)
Current position
• Re-engineered operating model developed
and implemented following disruption in 2017:
• FCA authorised and at the forefront of regulatory
direction of travel (e.g. recording all issues of credit)
• Significant turnaround progress, especially on reducing
a largely fixed cost base
Growth ambitions
• Growth opportunities through evolution of product
proposition in both home credit and Satsuma
and market consolidation
Financial targets
• Clear path to breakeven for 2020
• IT investment will deliver sustainable operational efficiency
and improved capability
• Targeting c.£300m receivables and c.10% ROA
in the medium term
Satsuma lending
volumes increased
by approximately
10%
CCD is now well placed to return the
business to profitability and customer
and receivables growth in the
medium term.
Chris Gillespie
CCD – financial performance
CCD is the market leader in the UK and Republic of Ireland home credit markets and is now also a leading player in digital loans within
the high-cost, short-term credit market through Satsuma. The ongoing turnaround of the home credit business has continued to progress
well in 2019 and the business is now on a stable footing following the events of 2017. With an operating model which has fully embraced
the direction of regulatory travel, the development of new product propositions and continuing market dislocation due to tougher
regulation, CCD is now well-placed to return the business to profitability and customer and receivables growth in the medium term.
Average of month end receivables for the 12 months ended 31 December.
1
2 Revenue as a percentage of average receivables for the 12 months
ended 31 December.
3 Impairment as a percentage of average receivables for the 12 months
ended 31 December.
4 Revenue less impairment as a percentage of average receivables
for the 12 months ended 31 December.
5 Represents exceptional costs of £14.4m in relation to the ongoing
turnaround of the home credit business following the migration
to the employed operating model in July 2017 (2018: £29.9m).
6 Costs, before exceptional items, as a percentage of revenue
for the 12 months ended 31 December.
7 Adjusted loss before interest after tax as a percentage of average
receivables for the 12 months ended 31 December.
Customer numbers ('000)
Year-end receivables
Average receivables1
Revenue
Impairment
Revenue less impairment
Revenue yield2
Impairment rate3
Risk-adjusted margin4
Costs
Interest
Adjusted loss before tax
Exceptional items5
Statutory loss before tax
Year ended 31 December
2019
£m
522
249.0
247.3
295.4
(96.2)
199.2
119.5%
39.0%
80.5%
(210.3)
(9.7)
(20.8)
(14.4)
(35.2)
2018
£m
560
292.5
296.2
342.2
(120.8)
221.4
115.5%
40.8%
74.7%
(244.7)
(15.4)
(38.7)
(29.9)
(68.6)
Change
%
(6.8)
(14.9)
(16.5)
(13.7)
20.4
(10.0)
14.1
37.0
46.3
51.8
48.7
Cost income ratio6
71.2%
71.5%
Return on assets7
(3.6%)
(6.4%)
Provident Financial plc
Annual Report and Financial Statements 2019
39
Strategic report
C O N S U M E R C R E D I T D I V I S I O N C O N T I N U E D
CCD – financial performance continued
CCD has reported a 46.3% reduction in adjusted loss before tax
to £20.8m in 2019 (2018: loss before tax of £38.7m), in line with
management’s internal plan, as the business has continued to
successfully adapt to the ongoing evolution in the regulatory
environment. As a result of the actions taken by management,
the business delivered a reduced adjusted loss of £5.7m
(2018: £15.5m) in the second half of the year and the business
is well-placed entering 2020. As previously communicated, the
business is expecting to deliver a loss in the first half of 2020,
consistent with the normal seasonality of the business, a profit
in the second half of 2020 and a breakeven result for 2020
as a whole. CCD’s statutory loss before tax reduced by 48.7%
to £35.2m (2018: loss before tax of £68.6m), with exceptional
restructuring costs reducing from £29.9m in 2018 to £14.4m in 2019.
CCD customer numbers ended the year at 522,000, 6.8% lower
than 560,000 last year, which represents a significantly reduced
rate of decline compared with 28.2% in 2018. The focus for 2019 has
been on: (i) stabilising the rate of decline in the home credit customer
base against the backdrop of increased regulation, the ongoing
enhancement of business processes and increased efficiency
to reduce the cost base; and (ii) continuing to grow Satsuma
customer numbers in a responsible and sustainable manner.
The improved momentum in new customer recruitment experienced
in the fourth quarter of 2018 was maintained in home credit during
2019, despite the significant reduction in field resources. New and
returning customer volumes were broadly in line with last year
despite a 20% reduction in average CEM resources through the
year. Home credit customer numbers ended the year at 386,000
(2018: 443,000), in line with the end of the third quarter. The
customer base is now beginning to stabilise having previously
shown reductions in the first three quarters of the year as the
number of new customers recruited had not been at a level
sufficient to stabilise the customer base. New and returning
customers volumes were marginally ahead of plan in the fourth
quarter and are expected to continue to improve during 2020,
benefiting from the ongoing embedding of performance
management and new ways of working in the UK, including the
use of a balanced scorecard with an element of variable pay, and
the roll-out of an enhancement to the home credit product,
Provident Direct.
Satsuma continued to experience a good flow of lending
volumes during 2019 and new business and further lending
volumes increased by approximately 10% and customer numbers
ended the year at 136,000, up 16.2% on last year (2018: 117,000).
However, following a number of high-cost lenders exiting the
market and discussions with the FCA, Satsuma took the decision
to temporarily reduce lending volumes in early December.
Accordingly, new business and further lending volumes in
December and January were significantly lower than last year.
Satsuma and home credit are expected to work more closely
together as Provident Direct is rolled out through 2020 and a lower
proportion of Satsuma loan applications are processed wholly
digitally. This reflects the decision to increase the level of interaction
with customers during the application process, including, in some
circumstances, the involvement of a field-based CEM. This puts
CCD in a unique position to build a sustainable business based
on a ‘hybrid’ operating model utilising the best of both digital
and home credit capabilities.
Total CCD receivables were £249.0m at the end of 2019
(2018: £292.5m), 14.9% lower than the end of 2018, and comprised
£205.8m in respect of the home credit business (2018: £253.0m)
and £43.2m in respect of Satsuma (2018: £39.5m).
40
Provident Financial plc
Annual Report and Financial Statements 2019
Year-end receivables
£249.0m
m
4
.
7
4
3
£
m
5
.
2
9
2
£
.
m
0
9
4
2
£
17
18
19
Home credit receivables have fallen by 18.7% in 2019 compared
with the 12.9% reduction in customer numbers. This primarily
reflects average issue values being approximately 9% lower in
2019 following the introduction of the new high-cost credit
guidance issued by the FCA as part of its review of the high-cost
credit sector which came into force between December 2018
and March 2019. The new guidance includes the requirement for
CEMs to present customers with the cost of either taking out a
concurrent loan or refinancing their existing loan when they
require further credit. Experience to date shows that there has
been a modest increase in the proportion of customers opting
for concurrent loans, which are typically lower value and shorter
in duration than refinanced loans.
Satsuma’s receivables have shown 9.4% growth in 2019
compared with the 16.2% increase in customer numbers due
to the significant reduction in lending volumes in December.
Revenue in CCD has fallen by 13.7% in 2019, a modestly lower
rate than the 16.5% reduction in average receivables. The revenue
yield of 119.5% in 2019 has increased from 115.5% in 2018, reflecting
a modest shift in mix to shorter-term, higher-yielding products.
Impairment in CCD has reduced by 20.4%, better than the rate of
reduction in average receivables. This reflects the improvement
in collections performance due to the benefit from the ongoing
improvement in business processes and the introduction of the
enhanced performance management framework. As a result, the
impairment rate of 39.0% in 2019 has reduced from 40.8% in 2018.
The business has recently completed the roll-out of electronic
card readers for CEMs to allow customers to make their repayments
with debit cards as well as cash. This has been well received by
both field employees and customers and is expected to support
further improvement in collections performance during 2020.
CCD’s target risk-adjusted margin is between 80% to 85%. The
combined improvement in revenue yield and impairment rate
during the year has resulted in the risk-adjusted margin increasing
from 74.7% in 2018 to 80.5% in 2019, within the target range.
Costs have reduced by 14.1% to £210.3m in 2019 (2018: £244.7m).
Despite cost headwinds from increased regulatory requirements,
upgrading certain elements of the old IT infrastructure and higher
complaints costs, CCD has continued to take the necessary
actions to reduce headcount and tightly manage costs in response
to the reduction in customer numbers. As previously reported,
in January 2019, CCD announced a voluntary redundancy programme
in central support functions which reduced central headcount
by approximately 200. There was also a further reduction of 50
head office roles during the year, mainly through non-replacement
of leavers. In addition, approximately 600 CEMs and field managers
left the business during 2019 either through natural attrition and
non-replacement of roles or through redundancy. Overall, there
has now been a reduction in roles within CCD of 1,500 since
September 2017. Together with actions already taken and the
ongoing tight control of costs, this has resulted in CCD’s annual
run rate cost base entering 2020 at around £200m as
communicated at the CMD.
Despite some upgrades in the year, CCD’s legacy IT systems are
old, inflexible and expensive to maintain. Accordingly, the business
is planning a programme of investment over the next two years to
modernise and refresh the IT infrastructure and support both better
customer service and the growth of the business going forward.
Interest costs in CCD have fallen by 37.0% to £9.7m in 2019 (2018:
£15.4m). This is a larger reduction than the reduction in average
receivables as CCD’s funding rate has been reduced to reflect a
more balanced allocation of funding costs between CCD and
Moneybarn now that Vanquis Bank is fully funded with retail deposits.
CCD – growth initiatives
CCD’s medium-term target is to grow the business to £300m
receivables (currently £249m) whilst delivering an ROA of
approximately 10%. CCD’s focus is now on developing the
customer proposition and growing the business. Accordingly,
management has developed a number of strategic initiatives
to support growth.
Provident Direct
Following discussions with the FCA in the second quarter of 2019,
CCD commenced testing of Provident Direct in the Birmingham
South area in the third quarter of the year. Provident Direct is
relationship managed in the home by a CEM with payments
collected remotely via CPA. The test has indicated that there is
strong demand for the product from both customers and the field
organisation and that collections performance is comparable to
home collection. In addition, the test has allowed the business to
refine the customer journey and supporting processes whilst
avoiding disrupting the field organisation during the seasonal peak
in trading in the run up to Christmas. Following the successful
test, Provident Direct is now being rolled out progressively, firstly
in Wales/West (c.15% of the business) in the first quarter of 2020,
with a view to having national coverage across the UK by the end
of the year. The product retains the essence of home credit but
should enable CCD to attract new and former customers of
suitable credit quality who value the relationship-based home
credit proposition but do not wish to have a weekly collections
visit by a CEM or for whom the home visit is inconvenient, such
as shift workers. The CEM will maintain regular contact with the
customer and will make home visits if the customer’s circumstances
change or if they are experiencing payment difficulties. Longer
term, the business envisages 30% or more of business being
transacted through Provident Direct.
Enhanced performance management
The FCA confirmed in early March 2019 that the business could
implement enhanced performance management of CEMs based
on a balanced scorecard supported by an element of variable
performance-related pay. The implementation of this full suite
of performance measures is essential in continuing to improve
the efficiency and effectiveness of the field organisation whilst
delivering consistently good customer outcomes. The balanced
scorecard was tested for impact on customer outcomes in the
Warrington area during May and was expanded to the North West
region in June, including testing an element of variable pay.
Following successful testing, the business completed full roll-out
of the framework in the UK during the third quarter of the year as
well as implementing new ways of working for field management
to support and oversee CEMs. These measures have contributed
to the ongoing improvement in CCD’s performance in 2019.
Management will continue to calibrate the balanced scorecard
and the variable pay element to both enhance customer
outcomes and improve performance.
Satsuma personal loans
Satsuma forms an important part of future strategy, particularly
as Satsuma and home credit are expected to work more closely
together as Provident Direct is rolled out through 2020. Satsuma
intends to test a product extension of a loan product priced between
79.9% and 99.9% APR under the Satsuma brand towards the end
of 2020. This will further expand CCD’s product range, addressable
market and provide customers with a pathway to cheaper credit.
Provident Financial plc
Annual Report and Financial Statements 2019
41
Strategic report R I S K M A N A G E M E N T A N D P R I N C I P A L R I S K S
Annual report –
risk management
The Group operates a prudent approach to risk given our customer profile.
We achieve this through strong controls to support sustainable business
growth while minimising losses and delivering fair customer outcomes.
Introduction and
recent developments
During 2019, the Group has continued to strengthen its risk
management capabilities through the appointment of a permanent
Group CRO, the creation of a Group Executive Risk Committee
(GERC) to provide greater focus on risk-related matters and the
refresh of the Group’s risk management framework (RMF) to
ensure we continue to operate sound risk management
practices and robust internal controls.
Group’s approach to risk management
The Group operates a prudent approach to risk given our
customer profile. We achieve this through strong controls to
support sustainable business growth while minimising losses
and delivering fair customer outcomes. Each of our divisions
has its own risk management frameworks, with broad direction
provided by the Group CRO to drive consistency, improved
collaboration and effective aggregation of our risk reporting. As
the Group continues to shape its longer-term business strategy
and plans, we expect our separate risk management frameworks
to evolve in parallel through greater integration, simplification
and improved effectiveness.
Risk culture
Based on the Group’s business model and guided by the Group
Board, senior management articulates the core risk values
through our Blueprint and risk appetite framework (RAF). We
have a number of strategic risk drivers with the overall aim of
delivering sustainable returns as a Group, while meeting the
needs and requirements of all our key stakeholders including
customers, regulators, investors, colleagues, communities and
suppliers. Our culture is underpinned by an appropriate balance
between risk and reward, with accountabilities reinforced
through the Senior Manager and Certification Regime (SMCR)
in the divisions.
Risk appetite
The Group defines its risk appetite as the amount and type of risk
the organisation is prepared to seek, accept or tolerate at any point
in time, and measured over a rolling 12-month period. Based on
our prudent business model, our risk appetite is holistic and
covers 16 key risk areas, 10 of which are considered as primary
and shape our principal risks detailed later in this report. Our risk
appetite statements form part of our wider control framework.
The Board is responsible for approving the Group’s risk appetite
statements at least annually with the supporting Board-level
metrics cascaded into more detailed business appetite metrics,
limits and thresholds at a divisional level.
Recent developments
The Group has continued to make good progress on key initiatives
started in 2018, strengthening its overall risk governance and
further embedding risk management practices.
• A newly appointed permanent Group CRO has replaced the
former interim CRO, emphasising the Group’s commitment
to further strengthening the Group’s central risk management
function, strategic approach to risk and oversight on behalf
of the Group Board and the Chief Executive Officer.
• The Group CRO has continued to work closely with the
divisional CROs (who maintain full responsibility for managing
risks at a divisional level) to foster greater cross-divisional
collaboration and consistency of risk reporting.
• The Group Board has approved a revised RAF, improving its
ability to make risk-based decisions in line with the updated
business plans.
• The Group Board has approved a revised Group Risk
Measurement Methodology (RMM) providing a consistent
approach to identifying and assessing key risks across
the Group.
• The Group CRO has continued to develop the RMF, further
embedding risk management and ensuring that appropriate
governance arrangements and robust controls are in place.
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Annual Report and Financial Statements 2019
• The GERC has been established allowing greater focus
on risk matters.
• The Group’s risk reporting capabilities have been significantly
strengthened, particularly with regard to the reporting of
strategic and emerging risks and regulatory interactions.
These components are now featured as part of a newly
developed Group CRO report which informs the Group ExCo,
GERC, GRC and Group Board.
• A number of thematic assessments were conducted into
the Group’s approach to anti-bribery and corruption and
complaints and its interaction with the FOS. This is driving
more coordinated actions to manage and address past,
current and potential future risks.
• The Group Board approved a revised version of the Group’s
Wind-Down Plan (WDP) ensuring an adequate plan and
appropriate processes are in place should this in an unlikely
scenario need to be invoked.
For 2019 we have refreshed our principal risks and strategic
and emerging risks which reflect the updated risk appetite and
significant uncertainty in our external environment. The changes
since our last Annual Report are summarised below with the full
list of risks on page 45.
• Given the rapidly changing environment in our technology
infrastructure covering digital (acquisition, payments and
servicing) and GDPR, we believe that information and data
security should be classified as a separate principal risk in
its own right. This is reinforced by a number of high-profile
security breaches in other firms which reinforce the significant
challenges in managing this risk effectively. This has therefore
been added as a strategic and emerging risk.
• In an increasingly digital and ‘self-service’ world, maintaining
business resilience through robust operational processes and
systems is critical. The PRA and FCA see this as a priority and
are currently consulting on a number of specific areas requiring
firms to identify services that could cause harm to customers,
and how they set impact tolerances and monitor their processes
to operate within these tolerances. Business resilience has
therefore been recognised as a new principal risk.
Our culture is underpinned by an
appropriate balance between risk
and reward, with accountabilities
reinforced through the Senior Manager
and Certification Regime (SMCR) in
the divisions.
• Models and their operation are now critical for managing key
aspects of our business including customer acquisition, credit
underwriting, provisioning and capital. We have therefore
added this as a standalone principal risk.
• Under strategic and emerging risks we have now consolidated
product liability and claims management companies (CMCs)
as a single risk under responsible lending. This reflects the
commonality of the actions we are taking to manage this.
• Under strategic and emerging risks we have added a new risk
called ‘persistent debt’. This reflects major changes within
Vanquis Bank in how we manage customers who have paid
more interest and fees than principal in the previous three-year
period. The mitigation strategies, if not implemented effectively,
have the potential for significant impact on financial performance
and customer outcomes.
• Under strategic and emerging risks we have removed Brexit
as we believe the impact of ‘no trade deal’ on the Group would
not be material. We have, however, highlighted the broader
potential risks to our sector of the uncertain macroeconomic
environment more generally including regulatory change.
Provident Financial plc
Annual Report and Financial Statements 2019
43
Strategic report R I S K M A N A G E M E N T A N D P R I N C I P A L R I S K S C O N T I N U E D
Risk governance structure
The Group’s risk governance structure is outlined below. In combination the various Board, executive and risk
committees strengthen our ability to identify, assess, manage and, as appropriate, escalate risks, while also
supporting the Group in managing the changes in the sector including the external regulatory environment.
Group Board
Reviews the Group RMF annually to ensure that it remains
fit for purpose and complies with relevant laws and
regulations including the Code.
Board Committees
Group Risk Committee (GRC)
Board Committee responsible for ensuring that there is an
appropriate RMF embedded across the Group; monitoring
key risk positions and trends; and providing oversight and
advice to the Board in relation to the current and potential
future risk strategy and exposures.
Customer, Culture and Ethics Committee
Board Committee responsible for reviewing the Group’s
culture and business processes to ensure they are focused
on delivering fair customer outcomes; overseeing the
Group’s delivery and embedding of its Blueprint;
and ensuring the Board meets its corporate
governance requirements under the 2018 UK
Corporate Governance Code.
Management Committees
Group ExCo
Executive Committee chaired by the Group
Chief Executive Officer responsible for developing,
proposing and implementing Board-approved strategy.
In doing so, it is responsible for managing the Group
strategic risks and overseeing divisional risks. Detailed
assessment and oversight of these risks is delegated
to the GERC.
Group Executive Risk Committee (GERC)
Executive Committee chaired by the Group CRO
responsible for managing the Group’s strategic and
emerging risks and overseeing divisional risk. The GERC
receives reports from the divisional CROs which cover
key risks within their respective divisions. The Group
CRO also provides a regular report from a second line
perspective on the enterprise-wide risks facing the
Group, how they are trending, whether they are within
risk appetite and highlighting any emerging or
developing risks that require focus.
Cross-Divisional Risk Forum (CDRF)
Risk forum chaired by the Group CRO, bringing each of the divisional CROs together and primarily acting as a platform for
sharing views, coordinating forward-looking risk assessment, identifying new and emerging risks and providing an independent
forum for the divisional CROs to escalate material risks. The CDRF enables the Group CRO to give an independent viewpoint
on both the risks of the divisions and the Group and assists the Chairman of the GRC to better understand and prioritise
the key risks of the Group.
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Provident Financial plc
Annual Report and Financial Statements 2019
Three lines of defence model (3LOD)
The Group operates a 3LOD model to articulate key accountabilities and responsibilities for
managing risk and to support effective embedding of risk management across the organisation.
Line of
defence
1.
Line management
Owns the risk and is responsible for identifying, assessing, monitoring and reporting risk within its respective areas
whilst ensuring that appropriate internal controls, processes and systems are in place to deliver against business
strategy and objectives.
2. Group and divisional risk functions
Set minimum policy and control standards, establishing effective risk management frameworks and providing
independent challenge and oversight, including agreeing risk appetite and protecting the Group against
non-compliance with laws or regulation.
3. Group Internal Audit
Provides independent and objective assurance on the design adequacy and operational effectiveness of internal
controls; includes overall effectiveness of the Group’s risk governance and risk management practices; and provides
assurance on whether the first and second lines of defence fulfil their respective responsibilities.
Principal risks and strategic and emerging risks
Principal risks
Strategic and emerging risks
P8
P6
P5
P7
P2
P9
P1
P3
P4
P10
t
c
a
p
m
I
t
c
a
p
m
I
E2
E1
E3
E5
E6
E4
Probability
Probability
P1. Credit risk
P2. Capital risk
P6. Regulatory risk
P7. Conduct risk
P3.
Liquidity and funding risk
P8. Business resilience risk
P4. Operational risk
P5.
Information and data
security risk
P9. People risk
P10. Model risk
E1.
Threats to our sector
and business plans
E4. Challenge to agent
self-employed status
E2. Risk culture and
E5. Home credit recovery
governance
– financial performance UK
E3. Responsible lending
and affordability
E6. Vanquis Bank –
persistent debt
Provident Financial plc
Annual Report and Financial Statements 2019
45
Strategic report R I S K M A N A G E M E N T A N D P R I N C I P A L R I S K S C O N T I N U E D
Principal risks
Principal risks are risks which are inherent to the Group’s strategy and business model and have formally been
articulated as part of the Group’s RAF. Principal risk categories and associated risk appetite statements are
reviewed and approved by the Board on an annual basis, effectively defining the Group’s overall risk appetite.
P1. Credit risk
Description
The risk of unexpected credit
losses arising through either
adverse macroeconomic factors
or parties with whom the Group
has contracted fail to meet their
financial obligations.
Trend:
Mitigating activities
• Credit risk appetite established in all divisions, with metrics included in the Group risk appetite
to ensure focus.
• The Group operates credit scoring methodologies led by credit specialists in all of its businesses
and these are well maintained and monitored on a regular basis.
• The credit scoring methodologies are supported by clearly defined credit policies to restrict
certain types of lending, credit scoring methodologies and also manual underwriting support
processes in many parts of the business, particularly home credit.
• The Group operates in the non-standard lending sector and as such credit default levels are
higher, but all indicators confirm the risk profile is within expected ranges.
• Each division has reviewed its respective credit profiles and has undertaken selective tightening
to ensure any higher than desired risk segments have been addressed.
• Macroeconomic downturn risks are assessed through stress testing as part of the ICAAP
processes and these confirm the Group can comfortably withstand the impact of a material
stress, as defined by the PRA.
• The Group is reliant upon third-party data from credit bureaus and, as such, is dependent upon
the accuracy of this data.
P2. Capital risk
Description
The risk that the Group has
insufficient capital to either meet
regulatory requirements or to
sustain the long-term viability
of the business.
Trend:
Mitigating activities
• Capital risk appetite established at Group and Vanquis Bank level, with thresholds reported
to and monitored by Group and Vanquis Bank boards.
• The ICAAP process has confirmed that the Group is projected to have sufficient capital
resources even under a severe stress environment.
• Vanquis Bank has undertaken its own ICAAP process with this ring-fenced from the Group.
• The resolution of the FCA investigation into ROP at Vanquis Bank has now been completed.
• The FCA investigation into forbearance and termination options at Moneybarn has now been
finalised. The specific customer remediation activities have been completed and were within
existing provisions.
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Provident Financial plc
Annual Report and Financial Statements 2019
Trend:
Increased risk
Stable
Improving
P3. Liquidity and funding risk
Trend:
Description
The risk that the Group has
insufficient liquidity to meet its
obligations as they fall due, or is
unable to maintain sufficient funding
for its future needs.
Mitigating activities
• Liquidity and funding risk appetite established at Group and Vanquis Bank level, with thresholds
reported to and monitored by Group and Vanquis Bank boards.
• The Group seeks to maintain a secure funding structure by:
• maintaining borrowing facilities to fund growth and contractual maturities outside
of Vanquis Bank over the next 12 months; and
• maintaining diversified funding sources.
• During the year, the Group refinanced the revolving credit facility.
• Good progress has been made to establish alternative funding sources, including the signing
of the bilateral facility with NatWest Markets to securitise Moneybarn receivables.
• In addition, Vanquis Bank accepts retail deposits and, in line with its regulatory requirements,
maintains liquid resources to meet certain stress events as stipulated within its Internal Liquidity
Adequacy Assessment Process (ILAAP). The Group and Vanquis Bank also monitor and report
their liquidity coverage ratios (LCR) on a consolidated and individual basis to the PRA.
P4. Operational risk
Description
The risk of loss resulting from
inadequate or failed internal
processes, people and systems
or from external events.
Operational risk more broadly
covers a wide range of different
categories including specific event
risk, fraud, IT/systems risk, business
continuity, AML, etc.
Trend:
Mitigating activities
• Each division has its own operational risk frameworks in place which include risk identification,
assessment and control remediation.
• Risk registers are in place across the Group with primary focus on future embedding of control
self-assessment across the divisions which are at various levels of maturity.
• The 3LOD model throughout the Group ensures there are clear lines of accountability between
management who own the risks, oversight by the risk function and independent assurance
provided by Internal Audit.
• The CCD recovery plan has been delivered with focus now on continued embedding of the new
control framework.
• Given the importance of the outsource arrangements, the supplier management framework
is being further developed to drive greater consistency and improved oversight in how we
manage our suppliers.
Provident Financial plc
Annual Report and Financial Statements 2019
47
Strategic report R I S K M A N A G E M E N T A N D P R I N C I P A L R I S K S C O N T I N U E D
Principal risks continued
Trend:
Increased risk
Stable
Improving
P5. Information and data security risk
Trend:
Description
Sensitive data faces the threat
of misappropriation or misuse.
Failure to identify or prevent a major
security-related threat or attack, or
react immediately and effectively,
could adversely affect the trust of
our current or future customers in
the services we provide, our
reputation and our operational
or financial performance.
P6. Regulatory risk
Description
The risk that the Group is exposed
to financial loss, fines, censure or
enforcement action due to failing
to comply with regulations
(including handbooks, codes
of conduct, financial crime, etc.).
Mitigating activities
• Established a Group data privacy governance framework at Group and divisional level,
with regular metrics to ensure ongoing focus on personal data privacy risks.
• Appointed a Group Data Protection Officer to ensure alignment of data management policies
(including compliance with article 38 of GDPR and mandatory requirements of article 39).
• Embedded key processes and procedures to manage privacy by design tools, data breach
management and correct consent capture where required.
• Agreed standard Group-wide Data Retention Policy.
Trend:
Mitigating activities
• The Group operates in a highly regulated environment and in an industry sector where
customers are potentially more vulnerable and need careful management.
• We remain mindful that the regulatory landscape is continually evolving and regularly assess
our risks through horizon scanning and regulatory impact assessment across the Group.
• At all levels, the Group has worked hard to build and maintain positive relationships with our key
regulators including the PRA, FCA, CBI and FOS. Any regulatory actions are managed and monitored
closely to ensure these are delivered fully and within the spirit of any feedback received.
• All regulatory interactions are recorded and tracked, with regular reporting through our executive
and Board Committees to ensure consistency and read across through a Group lens.
• The Group engages with regulatory authorities and industry bodies on forthcoming regulatory
changes, market reviews and investigations, ensuring programmes are established to deliver
new regulation and legislation.
• Financial crime improvement programme has been initiated in Vanquis Bank to further
enhance onboarding and transaction monitoring controls through new systems and upgraded
operating model.
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Provident Financial plc
Annual Report and Financial Statements 2019
P7. Conduct risk
Description
The risk of customer detriment due
to poor design, distribution and
execution of products and services
or other activities which could lead
to unfair customer outcomes or
regulatory censure.
Trend:
Mitigating activities
• Conduct risk appetite established at Group and divisional level, with metrics included
in the Group risk appetite to ensure ongoing focus.
• Conduct policies and procedures in place at a divisional level to ensure appropriate
controls and processes that deliver fair customer outcomes.
• Cultural transformation initiated through launch of the Group Blueprint centred around
our customer purpose and colleague behaviours.
• Newly formed Customer, Culture and Ethics Committee to provide specific oversight on
embedding of Group Blueprint and how we deliver the Group’s customer-focused purpose.
• Review of responsible lending processes and outcomes across all our divisions to provide
assurance to the Board on our past and current affordability processes and outcomes.
• Enhanced complaints management through effectively responding to, and learning from,
root causes of complaint volumes and FOS change rates.
• Monitoring and testing of customer outcomes to ensure the Group delivers fair outcomes
for customers whilst making continuous improvements to products, services and processes.
• Ongoing review of product governance to ensure existing products or changes continue
to meet the needs of our customers.
P8. Business resilience risk
Trend:
Description
The risk of unexpected outages
around key critical business
activities resulting in potential poor
customer outcomes, regulatory
sanction, reputational damage
and financial loss.
Mitigating activities
• Business resilience risk appetite established at Group and divisional level, with metrics included
in the Group risk appetite to ensure ongoing focus.
• Overall accountability for business continuity management, business resilience and crisis
management now resides with the Group Chief Information Officer (CIO).
• Detailed assessments are being completed across the divisions on current business continuity
and resilience capabilities, alongside robustness of IT legacy systems.
• Based on the above, detailed continuity plans, impact assessments and testing arrangements
will be completed in 2020.
Provident Financial plc
Annual Report and Financial Statements 2019
49
Strategic report R I S K M A N A G E M E N T A N D P R I N C I P A L R I S K S C O N T I N U E D
Principal risks continued
Trend:
Increased risk
Stable
Improving
P9. People risk
Description
The risk that the Group fails to
provide an appropriate colleague
and customer-centric culture,
supported by robust reward and
wellbeing policies and processes;
effective leadership to manage
colleague resources; effective talent
and succession management;
and robust controls to ensure all
colleague-related requirements
are met.
P10. Model risk
Description
The risk of financial losses where
models fail to perform as expected
due to poor governance (including
design and operation).
(Within the context of PFG this
includes credit acquisition,
underwriting, financial and
regulatory reporting and
capital management.)
Trend:
Mitigating activities
• A new Cultural Blueprint has been developed and is being embedded across the organisation.
• A Group Head of Human Resources has recently been recruited to lead our people strategy
across our combined businesses.
• Priority focus is around development of leadership strength, alongside future succession
planning, diversity performance, retention and engagement.
• Balanced scorecards are being rolled out for all leadership roles which provide appropriate
incentives between financial and non-financial objectives.
Trend:
Mitigating activities
• Model risk appetite established at Group and divisional level, with metrics included in the Group
risk appetite to ensure ongoing focus.
• New Model Risk Policy developed within the bank, which is currently being amended for roll-out
Group wide.
• Model inventories are being developed at Group and divisional level to enable prioritised focus
on independent validation of these models which could have critical impact on business activities.
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Provident Financial plc
Annual Report and Financial Statements 2019
Strategic and emerging risks
Strategic and emerging risks are risks which are largely unknown; however, over a longer period of time they
could affect the Group’s overall strategy and cause the same impact as principal risks. Strategic and emerging
risks are reviewed and monitored on a regular basis at the GERC and GRC.
E1. Threats to our sector and business plans
Trend:
Description
There is a risk that the non-standard
credit sector in which we operate
will continue to face considerable
macroeconomic, regulatory and
political challenges resulting in a
material effect on the Group’s costs
of compliance (investment and run
rate) and its future revenue streams
(e.g. through reduced credit interest,
increase in impairments, operating
restrictions and price capping).
Mitigating activities
• The Group continues to lobby its regulators (the FCA, PRA, CBI and FOS) and other key
stakeholders so that it is taking an active and positive role in influencing future changes aligned
to our Group Blueprint.
• The Group is working closely with its main shareholders to improve their understanding of the
changing regulatory environment and its impact on future revenue streams and profitability.
• The Group is driving a number of changes to pricing models, product strategies and processes
as a pre-emptive move to likely changes in the regulatory environment, e.g. the Gambling
Commission credit card payments and Satsuma manual affordability checks.
• Through our improved horizon scanning we continue to monitor forthcoming regulatory
changes so that these are planned for accordingly.
• We have evaluated the potential impacts of Brexit and believe this to be small across each
of our divisions.
E2. Risk governance and culture
Trend:
Description
There is a risk that the Group’s
culture and supporting risk
governance arrangements inhibit
effective enterprise risk oversight,
potentially resulting in poor risk
management practices and
control failures.
Mitigating activities
• The Consumer Credit Division has made extensive progress in addressing control issues
underpinned by process risk and control self-assessment.
• Vanquis Bank has conducted an enterprise-wide review of all operational areas to determine any
specific vulnerabilities and has already commenced a programme of control enhancement.
• A new GERC has been established which provides more focused discussions on the major risks
we face as an organisation including the effectiveness of any remedial action plans.
• Led by the Group CRO, the Group has started working on greater risk harmonisation initially
to move to a single risk appetite framework, risk measurement and reporting at Group level.
• Work has commenced on further simplification of our risk management framework (RMF)
and risk operating model.
Provident Financial plc
Annual Report and Financial Statements 2019
51
Strategic report R I S K M A N A G E M E N T A N D P R I N C I P A L R I S K S C O N T I N U E D
Strategic and emerging risks continued
Trend:
Increased risk
Stable
Improving
E3. Responsible lending and affordability
Trend:
Description
There is a risk that the FCA will
identify PFG or its divisions as
non-compliant with responsible
lending rules, or the FOS may
identify ‘precedent cases’ that
could lead to widespread remedial
activities as well as a significant
increase in the level of complaints
related to irresponsible lending
by CMCs.
Mitigating activities
• The Group affordability programme has been completed and outcomes shared with the FCA.
• Closer engagement with the FOS related to its interpretation of regulatory rules around
responsible lending. Meetings with the FOS were held to better understand its assessment
of sustainable borrowing with a view to building that into our complaints processes.
• We are continuing to review the root cause analysis of complaints to enable us to implement
enhanced customer facing processes, thus avoiding unnecessary FOS referrals.
• We are continually reviewing our affordability assessments to ensure these remain aligned
with our customers’ circumstances and any ongoing changes prescribed by the FCA.
• In this respect, we have recently updated our customer journeys and affordability checks in
Satsuma. This is in response to recently issued guidance across the high-cost short-term credit
sector from the FCA on the use of automated bureau checks (TAC codes) for corroborating
customer income.
• A contingent liability is included in the financial statements which states that if the Group was to
be unsuccessful in defending certain irresponsible lending complaints, it may lead to a material
increase in the cost of settling such complaints.
E4. Challenge to agent self-employed status
Trend:
Description
The Group has been, and may
continue to be, subject to claims
brought against it by either former
agents or tax authorities challenging
the historic employment status of
the Group’s home credit agents in
the UK and the employment status
of agents in the Republic of Ireland
(ROI), particularly given recent
employment status cases reported
in the media.
Were the Group to be unsuccessful
in defending such claims, it may be
required to make payments to
former agents as well as being
liable to pay additional taxes, in
particular employer’s national
insurance contributions to the
relevant authorities.
Mitigating activities
• In July 2017, the Group changed the operating model of its home credit business in the UK from
a self-employed agent model to an employed workforce so as to take direct control of all aspects
of the customer relationship. In the ROI the Group continues to operate a self-employed agent
operating model.
• Policies and procedures were in place in the UK up to the transition to the new operating model
in 2017 and continue to be in place in the ROI which seek to ensure that the relationship between
the business and the agents it engages is such that self-employed status is maintained.
Compliance with policies has been routinely evidenced and tested.
• To date the Group has successfully defended historical employment status claims brought
against it by former agents in the UK and employment status claims brought by agents in the
ROI. The Group has also previously agreed the self-employed status of agents with the tax
authorities in the UK and the ROI.
• It is understood from discussions with HMRC that it has started undertaking an industry-wide
review of the self-employed status of agents in the UK.
• The Group’s discussions with HMRC, which are focusing on the period from when the FCA took
over responsibility for the regulation of consumer credit in April 2014 to the change of operating
model in July 2017, remain in the initial fact finding stages. The Group is working positively and
collaboratively with HMRC and HMRC expects that the review could continue for another year.
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Provident Financial plc
Annual Report and Financial Statements 2019
E5. Home credit recovery – financial performance UK
Trend:
Description
There is a risk that the UK business
may fail to grow in line with
expectations (both home credit
and Satsuma) and the cost base
may become misaligned to the
level of business, resulting in
sub-optimal performance.
Mitigating activities
• The plan to breakeven has been developed and has been broken down into a number of
workstreams which include cost optimisation, customer growth and effective collections.
• Programme plans presented to the Group Board with governance plans in place to monitor
progress with regular review points.
• Balanced scorecard and incentives introduced in field to optimise CEM collection performance
and agreed with the FCA.
• Provident Direct being trialled in the field to automate collections alongside enhancements
through continuous payment authorities (CPA) and card payments.
E6. Vanquis Bank – persistent debt
Trend:
Description
There is a risk that low levels
of customer engagement with
Vanquis Bank’s Persistent Debt (PD)
strategy could lead to adverse
customer and commercial outcomes.
Mitigating activities
• An increase to the monthly minimum payment due (MPD) as a percentage of principal balance.
• The introduction of a recommended payment amount to encourage customers to pay an
amount higher than the MPD.
• Ongoing monthly communications (in addition to the mandatory communications that are sent
at months 18 and 27 of the customer’s PD journey) outlining what the customer needs to do to
exit and remain out of PD.
• To mitigate the risk of customers not engaging with Vanquis Bank following the PD intervention
point (from March 2020), management is implementing a communication strategy to continue
to encourage the customers potentially affected to engage and enter a pay-down plan.
• While aiming to avoid a ‘blanket suspension of cards’, our strategy is to prevent further spend
where our risk factors clearly indicate that this is the best outcome for our customers who
are in PD.
Provident Financial plc
Annual Report and Financial Statements 2019
53
Strategic report R E L AT I O N S W I T H R E G U L AT O R S
As a regulated Group, building and maintaining strong and proactive
relationships with our regulators is extremely important. It influences our
strategic thinking as well as enabling us to plan for regulatory change with
greater certainty and confidence.
Relations with regulators
As a Group, building and maintaining strong and proactive
relationships with our regulators is extremely important. It influences
our strategic thinking as well as enabling us to plan for regulatory
change with greater certainty and confidence. Over the last
12 months, we have made substantive progress in closing down
the majority of our agreed regulatory actions, while further
strengthening our regulatory operational processes including
horizon scanning, change management and reporting.
As Provident Financial plc is a holding company, there are no
approved persons or senior managers at the Group Board level.
However, in seeking to improve the connection between the
divisions and the Group Board, and to provide more effective
oversight by the Group, the Group executive directors and some
Group non-executive directors undertake roles on the Boards of
divisional subsidiaries; as such, they carry regulatory approvals
specific to that regulated entity.
During the last financial year, the Group has focused on a
number of key initiatives which are summarised below.
Enhanced supervision by the FCA
As a consequence of: (i) the disruption to the home credit business
following the migration to the employed operating model in July 2017
and the subsequent implementation of the recovery plan in response
to the disruption; (ii) the FCA’s investigation into Vanquis Bank’s
ROP product; and (iii) the FCA’s investigation into Moneybarn, the
Group continues to be subject to enhanced supervision as notified
by the FCA in its Watchlist Letter. Firms placed under enhanced
supervision may be required to provide formal commitments,
where appropriate, to tackle the underlying concerns raised
by the FCA and the FCA may also exercise other wide-ranging
powers. The Group has a detailed plan of activities agreed with
the FCA with plans to formally attest that it has addressed the
outstanding regulatory concerns by the end of 2020.
FCA review of high-cost credit
On 18 December 2018, the FCA published CP18/43 in respect of
its review of high-cost credit, including final rules and guidance
in respect of home-collected credit. The rules introduced a package
of reforms to raise standards in disclosure and sales practices to
prevent home credit firms from offering new loans or refinancing
existing loans during home collection visits without the customer
specifically requesting it. CCD made the necessary changes to
its processes to ensure compliance with the new rules in advance
of them coming into force on 19 March 2019. This included the
requirement for CEMs to explain all available options to a customer
who wishes to borrow, including refinancing their existing loan
or taking out a concurrent loan. The changes made to the home
credit operating model over the last two years, including the voice
recording of all sales interactions with customers, mean that the
business can effectively evidence compliance with the
revised requirements.
FCA Credit Card Market Study (CCMS)
In February 2018, the FCA published PS18/4 setting out its final
policy rules in respect of persistent debt and earlier intervention
remedies from the CCMS. The overall objective of the package
of remedies is to reduce the number of customers in problem
credit card debt and put borrowers in greater control of their
borrowing. In particular, the rules require credit card firms to
undertake specific measures in respect of customers defined
as being in persistent debt. The FCA defines persistent debt as
a customer who pays more in interest, fees and charges than
principal over an 18 month period. Under this definition, where
customers are in persistent debt, firms need to undertake the
following actions:
• at 18 months, prompt customers in persistent debt to change
their repayment behaviour if they can afford to;
• at 27 months, send another reminder if payments indicate a
customer is still likely to be in persistent debt at the 36-month
point. Customers need to be made aware that, if they do not
change their repayment behaviour, their card may be suspended,
which may be reported to credit reference agencies. The
customer should also receive contact details for debt advice
services; and
• at 36 months, intervene again if a customer remains in
persistent debt with strategies to help the customer repay
their outstanding debt more quickly over a reasonable period,
usually between three and four years.
The proposals in PS18/4 came into force on 1 March 2018 and
firms had six months to be fully compliant. Approximately, 11%
of Vanquis Bank’s active customers met the FCA’s definition
of persistent debt at September 2018 and the first 36-month
checkpoint for persistent debt customers is in March 2020.
Vanquis Bank increased its minimum payment rates in the
second half of 2018 and has introduced a number of proactive
measures in 2019, including recommended payments and the
testing of a number of communication strategies, to encourage
increased monthly repayments and reduce the number of customers
meeting the FCA’s definition of being in persistent debt.
FCA review of the motor finance market
In the FCA’s Business Plan for 2017/18 the FCA stated that it
was looking at the motor finance market to ensure that it works
well and to assess whether consumers are at risk of harm. The
FCA published an update on this work on 15 March 2018 with
its final findings issued on 4 March 2019. The FCA’s final findings
indicated that they have concerns regarding four areas of the
motor finance market: (i) commission arrangements, in particular
non-flat rate structures; (ii) sufficient, timely and transparent
information, mainly in respect of broker practice and information
about difference in commission (DIC) type commission
arrangements; (iii) lender controls in respect of the oversight of
dealers and brokers; and (iv) affordability assessments, whereby
the FCA references the additional clarity given in PS18/19 last
year around affordability checks, and the expectation that all
lenders have implemented the appropriate additional practices.
54
Provident Financial plc
Annual Report and Financial Statements 2019
Over the last 12 months, we have made
substantive progress in closing down
the majority of our agreed regulatory
actions, while further strengthening
our regulatory operational processes
including horizon scanning, change
management and reporting.
Moneybarn has flat fee commission structures and has never
given discretion to brokers in setting the interest or commission
levels. Customers are made aware of the existence of a payment
of commission in Moneybarn’s pre-contractual paperwork that
all brokers must provide to the customer and evidence that the
customer has received it. Moneybarn has an active physical audit
programme for all of its brokers and was the first vehicle finance
lender in the market to have such an audit process in place.
Like all of the Group’s other businesses, Moneybarn made all
necessary changes to its processes required by PS18/19 in
advance of the 1 November 2018 deadline and there have
been no further updates since then from the FCA.
Irresponsible lending complaints and the Financial
Ombudsman Service (FOS)
There continues to be heightened claims management company
activity around non-standard lending sectors, particularly in respect
of irresponsible lending in high-cost credit and more recently in
home credit. As a result, CCD has seen an increase in the number
of such complaints and referrals to the FOS, particularly in the first
half of 2019, although complaint levels have now stabilised. CCD
continues to robustly defend inappropriate or unsubstantiated
claims and is working closely with the FOS in this regard.
See note 13 to the financial information.
Senior Manager and Certification Regime (SMCR)
Following implementation of SMCR within the banking sector,
the regime has been extended to all solo regulated firms. In the
context of PFG, this means that from 9 December 2019, all three
regulated entities (Vanquis Bank, CCD and Moneybarn) are now
captured under SMCR. The programme of work completed in
2019 has ensured that the individual accountabilities of Senior
Manager Functions (SMFs) have been considered in the context
of the Group’s wider governance arrangements.
Gambling Commission ban on credit cards
for gambling
On 14 January 2020, the Gambling Commission announced that
with effect from 14 April 2020, gambling through credit cards will
be banned. The ban follows a detailed review by the Commission
and the Government. While it is incumbent on merchants to
enforce the ban, it is estimated that this will have a modest
impact on Vanquis Bank earnings.
Provident Financial plc
Annual Report and Financial Statements 2019
55
Strategic report F I N A N C I A L R E V I E W
A resilient
financial performance
Financial model
To support the delivery of the Group’s purpose, the Group
has a financial model founded on investing in customer-centric
businesses offering attractive returns, which aligns an appropriate
capital structure with the Group’s dividend policy and future
growth plans.
The Group’s medium-term targets, as communicated at the
Capital Markets Day in November, are to deliver:
• receivables growth of between 5 and 10% per annum over
the next 5 years (2019: £2.2bn);
• an ROE of between 20 and 25%, with an expectation of reaching
the lower end of this range by 2021 (2019: 18%); and
• a cost income ratio of 38% by 2022 (2019: 43%).
This is considered to be a sustainable level of return for the
Group, balancing the estimated impact of known regulatory
changes whilst delivering good customer outcomes.
The Group has a Total Capital Requirement (TCR) of 25.5%. This
represents the Group’s minimum regulatory capital requirement
set by the PRA together with the capital conservation buffer (2.5%)
and current counter-cyclical buffer (1.0%). The Board currently aims
to maintain a headroom in excess of £50m above the TCR. This is
considered to be an appropriate level of headroom based on the
ongoing recovery of the Group, the economic and regulatory
backdrop and maintaining an appropriate level of capital to
support the ongoing access to funding from the bank and debt
capital markets.
The Board’s dividend policy is to maintain a dividend cover of at
least 1.4 times as the home credit business recovers and moves
into profitability. The dividend policy reflects the Group’s current
risk appetite of maintaining a regulatory capital headroom in excess
of £50m and progressively absorbing the remaining transitional
impact of IFRS 9 on regulatory capital by 1 January 2023.
The progress of our KPIs against our medium-term targets
will be set out throughout this report.
Certain alternative performance measures (APMs) have been used
in this report. See page 237 for an explanation of relevance as well
as their definition.
I am pleased to present the Financial
Review after being the Group Chief
Finance Officer for 2019. The Group
has continued its turnaround and,
with a robust balance sheet and
funding position, we are well
positioned continue to deliver on
our targets in the medium term.
Simon Thomas
Chief Finance Officer
56
Provident Financial plc
Annual Report and Financial Statements 2019
2019 Group performance
Group performance
The Group’s 2019 results can be summarised as follows:
Year ended 31 December
2019
£m
2018
(restated) 1
£m
Change
%
Adjusted profit/(loss)
before tax:
– Vanquis Bank
– Moneybarn
– CCD
– Central costs
173.5
30.9
(20.8)
(21.0)
190.9
28.1
(38.7)
(20.2)
Adjusted profit before tax
162.6
160.1
Amortisation of acquisition
intangibles
Exceptional items
Statutory profit before tax
(7.5)
(26.3)
128.8
(7.5)
(55.3)
97.3
Receivables
2,212.6
2,204.0
Cost income ratio2
42.8%
42.3%
Return on assets3
7.9%
7.7%
Return on equity4
18.2%
19.1%
(9.1)
10.0
46.3
(4.0)
1.6
—
52.4
32.4
Adjusted basic EPS
Basic EPS
DPS
47.3p
33.3p
25.0p
48.7p
27.3p
(2.9)
22.0
10.0p
150.0
1
2018 comparatives have been restated for: (i) the change in treatment
of directly attributable acquisition costs in Vanquis Bank following a
refresh of contractual terms with affiliates in 2019 – this has resulted in
a £6.6m increase in 2018 profit before tax, a benefit of £10.5m to 2019
profit before tax and is expected to result in a reduction of approximately
£6m in 2020 profits compared with previous plans; and (ii) the changes
in recognition of revenue on credit impaired receivables and treatment
of directly attributable acquisition costs in Moneybarn which have
resulted in a reduction in revenue, impairment and administration
and operating costs but have had no impact on Moneybarn’s profits.
2 Administrative costs and operating costs, before exceptional items
as a percentage of revenue for the 12 months ended 31 December.
3 Adjusted profit before interest after tax as a percentage of average
receivables for the 12 months ended 31 December.
4 Adjusted profit after tax as a percentage of average equity (average
equity is stated after deducting the pension asset, net of deferred tax)
for the 12 months ended 31 December. 2018 average equity has been
restated as though the £300m rights issue in April 2018 had occurred
on 1 January 2018.
Regulatory capital
headroom (£m)
£117m
7
1
1
6
9
£50m
minimum
Cost:income ratio
(%)
42.8%
38% target
by 2022
3
.
2
4
8
.
2
4
Group adjusted profit before tax of £162.6m was 1.6% higher than
2018 (2018 (restated): £160.1m). Statutory profit before tax increased
by 32.4% to £128.8m (2018 (restated): £97.3m) mainly due to a
reduction in exceptional items.
Group receivables grew by 0.4% in 2019 (2018 (restated): 4.9%).
This was, as expected, a lower level than the medium-term
guidance of growth of between 5% and 10% per annum. Vanquis
Bank receivables reduced by 2.2% to £1,461.5m (2018: (restated):
£1,495.1m) which is consistent with wider industry trends and
the impact of persistent debt regulation. Moneybarn receivables
continued to show strong growth and were up 20.6% to £502.1m
(2018 (restated): £416.4m) whilst CCD receivables are now beginning
to stabilise reflecting the ongoing recovery of the home credit
business, ending the year down by 14.9% to £249.0m (2018:
£292.5m). The Group’s target is to deliver receivables growth
within a range of between 5% and 10% per annum over the next
five years with growth more weighted towards years three, four
and five as growth initiatives gain traction.
Adjusted basic earnings per share of 47.3p (2018 (restated):
48.7p) reduced by 2.9%, reflecting the impact of the rights issue
shares issued in April 2018. Basic earnings per share increased
by 22.0% to 33.3p (2018 (restated): 27.3p), despite the impact of
the rights issue shares issued in April 2018, reflecting the
reduction in exceptional items in the year.
Restatement of prior year results
Change in treatment of directly attributable acquisition
costs in Vanquis Bank
As part of a refresh of contractual terms with affiliates in 2019,
and to align with market practice, directly attributable acquisition
costs within Vanquis Bank are now capitalised as part of credit
card receivables and amortised over the expected life of customer
accounts rather than being charged to the income statement
as incurred. Directly attributable acquisition costs represented
approximately 70% of total acquisition costs in 2019 compared
with approximately 30% in 2017. This reflects the progressive
shift in mix of new customer booking volumes towards internet
affiliates as opposed to other channels such as direct marketing
or direct mail where costs are not directly attributable to individual
customer bookings. The new treatment results in a reduction in
the interest income recognised on credit card receivables and
a reduction in administrative and operating costs. Prior year
comparatives have been restated resulting in an increase in
receivables of £21.3m at 31 December 2018 and an increase
in profit before tax in 2018 of £6.6m, comprising a reduction
in costs of £12.0m and a reduction in revenue of £5.4m.
The change in treatment benefited 2019 profit before tax by
£10.5m and is expected to result in a reduction in 2020 profit
before tax of approximately £6m compared with previous plans.
Group ROE
(%)
18.2%
Group receivables growth
(%)
0.4%
20–25%
target
1
.
9
1
2
.
8
1
5–10% target
per annum
18
19
18
19
18
19
.
9
4
18
.
4
0
19
Provident Financial plc
Annual Report and Financial Statements 2019
57
Strategic report
F I N A N C I A L R E V I E W C O N T I N U E D
Restatement of prior year results continued
Change in treatment of revenue recognition on credit
impaired receivables and directly attributable acquisition
costs in Moneybarn
Moneybarn has made two changes in accounting treatment
in 2019:
(i) Recognition of revenue on credit impaired receivables
Historically, Moneybarn has recognised revenue on credit
impaired receivables ‘gross’ of the impairment provision and
subsequently impaired this additional revenue through the
impairment charge resulting in a gross-up in the income
statement. In 2019, the Group has determined that revenue on
Moneybarn’s credit impaired receivables should be recognised
‘net’ of the impairment provision to align the previous accounting
treatment under IFRS 16 with the requirements of IFRS 9 and also
with the treatment adopted for similar assets in both Vanquis
Bank and CCD.
(ii) Treatment of directly attributable acquisition costs
Treatment of directly attributable acquisition costs – Historically,
directly attributable deferred acquisition costs in respect of broker
commissions were deferred within trade and other receivables and
amortised through administrative and operating costs over the
expected life of the associated customer contract. Following the
change in treatment of directly attributable acquisition costs in
Vanquis Bank, and to align the treatment across the Group, the
Group has concluded that directly attributable acquisition costs in
Moneybarn should be deferred as part of amounts receivable from
customers with amortisation therefore being treated as a deduction
from revenue.
Prior year comparatives have been restated in respect of the
two restatements described above. The restatements result in
a reduction in Moneybarn’s 2018 revenue of £27.6m, a reduction
in impairment of £13.6m and a reduction in administrative and
operating costs of £14.0m. There has been no impact on earnings.
The carrying value of receivables at 31 December 2018 has
increased by £19.8m with a corresponding reduction in trade
and other receivables.
Trading performance
The performance of the three operating divisions can be found
on page 30 for Vanquis Bank, 34 for Moneybarn and 38 for CCD.
Central costs
Central costs in 2019 were £21.0m, up from £20.2m in 2018. The
increase primarily reflects unallocated interest costs of £2.5m
(2018: credit of £0.1m) taken centrally, primarily in respect of the
cost of maintaining a high level of headroom on the revolving
credit facility in the first half of the year and the costs of
defending the unsolicited NSF offer.
58
Provident Financial plc
Annual Report and Financial Statements 2019
Exceptional items
Net exceptional costs, which are considered material and
one-off in nature, of £26.3m in 2019 (2018: £55.3m) comprise:
Charge/(credit)
Bid defence costs associated with NSF’s
unsolicited offer for the Group
Restructuring costs, primarily in respect
of the ongoing turnaround of CCD
Release of provisions in respect of ROP
refund programme
Release of provisions in respect
of Moneybarn FCA investigation
Premium and fees paid on the
redemption of senior bonds
Pension charges in respect of the
equalisation of Guaranteed
Minimum Pensions
Exceptional items
2019
£m
2018
£m
23.8
—
19.3
29.9
(14.2)
(2.6)
—
—
26.3
—
—
18.5
6.9
55.3
Exceptional items amounted to a net charge of £26.3m in 2019,
52.4% lower than the charge of £55.3m in 2018. The net exceptional
charge in 2019 comprised bid defence costs of £23.8m in respect
of the NSF unsolicited offer and £19.3m in respect of Group
restructuring costs, mainly in respect of the ongoing turnaround
of the home credit business. These exceptional costs were partly
offset by credits totalling £16.8m as a result of the release of
provisions established in 2017 following completion of the ROP
refund programme at Vanquis Bank (£14.2m) and the FCA
investigation at Moneybarn (£2.6m).
Further detail is provided in note 2 of the financial statements.
Tax
The tax charge for 2019 represents an effective tax rate of 26.3%
(2018 (restated): 27.2%) on profit before tax, amortisation of
acquisition intangibles and exceptional items which reflects:
(i) the mainstream corporation tax rate of 19.0% on Group profits
(2018: 19.0%); and (ii) the 8.0% (2018: 8.0%) bank corporation tax
surcharge on Vanquis Bank’s profits in excess of £25m. The Group
is expected to benefit in future years from the further reduction
in the mainstream corporate tax rate to 17% on 1 April 2020
announced by the government and enacted in 2016.
The tax charge (2018: tax credit) in respect of net exceptional
charges in 2019 (2018: exceptional charges) amounts to £2.9m
(2018: £10.2m).
Despite changing the operating model of the UK home credit
business from a self-employed agent model to an employed
workforce in July 2017, the Group continues to be subject to
status claims brought against it by either former agents in
the UK or agents in the Republic of Ireland, or tax authorities
challenging the historic employment status of the Group’s
agents. It is understood from discussions with HMRC that they
have commenced an industry-wide review of the self-employed
status of agents. To date the Group has successfully defended
these claims and challenges although there can be no guarantee
that future claims or challenges will be successfully defended.
See note 30 to the financial statements.
Cost income ratio
Capital, funding and cost efficiency will play a part in
delivering better customer propositions and sustainable returns
for shareholders. The composition of the Group’s returns is
changing due to lower revenue yields across the sector. The
Group’s response has been to tighten underwriting to improve
impairment as well as taking action to reduce the cost base.
As communicated as part of the Vision for the Future, and
reiterated at the Capital Markets Day, the Group is targeting
a reduction in the cost income ratio to 38% by 2022. The cost
income ratio is calculated as administrative and operating costs,
prior to the amortisation of acquisition intangibles and exceptional
items, divided by revenue.
As expected, the Group’s cost income ratio has shown a
modest increase from 42.3% (restated) in 2018 to 42.8% in 2019,
notwithstanding the 7.5% reduction in the Group’s cost base from
tight cost control. The increase in the cost income ratio mainly
reflects the reduction in revenue at Vanquis Bank from reduced
ROP income and the continued increase in the mix of nearer-prime
customers. The Group is targeting a reduction in the cost income
ratio through delivery of a number of growth initiatives across
the Group together with continued cost efficiency.
Returns
Investing in capital generative businesses remains central
to the Group’s financial model.
ROE is the main returns measure used in the banking sector and
Vanquis Bank is now by far the biggest contributor to Group profits.
Accordingly, for both the Group as a whole and Vanquis Bank,
ROE will be the main measure of returns performance. The Group’s
target is to deliver an ROE of between 20% and 25% by 2021.
CCD and Moneybarn, which are undercapitalised, as surplus
capital for these businesses is held in the parent, Provident
Financial plc, will continue to report return on assets (ROA).
Moneybarn and CCD delivering a target ROA of 10% is consistent
with the Group’s ROE targets.
Return on equity (ROE)
Table 1: Calculation of ROE
£m
Adjusted profit before tax1
Tax
Adjusted profit after tax1
Shareholders’ equity
Pension asset
Deferred tax on pension asset
Adjusted equity
Average adjusted equity
ROE1
2019
162.6
2018
(restated) 2
160.1
(42.8)
(43.7)
119.8
740.5
116.4
707.0
(78.0)
(83.9)
13.3
675.8
659.2
14.3
642.5
609.9
18.2%
19.1%
1
Prior to the amortisation of acquisition intangibles of £7.5m (2018: £7.5m)
and exceptional items of £26.3m (2018: £55.3m).
2 2018 comparatives have been restated for: (i) the change in treatment
of directly attributable acquisition costs in Vanquis Bank following a
refresh of contractual terms with affiliates in 2019 – this has resulted in
a £6.6m increase in 2018 profit before tax, a benefit of £10.5m to 2019
profit before tax and is expected to result in a reduction of approximately
£6m in 2020 profit before tax compared with previous plans; and
(ii) the changes in recognition of revenue on credit impaired receivables
and treatment of directly attributable acquisition costs in Moneybarn
which have resulted in a reduction in revenue, impairment and
administrative and operating costs but have had no impact on
Moneybarn’s profits.
The Group calculates ROE as profit after tax, prior to the
amortisation of acquisition intangibles and exceptional items,
divided by average equity. Average equity is stated after deducting
the Group’s pension asset net of deferred tax. Table 1 sets out
the calculation of ROE in 2019 and 2018 on this basis.
The Group’s ROE has moderated from 19.1% (restated) in 2018
to 18.2% in 2019, reflecting the planned retention of equity in line
with Group’s dividend policy – the 2018 final dividend paid in
June 2019 was restricted to a nominal dividend as communicated
at the time of the rights issue. More normalised dividends were
resumed with the 2019 interim dividend which was paid in
September 2019. The Group’s medium-term target is to deliver
an ROE in the target range of between 20% and 25% by 2021.
Table 2: Calculation of ROA
£m
Adjusted profit before tax1
Interest
Adjusted PBIT1
Corporation/banking tax
Adjusted PBIAT1
Vanquis
Bank
173.5
31.4
2019
CCD Moneybarn
(20.8)
9.7
30.9
28.4
59.3
Group
162.6
72.0
234.6
Vanquis
Bank
190.9
36.0
2018 (restated)3
CCD Moneybarn
(38.7)
15.4
28.1
21.9
50.0
Group
160.1
73.2
233.3
226.9
(23.3)
204.9
(11.1)
(52.9)
152.0
2.1
(9.0)
(11.3)
(61.8)
(59.1)
4.4
(9.5)
(63.4)
48.0
172.8
167.8
(18.9)
40.5
169.9
Average receivables2
1,459.9
247.3
481.5
2,188.7
1,507.4
296.2
395.1
2,198.7
ROA1
10.4%
(3.6%)
10.0%
7.9%
11.1%
(6.4%)
10.3%
7.7%
1 Prior to the amortisation of acquisition intangibles of £7.5m (2018: £7.5m) and exceptional items of £26.3m (2018: £55.3m).
2 Average of month-end receivables for the 12 months ended 31 December.
3 2018 comparatives have been restated for: (i) the change in treatment of directly attributable acquisition costs in Vanquis Bank following a refresh of
contractual terms with affiliates in 2019 – this has resulted in a £6.6m increase in 2018 profit before tax, a benefit of £10.5m to 2019 profit before tax
and is expected to result in a reduction of approximately £6m in 2020 profit before tax compared with previous plans; and (ii) the changes in recognition
of revenue on credit impaired receivables and treatment of directly attributable acquisition costs in Moneybarn which have resulted in a reduction
in revenue, impairment and administrative and operating costs but have had no impact on Moneybarn’s profits.
Provident Financial plc
Annual Report and Financial Statements 2019
59
Strategic report
F I N A N C I A L R E V I E W C O N T I N U E D
Returns continued
Return on equity (ROE) continued
Vanquis Bank’s return on equity has reduced from 44.0% in 2018
to 32.4% in 2019. This primarily reflects the rebuilding of the equity
base following the implementation of IFRS 9 on 1 January 2018
(which resulted in a £111.4m reduction in equity) and the ROP
refund provision reflected at the end of 2017 (which resulted in
a £178.0m reduction in equity). Vanquis Bank’s return on equity
is expected to moderate to the Group’s target range of between
20% to 25% over the medium term reflecting (i) the average
equity base stabilising; and (ii) the risk-adjusted margin reducing
to between 23% to 25% due to the ongoing reduction in ROP
income and the impact of downwards repricing and fee changes
implemented in 2019.
Return on assets (ROA)
The Group calculates ROA as profit before interest, amortisation
of acquired intangibles and exceptional items, after tax (PBIAT)
divided by the average receivables during the period.
assessment of risks facing the Group. The ICAAP considers all risks
facing the business, including credit, operational, counterparty,
conduct, pension and market risks, and assesses the capital
requirement for such risks, including in the event of
downside stresses.
The Group and Vanquis Bank continually monitor and assess the
internal assessment of minimum regulatory capital requirements.
The minimum regulatory capital requirements of the Group and
Vanquis Bank are 25.5% (inclusive of a fixed add-on in respect of
pension risk) and 24.9% of total risk weighted assets respectively.
These assessments include: (i) CRD IV buffers of 3.5% of total risk
weighted assets comprising the capital conservation buffer (2.5%)
and counter-cyclical buffer (1.0%); (ii) the minimum Pillar 1 prescribed
requirement of 8.0% of risk weighted assets; and (iii) Pillar 2a
regulatory capital requirements of 14.0% and 13.4% of total risk
weighted assets for the Group and Vanquis Bank, respectively.
Table 3 shows the reconciliation of regulatory capital headroom
through 2019.
Table 2 on page 59 sets out the calculation of ROA in 2019 and 2018.
Table 3: Regulatory capital headroom
The Group’s ROA has shown a marginal improvement to 7.9%, up
from 7.7% (restated) in 2018, mainly due to the reduction in losses
in CCD.
CCD delivered a negative ROA of 3.6% in the year, a reduction from
the negative 6.4% in 2018, reflecting the reduction in losses as the
business continues in its turnaround, targeting breakeven in 2020.
Moneybarn has delivered an ROA of 10.0% in 2019, marginally
lower than 10.3% in 2018, but remaining in line with the Group’s
target of 10%.
Dividends per share
The Group’s dividend policy is to maintain a dividend cover ratio
of at least 1.4 times as the home credit business recovers and
moves into profitability. This will reflect the Group’s current risk
appetite of maintaining regulatory capital headroom in excess
of £50m and progressively absorbing the remaining transitional
impact of IFRS 9 on regulatory capital by 1 January 2023.
The Board is recommending an increase in final dividend of 60%
to 16p per share (2018: 10p) which, together with the 9p interim
dividend (2018: £nil), represents a 150% increase in the total
dividend per share to 25p (2018: 10p). Dividend cover for 2019,
prior to the amortisation of acquisition intangibles and exceptional
items, is 1.9 times (2018 (restated): 4.9 times).
As communicated in March 2019, as well as bringing forward
the payment of interim dividends from late November to late
September, the Board has brought forward the payment of final
dividends from late June to late May. The 2019 final dividend will
therefore be paid on 22 May 2020.
Prudential regulation
Vanquis Bank is regulated by the PRA which sets requirements
for Vanquis Bank as an individual entity relating to capital
adequacy, liquidity and large exposures. Vanquis Bank is also
regulated by the FCA for conduct purposes. 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, liquidity and large exposures.
The minimum amount of regulatory capital held by the Group
and Vanquis Bank represents the higher of the PRA imposed
requirement, being their respective TCR requirements together
with the CRD IV stipulated buffers, and their respective internal
assessments of minimum capital requirements based upon an
£m
Regulatory capital headroom at 31 December 2018
Year 2 IFRS 9 transitional impact
Regulatory capital headroom at 1 January 2019
IFRS 16 adoption
Prior year adjustment in respect of DAC
Adjusted profit before tax
Tax
Exceptional costs, net of tax
Share-based payments
Pension contributions
Capital released against receivables movement
Other (movements in deferred tax, intangible assets
and leases)
Regulatory capital headroom prior to dividends
Dividends
Regulatory capital headroom at 31 December 2019
Year 3 IFRS 9 transitional impact
Regulatory capital headroom at 1 January 2020
2019
96
(18)
78
(26)
15
163
(43)
(29)
2
(3)
8
15
180
(63)
117
(28)
89
The Group’s CET1 ratio on an accrued profits basis at
31 December 2019 was 30.7% compared with the Group’s TCR
of 25.5%. On this basis, the regulatory capital headroom was
5.2%, equivalent to approximately £117m based on the Group’s risk
weighted assets of £2.2bn. The increase in headroom from £96m
at 31 December 2018 reflects (i) retained profits less accrued
dividends; (ii) an increase in regulatory capital of approximately
£15m from the prior year restatement arising as a result of the
change in treatment of directly attributable acquisition costs in
Vanquis Bank; and (iii) the release of the FCA provisions in respect
of ROP and Moneybarn which, after tax, benefited regulatory
capital by approximately £10m. These favourable impacts were
offset by the anticipated second year transitional impact of IFRS 9
of £18m and the impact of the implementation of IFRS 16 ‘Leases’
from 1 January 2019 of £26m.
The Group’s regulatory capital headroom reduced to
approximately £90m on 1 January 2020, when the third-year
transitional impact of IFRS 9 of £28m came into effect, meaning
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Provident Financial plc
Annual Report and Financial Statements 2019
that the Group has absorbed 30% of the IFRS 9 impact at this
date. This level of headroom is consistent with the Board’s
current risk appetite of maintaining regulatory capital headroom
in excess of £50m whilst progressing towards the Group’s dividend
cover target of at least 1.4 times in the medium term and
absorbing the remaining 70% transitional impact of IFRS 9.
For illustrative purposes, after adjusting for the impact on risk
weighted assets, the CET1 ratio at 31 December 2019 would
reduce from 30.7% to 24.1% if the IFRS 9 transitional arrangements
did not apply.
The Group’s internal plans and medium-term guidance, including
receivables growth expectations and dividend guidance, are
consistent with maintaining regulatory capital headroom of at
least £50m above the current TCR of 25.5%. However, the Group
continues to actively explore a number of options to improve
capital efficiency and management has identified a number of
areas which may result in potential future reductions in the TCR,
including, but not limited to, potential reductions in capital
requirements for Pillar 2a and pensions add-on. The Group’s next
capital review (C-SREP) with the PRA is confirmed for March 2020,
with the result expected in the second quarter.
The Board also continues to monitor its risk appetite in respect
of the appropriate level of regulatory capital headroom in light
of the Group’s ongoing recovery.
The reconciliation of the Group’s net assets to regulatory capital held
can be found in the Capital Risk Management section on page 187.
Pillar 3 disclosures
As part of the regulatory supervision by the PRA, the Group,
consistent with other regulated financial institutions, is required
to make annual Pillar 3 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 3 disclosures is included within the 2019 Annual Report
and Financial Statements. The Group’s full Pillar 3 disclosures can
be found on the Group’s website, www.providentfinancial.com.
Funding and liquidity
The Group borrows to provide loans to customers. 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.
Bank funding, bonds and loans are used to fund CCD, Moneybarn
and central operations (the non-bank Group) whilst retail deposits
are used to fund Vanquis Bank. The Group’s current funding
policy is to maintain committed facilities to meet contractual
maturities and fund growth for at least the following 12 months.
The Group had total committed borrowing facilities, including
retail deposits, of £2,019.0m (2018: £2,363.0m) at the end of
2019. These facilities have a weighted average period to maturity
of 2.2 years (2018: 2.3 years). This has reduced in the year as a
result of the reduction in the period to maturity of the retail
deposits and the M&G loan, offset by the extended period to
maturity of the syndicated bank facility which was extended
by two years to July 2022.
Group borrowings at the end of 2019 were £1,949.9m (2018:
£2,035.6m), including £16.3m (2018: £17.1m) of interest accrued
on borrowings. The reduction in borrowings in 2019 reflects cash
generated from operations, offset by growth in receivables, the
cash required to complete the ROP refund programme and
the decrease in liquid resources at Vanquis Bank.
The Group’s funding rate during 2019 was 4.3%, a modest reduction
from 4.4% in 2018 as Vanquis Bank is now fully funded with retail
deposits. This was partly offset by the impact of the significant
amount of headroom of over £300m being carried on the
Group’s revolving credit facility during the first half of the year.
The funding structure of the Group’s facilities at 31 December 2019
is shown in Table 4 below.
Table 4: Group borrowing facilities
Vanquis Bank
Retail deposits
Non-bank Group
Bank facility
Bonds and other borrowings:
– Senior 7.0% public bond maturing
in 2023
– M&G term loan
– Retail bonds
Moneybarn securitisation1
Total facilities available
to the non-bank Group
Non-bank Group borrowings
under facilities
Headroom on borrowing facilities
of the non-bank Group
At
31 Dec 2019
actual
£m
Proforma
post-
securitisation
£m
1,345
1,345
235
211
250
50
150
—
250
—
150
275
685
886
616
616
69
270
1
Current committed facility is £100m progressively increasing to £275m
over the next 18 months.
Non-bank Group funding
The following transactions impacted the Group’s non-bank
funding during 2019:
• The Group repaid the fourth instalment of £15m on the
M&G term loan in January 2019, in line with its contractual
maturity. The Group refinanced its revolving syndicated bank
facility on 24 July 2019. The facility reduced from £450m to
£235m, reflecting a reduction in the requirement of the Group
for a revolving facility as Vanquis Bank is now fully funded with
retail deposits and the home credit business is significantly
smaller than when the previous facility was established. The
new facility has a maturity of July 2022 and an interest rate of
300 bps plus LIBOR, increased from 225 bps plus LIBOR in the
previous facility. The covenant package and limits remained
unchanged but will be assessed under IFRS 9 rather than
under IAS 39 in the previous facility.
• On 31 July 2019, Fitch Ratings reaffirmed the Group’s credit
rating at BBB- with a negative outlook.
• In line with the contractual maturity, the Group repaid senior
bonds of £27.5m in October 2019.
Headroom on the Group’s committed debt facilities was £69.1m
(2018: £327.4m) at 31 December 2019.
Provident Financial plc
Annual Report and Financial Statements 2019
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Strategic report F I N A N C I A L R E V I E W C O N T I N U E D
Funding and liquidity continued
Table 5: Performance against covenants assessed
under IFRS 9 (2018: IAS 39)
Covenant
Gearing1
Limits
<5.0 times
2019
(IFRS 9)
2.4
2018
(IAS 39)
2.0
Net worth – Group2
>£400m
675.8
804.3
– Excluding
Vanquis Bank
>£155m
284.7
313.3
Interest cover3
Cash cover4
>2.0 times
>1.1 times
3.4
1.19
3.2
1.20
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 items 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. This covenant is 1.1 times
under the M&G facility and 1.0 times under the syndicated bank facility.
Covenants were reported under IAS 39 until July 2019 when the
revolving syndicated bank facility was refinanced. The covenant
requirements were then restated onto IFRS 9 but the limits
remained unchanged.
The Group has comfortably complied with all covenant requirements
throughout the year.
Retail deposits
The flow of retail deposits within Vanquis Bank has continued in line
with its internal funding plan and, at 31 December 2019, Vanquis
Bank had retail deposit funding of £1,345.2m, down from £1,431.7m
at 31 December 2018. This reflects the modest reduction in
Vanquis Bank receivables during the year and a reduction in the
liquid assets buffer due to reduced internal liquidity requirements.
A reconciliation of the movement in retail deposits during 2019
and 2018 is as follows:
Table 6: Reconciliation of retail deposits
£m
At 1 January
New funds
Maturities
Retentions
Cancellations
Interest
2019
2018
1,431.7
1,301.0
125.1
352.2
(327.2)
(347.9)
119.9
134.9
(15.2)
(24.4)
10.9
15.9
At 31 December
1,345.2
1,431.7
Rates of between 1.40% and 2.20% have been paid on retail
deposits during 2019 (2018: 1.40% and 2.20%) and the blended
interest rate on the deposit portfolio in 2019 was 2.31% (2018:
2.17%), reflecting the low interest rate environment currently
being experienced. Including the cost of holding a liquid asset
buffer on the overall blended interest rate on retail deposits in
2019 was 3.3%, consistent with 2018.
The average period to maturity of retail deposits at 31 December
2019 was 1.9 years (2018: 2.2 years).
Funding opportunities
The Group’s historical funding structure has served the Group
very well. However, as part of the focus on cost efficiency, the
Group has undertaken a full review of funding and outlined at the
CMD a number of opportunities are being considered to further
diversify the Group’s sources of funding, reduce the funding
cost and improve the long-term stability of the Group.
The first opportunity was in respect of a securitisation of the
Moneybarn receivables book. The Group successfully signed
a bilateral securitisation facility with NatWest Markets to fund
Moneybarn business flows on 14 January 2020. The new facility
provides up to £100m of initial funding and is anticipated to
grow to £275m over the next 18 months. The facility provides
a comparable funding rate to the revolving credit facility
which reduced from £450m to £235m as indicated above.
The successful completion of this facility builds the Group’s
capability in securitisation creating the option to issue publicly,
allowing similar funding to be deployed elsewhere in the Group.
Vanquis Bank would be the business with the greatest potential
for further securitisation. As a part of obtaining consent for the
securitisation from the Group’s existing lenders, the Group’s
revolving syndicated credit facility has reduced from £235m to
£211m and the Group has repaid in full the M&G loan facility of
£50m, which was repayable in two equal instalments of £25m
in January 2020 and 2021. After taking account of the securitisation
of Moneybarn’s receivables and the ongoing retail deposits
programme in Vanquis Bank, the Group has sufficient facilities
to fund contractual debt maturities and projected growth in
the Group until mid-2022.
The second identified opportunity is in respect of retail deposits
funding some element of Moneybarn. The Group is currently
exploring a number of potential structures to enable Moneybarn
to access Vanquis Bank’s retail deposits capability and the Group
is aiming to provide a formal proposal to the PRA in the first half
of 2020. As demonstrated by Vanquis Bank, there is a deep and
liquid market of deposits available to support growth as and
when it happens. This would increase funding efficiency and
flexibility compared with the existing non-bank Group funding
sources which typically have to be sourced in large tranches
upfront. Vanquis Bank’s blended interest rate is approximately
3.0%. This compares with a funding cost for the non-bank Group
of approximately 6.0% to 6.5%, which means the ability to fund
part of Moneybarn through deposits would significantly reduce
Moneybarn’s overall cost of funding.
The Group also continues to actively consider issuing further
senior bonds, private placements and potentially a Tier 2 instrument.
In addition, the Group is also assessing ways in which to manage
the Vanquis Bank balance sheet more efficiently. In respect of
funding, the funding mix could be diversified into instant access
deposits or into wholesale markets through further securitisation.
In respect of liquidity, the mix of the assets held in the liquid
assets buffer could be revisited rather than solely relying on the
Bank of England Reserve Account. The Group aims to make
further progress on these areas through 2020.
Liquidity requirements
To ensure that sufficient liquid resources are available to fulfil
operational plans and meet financial obligations as they fall due
in a stress event, the PRA requires that all regulated entities
maintain a liquid assets buffer held in the form of high-quality,
unencumbered assets.
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Annual Report and Financial Statements 2019
In order to assist stakeholders using the Group’s financial
statements, supplementary commentary has been provided
within the Group’s financial statements in highlighted boxes.
The additional commentary addresses questions regularly asked
by investors, analysts and other stakeholders, as well as providing
further information on the Group’s key accounting policies, financial
model and important movements in income statement and
balance sheet items during the year.
Going concern
The 2019 financial statements have been prepared on a going
concern basis under the historical cost convention, unless
otherwise stated.
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 principal risks and mitigating activities as set out
in the risk report. The Board has also considered the Group’s
budget projections, as approved in January 2020, including:
• regulatory capital projections against the PRA’s regulatory
capital requirements;
• funding levels and headroom against committed
borrowing facilities;
• cash flow and liquidity requirements; and
• compliance against covenant requirements.
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 and
Company continues to assess the going concern basis in
preparing the financial statements.
Simon Thomas
Chief Finance Officer
27 February 2020
The total liquid resources required to be held is calculated in line
with the Overall Liquidity Adequacy Rule (OLAR) and is set out in
the Internal Liquidity Adequacy Assessment Process (ILAAP)
undertaken by Vanquis Bank. Liquid resources must be
maintained based upon daily stress tests.
As at 31 December 2019, the liquid assets buffer, including
additional liquid resources to meet the OLAR and an operational
buffer, amounted to £321.9m (2018: £420.6m). The decrease
during the year primarily reflects a change in risk appetite by the
Vanquis Bank board resulting in an decreased severity of the
stresses set out in the 2018 ILAAP. Vanquis Bank currently holds
its liquid assets buffer, including other liquid resources, solely in
a Bank of England Reserve Account.
CRD IV introduced further liquidity measures applicable to the
Group: the liquidity coverage ratio (LCR) and net stable funding
ratio (NSFR). As at 31 December 2019, the Group, on a consolidated
basis, and Vanquis Bank, on an individual basis, had an LCR of
224% (2018: 688%) and 485% (2018: 646%) respectively.
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 with the exception of the adoption of IFRS 16 ‘Leases’
and IFRIC 23 ‘Uncertainty over Income Tax Treatments‘, as set
out on pages 175 to 182.
IFRS 16 replaced 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 leases and service contracts on the
basis of whether an identified asset is controlled by the customer.
Distinctions between operating leases and finance leases are
removed for lessee accounting and was replaced by a model
where a right of use asset and a corresponding liability are
recognised for all leases where the Group is the lessee, except
for short-term assets and leases of low-value assets.
The right of use asset is initially measured at cost and subsequently
measured at cost less accumulated amortisation and impairment
losses, adjusted for any remeasurement of the lease liability. The
lease liability is initially measured at the present value of future
minimum lease payments. Subsequently, the lease liability is
adjusted for interest and lease payments, as well as the impact
of lease modifications, amongst others. The classification of
cash flows will also be affected as, under IAS 17, operating lease
payments are presented as operating cash flows, whereas under
IFRS 16, the lease payments are split into a principal and interest
portion which will be presented as operating and financing cash
flows respectively.
Adoption of IFRS 16 increased assets by £81.9m and liabilities
by £89.0m which, net of deferred tax of £1.5m, resulted in a
reduction in net assets of £5.6m.
Provident Financial plc
Annual Report and Financial Statements 2019
63
Strategic report F I N A N C I A L R E V I E W C O N T I N U E D
Viability statement
In accordance with the 2018 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 business model becomes unviable. The exercise
indicates that Group viability only comes into question under
unprecedented macroeconomic conditions or extreme
regulatory intervention and constraints across the Group’s
three operating divisions.
The directors’ assessment has been made with reference to
the Group’s current position and prospects outlined within
the Strategic Report and the Group’s ongoing strategy. The
Board continues to believe in the strong market position of
the Group’s attractive businesses, its conservative funding
and capital structure and its strategy to build sustainable
businesses for the long-term strength of the Group. The
Board remains confident of the Group’s underlying prospects
and value, together contributing to attractive future shareholder
returns. 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 receive the greatest focus,
with the later years produced robustly, but at a higher level.
The Group focuses on relatively short-term lending to
consumers and operates a conservative and well-tested
‘low and grow’ business model that has previously proven
resilient to economic and business cycles. The longest
contractual loan term available in CCD is around two years,
Moneybarn typically issues four-year loans, while the average
time a Vanquis Bank credit card customer remains with the
business is around five years. The first three years of the
budget plan therefore forms the basis of this statement.
The three-year plan makes certain assumptions about the
regulatory environment, future economic conditions, new
strategies, products, the acceptable performance of the
Group’s divisions, the ability to fund growth and the
sustainability of the business models.
The plan is stress tested in a number of different robust
downside scenarios as part of the Board’s review of the
Group’s ICAAP. Stress testing covers significant financial,
business, operational and regulatory downsides which are
then aggregated into a combined severe downside scenario.
The stress test scenarios are formulated using information
and data from the 2008/09 financial crisis, the operational
and regulatory events affecting the Group during 2017 and
the scenarios published by the PRA as guidance to banks
and building societies on stress tests. The scenarios
therefore reflect the principal risks of the Group through
reducing new funds raised, increasing impairment,
operational impacts and regulatory changes.
As part of the ICAAP process, a reverse stress test exercise
is also undertaken to identify the circumstances under which
As a PRA-regulated bank which is a subsidiary of
Provident Financial plc, Vanquis Bank is required to produce
a Recovery and Resolution Plan (RRP) covering the bank and
the wider Group. The RRP outlines how Vanquis Bank and the
Group would regain viability under severe financial pressure
(recovery plan) and the steps the PRA could take to resolve
the situation (resolution plan). The process of producing the
RRP involves considering, assessing and documenting the
options available to Vanquis Bank and the Group in a severe
stress situation. This not only improves the understanding of
the sources and impact of risks to viability, but it also enables
the recovery options to be mobilised quickly and effectively,
should they ever be required.
The RRP is an integral element of the overarching prudential
risk management framework incorporating the ILAAP and
ICAAP, and is produced at least annually. The ILAAP is designed
to ensure the bank meets the overall liquidity adequacy rule
and further requirements of CRD IV, whilst the ICAAP outlines
the process to ensure that Vanquis Bank and the Group
maintain adequate capital resources at all times. In the event
that the Group suffers a severe stress, then the Group could
be materially adversely affected, for example due to a breach
of a financial covenant under its debt facilities or a breach of
a regulatory requirement. In such a scenario, there is a risk
that its creditors could initiate insolvency proceedings against
the Group and/or the PRA and the FCA exercising their
wide-ranging powers over the Group and/or Vanquis Bank.
As part of the exercise, it is assumed that the Group’s
non-bank divisions could be subjected to a controlled run-off
with no, or limited, further lending, allowing the Group to
meet contractual maturities as they fall due, in the absence
of dividend payments.
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, operational and credit risks. 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 144.
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Annual Report and Financial Statements 2019
C O R P O R AT E R E S P O N S I B I L I T Y
A better
everyday life
For the past 140 years we have been helping to
put people on a path to a better everyday life by
providing our customers with the tailored and
affordable credit products that meet their particular
needs. This enables them to do the things they
want to do in their lives and also ensures that we
deliver fair outcomes to them throughout their
journey with us. This is our purpose.
But this purpose also reflects our wider role in
society and ensures that operating responsibly
and sustainably is at the core of our business.
This means addressing the wider social, environmental
and ethical impacts of our business. From climate
change to equality, diversity and inclusion, and
social mobility to mental health, I recognise that
Provident Financial has an important role to play.
Malcolm Le May
Chief Executive Officer
Our corporate responsibility strategy
Provident Financial’s Group-wide corporate responsibility (CR)
strategy is intimately aligned with our purpose of helping to put
people on a path to a better everyday life. First and foremost
this purpose is about ensuring that we provide our customers
with the credit products that meet their particular needs and
deliver fair customer outcomes throughout their journey with us.
This, along with our strategic drivers and behaviours (our Blueprint),
is also about building sustainable relationships with all our
stakeholders, whether they are customers, employees or suppliers.
By balancing profit and purpose, we ensure that we generate a
financial return while responding to the needs of our stakeholders,
and operating our business in an efficient and effective manner.
Our CR strategy is to operate our business of lending to our
customers in a responsible manner, and act responsibly and
sustainably in all our other stakeholder relationships. This
means that we have to support our customers with responsible
lending, create an inclusive and engaging workplace, support
our purpose through our Social Impact Programme, respond
to climate change, and ensure that we treat our suppliers fairly,
engage with the investment community on sustainability matters
and remain a responsible taxpayer.
Through our purpose and CR strategy, we are able to focus our
attention on the issues that our stakeholders deem to be most
material to our business and which are set out in the materiality
matrix which is set out on page 15 of the Provident Financial 2019
CR report.
CR governance and management
Having effective governance and management structures in
place enables us to deliver on both our purpose and CR strategy.
Overall responsibility for the Group’s CR programme continues
to rest with the Provident Financial plc Board generally and
Malcolm Le May, the Chief Executive Officer, specifically. The
Group’s Executive Committee, which is chaired by the Chief
Executive Officer and includes the Group’s Chief Finance Officer,
General Counsel and Company Secretary, Chief Risk Officer,
Chief Information Officer, Corporate Communications Director,
HR Director and the Managing Directors of the operating companies,
also plays an important role as it reviews and approves aspects
of the responsible business programme and its budgets. This
Committee is also tasked with overseeing the development,
embedding and monitoring of the culture and ethics of the
Group, and ensuring they are consistent with being a trusted,
responsible and sustainable business.
The Customer, Culture and Ethics (CCE) Committee is a Board
Committee which we established in 2019 and also plays a key role in
providing oversight of matters that relate to the CR agenda. The
Committee is chaired by Non-Executive Director Elizabeth Chambers
and its members are Graham Lindsay (Non-Executive Director)
and Robert East (Non-Executive Director). Malcolm Le May
(Chief Executive Officer) also attends the CCE Committee as do
Provident Financial’s General Counsel and Company Secretary,
Group Corporate Communications Director, HR Director and
Head of Sustainability, and Vanquis Bank’s Customer Director.
Provident Financial plc
Annual Report and Financial Statements 2019
65
Strategic report The Group’s CR team is supported by colleagues from across
the Consumer Credit Division, Moneybarn and Vanquis Bank.
This includes the colleagues who sit on the Environmental Working
Groups we have in place and oversee the operation of our
environmental management system. It also includes the colleagues
who sit on the Social Impact Programme Steering Group established
in 2019. This Group-wide Steering Group will ensure a robust
governance framework specifically for the Social Impact Programme
and is able to engage with the right stakeholders on matters relevant
to the effective running of the programme. It will also play a key role
in identifying and promoting colleague volunteering opportunities.
Our commitment to the Sustainable
Development Goals
The Sustainable Development Goals (SDGs) are a global call to
action to end poverty, protect the planet and ensure that all people
can live in peace and prosperity. The 17 goals that make up the
SDGs build on the Millennium Development Goals but integrate
and address new areas such as peace and justice, innovation
and climate change. To achieve the targets of the SDGs, working
in partnership with others is crucial. Governments, businesses
and communities around the world need to commit to making
changes to improve life and ensure a sustainable future for
generations to come, and this is why we have decided to
play a part.
In 2019, we chose five of the SDGs to focus on, where we think
we can have a genuine impact. These are: Goal 1 No Poverty,
Goal 4 Quality Education, Goal 5 Gender Equality, Goal 8 Decent
Work and Economic Growth and Goal 10 Reduced Inequalities.
Now that we have prioritised which of the SDGs are the most
material to our business activities, we will, in 2020, work to align
our CR targets so that they deliver both the objectives of the
individual goals and our Blueprint.
C O R P O R AT E R E S P O N S I B I L I T Y C O N T I N U E D
CR governance and management continued
During 2019, the CCE Committee’s initial focus was to oversee
the Group’s compliance with the 2018 UK Corporate Governance
Code and the accountabilities under section 172 of the Companies
Act 2006. These call on the Board and its directors to balance
and provide oversight of the Company’s short and long-term
decision making and outcomes with respect to a wide set of
stakeholders, encompassing customers, employees, suppliers,
and the community, as well as shareholders.
The Committee’s other duties include:
• supporting the Board in overseeing policies, procedures,
standards and progress against KPIs, to ensure that the Group
conducts and develops business responsibly and consistently
in accordance with the Company’s customer objectives,
purpose and corporate culture;
• assisting the work of the Board’s Group Risk Committee in
reviewing the design and performance of the Group’s products
and channels (particularly with respect to our aim of achieving
greater customer centricity and fairer customer outcomes),
and in assessing whether the Company’s new culture and
purpose is embedded across the employee population;
• contributing to the work of the Board’s Remuneration Committee
in factoring dimensions like customer centricity, environmental
and community impact, and cultural and governance issues
into the setting of performance conditions for annual bonus
schemes and share incentive plans of executive directors
and senior management teams; and
• reviewing and providing guidance for external communications
and the Group’s public posture on key reputational issues that
the Group may encounter on the areas within its remit (e.g. with
respect to customers, diversity and broader environment, social
and governance (ESG) agenda).
In discharging its duties, the Committee adopts a KPI and
evidence-based approach to its work. It has worked with
management throughout 2019 to develop dashboards that
will be used at each of the Committee’s meetings to:
• gain an insight into customer outcomes that are being
delivered at a Group-wide level to ensure that they are
consistent with the Group’s strategy and purpose;
• oversee the Group’s embedding of its Blueprint, with a particular
focus on determining whether the Group is delivering its business
activities in accordance with its purpose and behaviours;
• review whether the Group’s culture is evolving to meet the
changing expectations of stakeholders and identify areas where
more focus is required in the Board’s decision making; and
• ensure that any material issues which relate to the culture
and ethics of the Group are reported to other relevant
Board Committees.
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Annual Report and Financial Statements 2019
Blueprint update
In 2019, we started delivering
a programme of ‘Big Blueprint
Conversation’ events, a regular
series of Blueprint-inspired
face-to-face sessions with
colleagues across different
parts of the Group.
In February 2019, we launched the Blueprint we developed in 2018,
which comprises our purpose and strategic drivers. This is designed
to help us balance delivering responsible and sustainable products,
services and partnerships to our customers, maintaining high levels
of regulatory compliance, and providing a stimulating and rewarding
workplace for our colleagues, while generating appropriate,
sustainable returns for our shareholders. This initially involved
cascading the Blueprint at an event to approximately 150 leaders
and influencers from across the Group. At this launch event, we
shared a clear, inspiring and motivating shared sense of purpose
for Provident Financial Group and sought to unify the whole
organisation framed in the context of the role that our businesses
play in customers’ lives. Following on, Blueprint roll-out sessions
were delivered to colleagues in Bradford, Chatham, London and
Petersfield, and to Consumer Credit Division field office colleagues
via divisional conferences. These sessions focused on galvanising
and energising colleagues from across the Group around the
Blueprint, and engaging them with the wider purpose
behaviours and strategic drivers.
Feedback from Blueprint roll-out sessions:
• 99% of colleagues either agree or strongly agree that it is
important for everyone to have a shared purpose across Provident;
• 88% of colleagues either agree or strongly agree that the work
they do connects to the Blueprint;
• 75% of colleagues either agree or strongly agree that they are
proud to work for Provident Financial; and
• 70% of colleagues either agree or strongly agree that they can
clearly see links between divisional plans, priorities and the
broader Provident Financial agenda.
Finally in 2019, we started delivering a programme of ‘Big Blueprint
Conversation’ events, a regular series of Blueprint-inspired
face-to-face sessions with colleagues across different parts of
the Group. Through these sessions we aim to help colleagues
make the connection between the Blueprint and the work they
do, thereby continuing the process of creating a common
language based around the Blueprint which will help colleagues
to connect with the longer-term ambitions, priorities and strategy
of the Group. In doing so, the events will contribute to creating a
sense of togetherness and show colleagues that they are all part
of something big.
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Annual Report and Financial Statements 2019
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Strategic report C O R P O R AT E R E S P O N S I B I L I T Y C O N T I N U E D
Our stakeholders
A key aspect of our business strategy relates to acting responsibly
and sustainably in all the relationships we have with our key
stakeholders. To this end, we have identified the following
stakeholders as being key to our business activities: customers,
colleagues, communities, suppliers, investors (both debt and
equity), regulators and government. The Group can also impact,
or be impacted by, the environment.
Our key stakeholders have an important role to play in enabling
us to operate our business in accordance with our purpose. Our
aim in this regard is to deliver a balance between the needs of
our customers, regulators, shareholders and colleagues in order
to ensure that Provident Financial is a successful and sustainable
business for all its stakeholders. It is therefore essential that we
engage with our key stakeholders to ensure that their views and
concerns are factored into our decision-making processes.
We do this by using a wide range of stakeholder engagement
techniques, including surveys and focus groups, and by
participating in consultation exercises.
This year, in order to comply with the requirements of section 172
of Companies Act 2006, we have produced a statement which
explains how the Provident Financial plc Board of directors has
taken wider stakeholders’ needs into account while performing
its duties throughout 2019. This statement sets out who our key
stakeholders are and how we engaged with them during 2019.
This statement is set out on pages 83 to 87 of this report.
In addition, we seek the views of our stakeholders for a number
of reasons. Examples of these are set out in the table below.
Stakeholder
Reason for engagement
Our
customers
Our
colleagues
In order to determine whether we are responsibly providing our customers
with appropriate amounts of credit, maintaining close contact with
them throughout their time with us, and supporting them sympathetically
if they experience difficulties, we engage with customers on a range of
issues. For example, we use a variety of mechanisms to measure customer
engagement across the Group, including: customer satisfaction surveys,
Net Promoter Score surveys and complaints monitoring through online
forums, phone calls, face-to-face surveys and focus groups (for new
products or changes to products and services). This data is reported to
divisional executive management and boards as appropriate. Customer
focus groups provide feedback on current and potential products. Our
customer-facing colleagues engage with customers on a daily basis
to responsibly lend and provide tailored products, assess customer
vulnerability and address any complaints. We utilise technology in order
to support the provision of customer service, such as voice recording
and speech analytic tools.
It is essential that we consistently and effectively engage with our colleagues
so that they understand the Group’s purpose and how they can support
its delivery, which we believe helps our customer base. Maintaining high
levels of colleague engagement also plays an important role in enabling
us to attract, retain and develop the talent we need to help us deliver
our purpose, ensuring that we provide a stimulating and rewarding
working environment, and supporting the development of a diverse,
open and inclusive workplace culture where everyone is a valued member
of the Group (see page 72). In 2019, we conducted our first colleague
engagement survey (see page 73). We also ensure that they keep informed
through huddles, regional team meetings in the field, colleague forums
via the intranet, social media and colleague blogs. We launched our
new Group recognition platform, ‘Better Everyday’, in 2019 which is
designed to help us create a culture where we say ‘thank you’ or ‘well
done’ to colleagues who are demonstrating our Blueprint behaviours.
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Provident Financial plc
Annual Report and Financial Statements 2019
Stakeholder
Reason for engagement
Our
regulators
and
government
Our
investors
Our
suppliers
The nature of our customer base and the market in which we specialise
makes the building and maintaining of open and trusting dialogue with
policy makers and our regulators, the PRA, FCA and CBI, critical to a
sustainable business model. We understand that building strong and
enduring relationships with our regulators is extremely important. It
influences our strategic thinking and enables us to plan for regulatory
change with greater certainty and confidence. Alongside being
transparent about the products, services and partnerships we deliver
to our customers, we also strive to be open in all other areas of our
business. This includes maintaining our commitment to being a fair and
responsible taxpayer, operating in an open, honest and straightforward
manner in all tax matters and being fair and reasonable in all our dealings
with tax authorities. Paying tax is a key part of how our business
contributes to society, meets our legal requirements, maintains our
reputation for high standards of business conduct and protects
shareholder value.
It is key that we meet with shareholders and engage with investors,
the owners of the Group, to maintain their support and to keep them
updated on the Group’s progress in delivering its purpose, sustainable
shareholder returns, strategy, governance and culture. Direct and regular
engagement with shareholders ensures that the Board has a clear
understanding of investor views. We also engage with the investment
community on CR matters by responding to requests for information
and through our inclusion in the Dow Jones Sustainability World Index,
Dow Jones Sustainability Europe Index, and the FTSE4Good Index
Series (see page 74).
Our suppliers play a vital role in our operations and so it is important
that we develop strong relationships with them and only buy products
and services from those who operate responsibly. Strong relationships
with suppliers can also mitigate risk in our supply chain. We encourage
best practice within our supply chain by ensuring we are compliant with
legislation such as the Modern Slavery Act and we are a signatory to the
Prompt Payment Code. Through our established due diligence processes
to manage supply chain-based risks we engage with our suppliers on
issues such as data protection, information security, business continuity,
and facilitation of tax evasion. This process also covers a range of CR issues
such as community investment, environment, diversity, modern slavery
and human trafficking.
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Strategic report C O R P O R AT E R E S P O N S I B I L I T Y C O N T I N U E D
Our stakeholders continued
Stakeholder
Reason for engagement
Our
communities
Through our Social Impact Programme we invest in activities and initiatives
which seek to address some of the key factors which, on their own or acting
together, may reduce someone’s likelihood to be accepted for credit.
As such, we engage with a range of community partners with whom
we work to address factors, including lack of literacy or numeracy skills;
disabilities and/or mental health issues; unemployment or under-employment;
low levels of educational attainment; and low, uncertain or fluctuating incomes.
This programme includes a work stream where we fund money and debt
programmes as well as work with mental health charities to ensure that
our customers, and the colleagues that support them, are supported
if they feel vulnerable. We provide literacy and numeracy education to
children and adults, and provide grants to grassroots organisations and
charities through Community Foundations which support local people.
We also encourage colleagues to support their own communities and
causes by enabling them to access matched funding and contribute
their time and skills to community activities by volunteering. In 2019, our
Social Impact Programme invested £1.45m in these activities and initiatives.
The
environment
Like any other company, our business activities impact the environment,
whether directly as a result of the energy that is used by our offices and
by our people when they travel, or indirectly through the activities in our
supply chains. We report on our environmental performance in our Annual
Report and Financial Statements (you can read more on page 80)
and also in our 2019 CR Report.
We also engage with our stakeholders to ensure that we manage and report on the CR issues that matter most to them and our
business. We typically do this by undertaking materiality assessments at least every two years to identify and prioritise the CR issues
that are material to the Group. This exercise helps to inform our purpose and CR strategy and ensures that our CR reports respond to
the interests of our stakeholders and comply with the Global Reporting Initiative’s G4 reporting guidelines. Our most recent materiality
assessment which we conducted in early 2019 was, as in previous years, facilitated by the independent sustainability management
consultancy Corporate Citizenship. The issues that were identified as a result of the materiality assessment exercise have been
plotted on the matrix that is included in our 2019 CR Report (see page 15 of the Provident Financial 2019 CR Report).
For further details on stakeholder engagement
see Section 172 on pages 83 to 87
Our corporate responsibility strategy
Our customers
Page 71
Our suppliers
Page 75
Our colleagues
Page 72
Our communities
Page 76
Our investors
(equity and debt)
Page 74
Our environment
Page 80
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Provident Financial plc
Annual Report and Financial Statements 2019
Details on our 2019 customer satisfaction performance is set out below:
Vanquis Bank
Moneybarn
(Feefo rating)
%
6
8
%
0
9
5
f
o
t
u
o
7
.
4
5
f
o
t
u
o
6
4
.
18
19
18
19
Provident
home credit
Satsuma
%
7
8
%
9
8
%
0
8
%
2
8
18
19
18
19
Enabling customers to raise issues
Ensuring that we are able to respond to customers’ issues is also
a good indicator that we are treating them fairly and that our
products, services and partnerships meet their specific needs.
This includes when customers have complaints. Should a complaint
arise, our focus is to get it resolved in a timely manner and understand
the reasons behind the complaint so that we can, if necessary, change
our processes. We have well-established complaint-handling
processes, procedures and timescales to guide the customer
relations teams in each of our businesses in resolving issues in
a professional and timely way. Colleagues also are trained well
enough to deliver excellent customer service whether face to
face, on the telephone or via email.
Information on the customer complaints received in 2019 is set
out below:
Vanquis Bank
Moneybarn
Consumer Credit
Division
7
6
7
,
8
3
3
2
1
,
4
3
3
5
0
5
,
1
5
5
4
,
4
8
5
6
3
,
2
2
7
,
6
3
18
19
18
19
18
19
We provide the contact details of the Financial Ombudsman Services
(FOS) to all our customers, so they have another option if they feel
we have been unable to resolve their complaint to their satisfaction.
During 2019, the total number of complaints referred to the FOS
was 4,253 (2018: 4,302). Of these, 1,481 or 35% (2018: 30%) were upheld
in favour of the customer. There continues to be heightened Claims
Management Company activity around the lending practices of our
sector. As a result, the Consumer Credit Division has seen a modest
increase in the number of complaints and referrals to the FOS.
The division continues to defend inappropriate or unsubstantiated
claims and is working closely with the FOS in this regard.
Provident Financial plc
Annual Report and Financial Statements 2019
71
Our customers
Supporting customers with responsible lending
To enable us to demonstrate that we are delivering our purpose of
helping to put people on a path to a better everyday life and ensure
that we are providing our 2.3 million customers with the credit
products that meet their particular needs, it is essential that we are able
to show that the culture of our business is centred on delivering fair
outcomes for our customers at every stage of their journey with us.
Provident Financial is a specialist lender for the 1 in 5 UK adults
who are not well served by the mainstream credit providers.
Consumers may not be well served by mainstream lenders
for a number of reasons. For example, they may be:
• experiencing a significant life event such as divorce or job loss;
• new to credit in the UK and therefore have little or no credit history;
•
• managing everyday life on low, irregular or average incomes
looking to build or rebuild their credit rating;
with no savings;
• have variable incomes as a result of being self-employed
or having a number of part-time jobs; or
•
looking for a product and service which is more tailored
to their needs.
The products, services and partnerships that we offer through our
three divisions are therefore tailor-made to meet the particular needs
of our customers. In general, the approach we take to providing credit
to our customers involves lending smaller amounts over shorter
periods of time. Under this approach, new customers to Vanquis Bank,
Satsuma and Provident home credit get 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 lending and it also enables the customers to
experience our products and see if they suit their needs. It also
enables our customers to enter or re-enter the credit market, stay
in control of their finances and build credit scores for greater future
access and choice. In the case of Moneybarn, where a vehicle is
held as security, we are able to lend more credit for longer periods.
The dashboard we developed in 2019 to help monitor the
implementation of our Blueprint and thus determine whether the
customer outcomes that are being delivered at a Group-wide level
are consistent with the Group’s strategy and purpose include a
number of key performance indicators which are aimed at tracking
rates of customer satisfaction and customer complaints across
our four main customer-facing brands.
Monitoring customer satisfaction
To determine whether our customers are satisfied with the
products and services we provide them with, we use a range of
approaches. This includes carrying out our own surveys so that
we can calculate the percentage of customers who are satisfied
with the products we offer, as well as management tools such as
Net Promoter Score, which measures the willingness of customers
to recommend our businesses to others. We also review systems
such as Feefo which gather and analyse feedback, suggestions
and observations from customers.
Strategic report
C O R P O R AT E R E S P O N S I B I L I T Y C O N T I N U E D
Finally, we have developed a new balanced performance
scorecard and remuneration policy to ensure the pay of the
senior executive team is linked to delivery against these internal
targets on gender diversity.
To support the wider EDI agenda we have published a new
corporate EDI Policy and rolled out a mandatory e-learning
module on EDI to all colleagues. We also used the Colleague
Engagement Survey we carried out in October and November 2019
to ask colleagues to volunteer information on a wider range of
aspects of the EDI agenda. This included sexual orientation;
ethnicity; impairment, health condition or learning difference;
and caring responsibilities. This information is set out below.
EDI data as at 31 December 20191
Ethnic background
Percentage of colleagues from a BAME background
Disability
Percentage of colleagues who disclose they have an
impairment, health condition or learning difference
Sexual orientation
Percentage of colleagues who disclose they
are lesbian, gay, bisexual or transgender
Caring responsibilities
Percentage of colleagues who disclose they have
caring responsibilities
2019
12%
5%
8%
43%
1
This EDI data is based on colleagues’ voluntary self-declaration via
our 2019 engagement survey. It accounts for 68% of the Provident
Financial Group workforce.
‘Better Everyday’ recognition scheme
During the year, we launched the ‘Better Everyday’ recognition
scheme with the dual purpose of encouraging colleagues to
consider the Blueprint behaviours in all they do and giving them
the means to recognise others when they see the behaviours
in action.
‘Better Everyday’ (also known simply as BE) is a Group-wide
colleague recognition scheme which will help us to create a
culture where we all say ‘thank you’, ‘well done’ and ‘good job’
to colleagues who are showing the Blueprint spirit by living our
Group behaviours by ‘putting the customer on the team’, ‘acting
like it’s yours’ or ‘being hungry for better’. Through the scheme,
anyone can send a colleague an eCard to say thank you, well
done and top job and/or nominate them for an award. Everyone
has the power to say thank you, and senior leaders can award
colleagues vouchers.
Our colleagues
Creating an inclusive and engaging workplace
To truly put the customer on the team and deliver on our
purpose of helping to put people on a path to a better everyday
life we need to build and sustain a diverse workforce that is
reflective of the diversity of the customer base that we serve.
We also know that creating an inclusive and diverse workplace
culture supports the attraction and retention of talented people,
improves effectiveness, delivers superior performance and will
ultimately contribute to the success of the Group.
Our initial focus in terms of championing equality, diversity and
inclusion (EDI) at Provident Financial has been on achieving a better
gender balance in our senior leadership population. In support of
this, we signed up to the Woman in Finance Charter in March 2019
and set a target to have at least 33% female representation in the
Group’s senior leadership population by December 2020 and 40%
female representation by December 2024.
Our gender diversity performance as it relates to our Women
in Finance Charter targets and in terms of the colleague grades
within our businesses is set out below.
To ensure that we do more to create a talent pipeline of future
women leaders within our business we have also undertaken
a range of activities throughout 2019. This has seen us deliver
a Next Generation Women’s Leadership Programme to the first
cohort of female colleagues at the middle/senior management
level (a second cohort is currently on the programme for 2020).
We have also appointed EDI Business Ambassadors to help
improve visibility of leadership on EDI from the top and drive
progress in each division and delivered ‘speaker series’ sessions
at our Bradford, Chatham, London and Petersfield offices to
encourage colleagues to think about how we can better nurture
and celebrate a culture of EDI across all our businesses.
Gender diversity data as at 31 December 2019
Total
workforce
Directors
Senior
management
Middle
management
First-level
management
Colleagues
3,117
2,591
%
5
5
%
5
4
2,673
2,181
%
5
5
%
5
4
7
24
%
3
2
%
7
7
6
23
%
1
2
%
9
7
29
84
%
6
2
%
4
7
32
76
%
0
3
%
0
7
152
222
%
1
4
%
3
5
103
190
%
5
3
%
5
6
186
239
%
4
4
%
6
5
138
152
%
6
4
%
4
5
18
19
18
19
18
19
18
19
18
19
2,780
2,066
%
7
5
2,355
1,708
%
8
5
%
2
4
19
%
7
4
18
Female
Male
72
Provident Financial plc
Annual Report and Financial Statements 2019
19%
24%
11%
19%
70%
Our
purpose
Colleague responses to key areas across the Group
Overall
colleague
engagement
Nearly 70% of colleagues from across the Group took the time
to have their say and respond to the survey. The headline
findings from the results are set out below.
Throughout 2020, the more detailed findings from this survey
will be shared with our different divisions and individual teams.
These show that there is a clear need to focus on several key
areas across the Group. These include bringing our purpose and
strategy to life; leadership in and across our businesses; people
development and reward; and how we can better put customers
on the team.
Colleague survey
In 2019, we carried out a Group-wide colleague survey because
we recognised that listening to what our people have to say is a
hugely important step towards us becoming better at what we
do and truly living our purpose of helping to put people on a
path to a better everyday life. This was the first time we have
carried out a survey across every Provident Financial Group business.
70+
21%52+
53+
60+
52+
13%43+
71+
11%47+
70+
Doing the
right thing
for customers
Your
development
and rewards
How it feels
to work here
Unfavourable response
Working
together
Favourable response
Your
manager
Neutral response
Your
role
Leadership
60%
43%
53%
70%
26%
28%
28%
23%
24%
52%
52%
47%
25%
25%
19%
19%
16%
31%
71%
Provident Financial plc
Annual Report and Financial Statements 2019
73
Strategic report19
+
21
+
N
24
+
24
+
N
16
+
13
+
N
31
+
26
+
N
19
+
11
+
N
25
+
28
+
N
23
+
25
+
N
28
+
19
+
N
19
+
11
+
N
C O R P O R AT E R E S P O N S I B I L I T Y C O N T I N U E D
Our investors (equity and debt)
Engaging the investment community in CR
We continue to share information on our sustainability performance,
alongside our financial performance, with the investment
community so investors, analysts and other key stakeholders can
see how we have, in delivering our business activities, balanced
profit and purpose. We do this by responding directly to requests
for information from individual investors and analysts, and by
maintaining a presence on specific investment indices and
registers which focus on sustainability matters. This enables us to
share with the investment community information on the progress
we are making in terms of delivering our business strategy in
accordance with our purpose, and as well as on material issues
such as responsible lending, customer satisfaction and corporate
governance, as well as on a broader spectrum of issues such as
climate change, EDI and human rights.
In 2019, the Group engaged with:
We made our annual submission of climate change data to
CDP in August 2019. CDP requests information on the risks
and opportunities of climate change from the world’s largest
companies, on behalf of institutional investor signatories with a
combined US$96 trillion of assets under management. Through
the CDP submission, we can inform investors of any material
climate change-related risks and opportunities, and how we
manage them. Our 2019 CDP submission was rated ‘C Awareness’,
demonstrating that we have knowledge of our impacts on climate
change and of climate change issues more broadly. Our CDP
submissions are published at www.cdp.net.
In September 2019, we were notified of our inclusion in both
the Dow Jones Sustainability World Index (DJSI World) and
Dow Jones Sustainability Europe Index (DJSI Europe). The DJSI
is a category of the S&P Dow Jones Indices, one of the world’s
leading index providers, and our submission was assessed by
RobecoSAM, the investment specialist that focuses exclusively
on sustainability investing. The DJSI World represents the top
10% of the largest 2,500 companies in the S&P Global BMI, and
the DJSI Europe selects the top 20% of the largest 600 European
companies in the S&P Global BMI based on long-term economic,
environmental and social criteria.
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Provident Financial plc
Annual Report and Financial Statements 2019
Following the annual review undertaken by the FTSE4Good
Advisory Committee, we were once again included in the
FTSE4Good Index Series. Our overall score remained at 4.5 out
of 5. The FTSE4Good is an extra-financial market index, which
measures the performances of over 800 companies against a
range of environmental, social and governance (ESG) criteria.
To be included in the FTSE4Good Indexes companies must
support human rights, have good relationships with the various
stakeholders, be making progress to become environmentally
sustainable, ensure good labour standards in their own company
and in companies that supply them, and seek to address bribery
and corruption.
Being a responsible taxpayer
We continue to be committed to being a fair and responsible
taxpayer, operating in an open, honest and straightforward
manner in all tax matters and being fair and reasonable in all our
dealings with tax authorities. This is important not only because
it is an essential component of good corporate governance, but
because in being open with our stakeholders on issues that are
important to them, we are able to build further trust. We seek
to ensure that we comply with all tax rules and regulations in each
territory in which we operate. While we safeguard our reputation
as a responsible taxpayer, we recognise that we also have a
responsibility to protect shareholder value by managing
and controlling our tax liabilities.
In order to comply with the duty under paragraph 16(2),
Schedule 19 of the Finance Act 2016, we are required to publish
the Provident Financial plc Tax Strategy on our corporate
website, updating the strategy as appropriate.
Our most recent Tax Strategy can be viewed on the Provident
Financial Group website at providentfinancial.com
Further information on the Provident Financial plc Tax Strategy,
including details on the total direct and indirect tax contributions
we pay on an annual basis and our approach to managing tax
risk, is set out in our 2019 CR Report.
The approach we take in being
a fair and responsible taxpayer
involves operating in an open,
honest and straightforward
manner in all tax matters.
Our suppliers
Treating our suppliers fairly
Compared to other businesses from other sectors or industries,
we have a supply chain that is relatively straightforward. The vast
majority of our tier one suppliers are based in the UK and Ireland.
Despite this, we do need to ensure that we treat all our suppliers
fairly, particularly when it comes to paying them promptly, and
use our not insignificant purchasing power responsibly. In 2019,
our spend on products and services was £237.6m. This level of
expenditure means that we have the purchasing power to choose
more sustainable products or services, or to set an expectation
of our suppliers that motivates them to demonstrate and implement
values that make them a more responsible business. The procurement
teams in the Group’s operating companies continue to factor CR
considerations into the due diligence processes they use with
prospective and existing suppliers. This enables the businesses to
identify and manage potential supply chain risks, and engage with
suppliers to ensure that they comply with our policy requirements
and meet legislative requirements such as the Modern Slavery Act.
Approximately two-thirds of our procurement spend is on services
such as mailing, marketing, security, debt recovery, credit scoring
and professional services (e.g. legal and accountancy services).
The second highest spend relates to our information technology
infrastructure (i.e. hardware, software and support). We use a high
number of suppliers, ranging from small to medium-sized enterprises
(SMEs), to large multinational corporations. These organisations,
which are based predominantly in the UK and Ireland, will, in turn,
use their own suppliers too. When it comes to working with SME
or start-up suppliers, we recognise that late payment of invoices can
cause cash flow problems for them. As a Group, we are signatories
of the Prompt Payment Code, which means we are committed to
paying our suppliers promptly. Indeed, prompt payment of suppliers
is a metric that is included in the Blueprint dashboard referenced
previously. Being signatories to the Prompt Payment Code allows
us to encourage best practice within our supply chains. In 2019,
96% of the Group’s invoices were paid in line with the Prompt
Payment Code terms, and we continue to strive to achieve 100%.
96%
of the Group’s invoices were paid in line with
the Prompt Payment Code terms in 2019
Percentage of companies paid in 60 days in 2019
Group corporate office
Consumer Credit Division
%
4
9
%
0
9
%
4
9
%
4
9
18
19
18
19
Moneybarn
Vanquis Bank
%
0
0
1
%
9
9
%
0
9
%
9
8
18
19
18
19
Provident Financial plc
Annual Report and Financial Statements 2019
75
Strategic report C O R P O R AT E R E S P O N S I B I L I T Y C O N T I N U E D
Our communities
Supporting our purpose through
our Social Impact Programme
The Provident Financial community investment strategy plays
a key role in ensuring that we fulfil our purpose of helping to
put people on a path to a better everyday life. It does this by
investing in activities which seek to address key barriers to
financial inclusion and helping people overcome them. Our
community investment activities are delivered through our
Group-wide Social Impact Programme, which invests in activities
and initiatives which seek to address some of the key factors
which, on their own or acting together, can reduce someone’s
likelihood to be accepted for credit.
Our Social Impact Programme
The Provident Financial Social Impact Programme, which we
launched in 2018, delivers community investment activities in
three key areas:
• Customer and colleague vulnerability – supporting the
vulnerable customer agenda by addressing issues such as
money/debt advice, financial difficulties and mental health
and wellbeing. This also involves looking after the mental
health of colleagues from across the Group, particularly those
who are working on the front line in customer-facing roles.
• Education and skills – supporting both children and adults on
aspects of education, particularly those that relate to literacy
and numeracy.
• Community investment – supporting Community Foundations
to address the social inclusion issues that are relevant to our
customers and the communities where we operate.
In 2019, we committed almost £1.45m to fund a range
of activities through our Social Impact Programme.
Improving educational and skills attainment
We support both children and adults in their literacy and numeracy
education because they are vital skills to securing a brighter
financial future. Throughout 2019, we worked with the national
charities National Numeracy and National Literacy Trust and a
smaller organisation, Leading Children, to help raise numeracy
and literacy levels. Through our education programme we also
support both young people and adults from disadvantaged
areas in their education to help raise their aspirations and have
a better chance of a future that sees them included in society.
We do this by delivering a holistic approach to education, which
supports both literacy and numeracy, as well as provides insights
into the world of work and essential life skills.
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Maths mastery programme
In partnership with Bradford-based education consultancy service
Leading Children, we have developed a bespoke numeracy
programme based on some of the Singaporean maths for mastery
concepts. Teachers from across the district have been trained in
the programme. At an event which celebrated the first year of
running the programme held on 4 July 2019, teachers from the
six schools that took part all reported that they had seen great
improvements in children being able to demonstrate their
understanding of the concepts and a close in the gap
between the slower and quicker graspers.
Through our partnership with Leading Children we also provided
reciprocal reading training to 18 teachers from Holy Trinity Primary
School in Birmingham. Reciprocal reading refers to an instructional
activity in which students become the teacher in small group
reading sessions. Teachers model then help students learn to
guide group discussions using four strategies: summarising, question
generating, clarifying and predicting. Once students have learned
the strategies, they take turns assuming the role of teacher in
leading a dialogue about what has been read. Following the training,
the teachers implemented reciprocal reading into their curriculum.
2019 community investment figures explained
Total £1,448,138
(2018: £1,680,578)
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Cash
2019: £1,249,818
(2018: £1,431,990)
Management costs
2019: £149,605
(2018: £210,759)
Value of
employee time
2019: £48,715
(2018: £37,829)
Examples of the work we have delivered throughout 2019
through the Provident Financial Social Impact Programme
are set out below, with further information on our work
included in our 2019 CR report.
Through our Social Impact Programme,
we work with partners to improve
literacy or numeracy skills, address
disabilities and/or mental health issues,
provide money/debt advice and
encourage social inclusion/mobility.
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Raising career aspirations
In 2019, more than 40 Vanquis Bank colleagues spent over
220 hours volunteering on activities through our education
programme. This included helping as reading volunteers at
Byron and Brompton Westbrook primary schools in Chatham
and some of our partner schools in Bradford, and taking part in
National Literacy Trust’s Words for Work programme which gives
young people from disadvantaged communities the skills they
need to succeed in their education and encourage them to
widen their aspirations. For example, in October 2019, a group of
25 students who were aged 16+ from Leyton College in London
visited the Vanquis Bank offices in Fenchurch Street. A group of
colleague volunteers shared their knowledge and experiences
of ‘real-life’ work with these students and gave them the
opportunity to ask questions about the skills they will need to
enter the workplace and open their eyes to different career
pathways. The students were also able to gain valuable tips
on completing job applications and interview practice.
Supporting customer and colleague vulnerability
To truly put our customer on the team and deliver our purpose
of helping to put people on a path to a better everyday life, it is
essential that the culture of our business is centred on delivering
fair outcomes for our customers at every stage of their journey
with us. This includes ensuring the fair and consistent treatment
of customers in vulnerable situations, as well as supporting
colleagues across the Group, particularly those who are working
on the frontline in customer-facing roles.
Good mental health is an integral part of how we live our lives,
make decisions, perform in our jobs and interact with others.
Money problems and mental health are linked. Mental health
problems can make it harder for people to manage their finances
and living in financial stress can harm one’s mental health. As a
specialist lender to the 1 in 5 UK adults who are not well served by
the mainstream we are uniquely placed to have an insight into the
financial inclusion barriers that our customers face due to their
circumstances. This means we can play a role in supporting our
customers and colleagues to help them deal with the mental
health issues they are confronted with.
Customer vulnerability
Through this workstream, our focus is to ensure that the culture
of our business is centred on delivering fair and positive
outcomes for our customers at every stage, even when they
experience financial difficulties.
We support both children
and adults in their literacy and
numeracy education because
they are vital skills to securing
a brighter financial future.
During 2019, we brought together colleagues who support the
Group’s most vulnerable customers to share best practice and
case studies, to deliver consistent training, and to create a
wellbeing support network.
We also work with a number of money advice providers who
offer free support to consumers (some of whom may be our own
customers) who may find themselves having difficulty in managing
their debt repayments. These include the Money Advice Trust,
Money Advice Scotland, The Money Charity, Advice UK, Christians
Against Poverty, StepChange, IncomeMax, the Institute of Money
Advisers, and the Money Advice Liaison Group.
IncomeMax – Vanquis Bank continues to work with IncomeMax,
through an innovative partnership that began in 2015, to support
customers of the bank that are experiencing financial difficulties.
IncomeMax is a community interest company that helps people
to maximise their household income by providing them with
independent personal welfare advice that helps them take control
of their finances. Since 2015, IncomeMax has identified £865,000
of additional income for Vanquis Bank customers experiencing
financial hardship and struggling to make ends meet.
The Money Charity – We have a long-standing relationship with
The Money Charity, through which we have traditionally supported
the delivery of tailored financial education workshops to schools
and colleges in many of the communities we serve. In 2019, we
tasked The Money Charity to support adults in hard-to-reach groups
through the delivery of financial capability workshops. By working
with a number of third-sector organisations which support the
homeless, ex-offenders and women experiencing domestic
violence, The Money Charity delivered 78 workshops in 2019.
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Annual Report and Financial Statements 2019
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Improving educational and skills attainment continued
Thriving at work
Throughout 2019, our Vanquis Bank business piloted the
Thrive mental wellbeing app across its workforce. The app is
an NHS-approved, evidence-based solution for the prevention,
screening and self-management of depression and anxiety.
The app also includes a coaching service where colleagues have
the option to receive additional support where they can chat in
the app to a qualified mental health professional at the touch of
a button. Feedback from the bank’s colleagues indicates that the
app has been well received. As such, throughout 2020, we will
introduce the Thrive app to all Provident Financial colleagues
as part our Mental Health and Wellbeing Strategy.
We also worked with the Bank Workers Charity during 2019 to deliver
a programme of interactive sessions for people managers from
across the Group to help them to understand the causes and impacts
of stress, anxiety and depression. To date, people managers from
across the Group have benefited from receiving the training.
Mental health awareness
Following on from Mental Health Awareness Week 2019 in May,
we offered our Bradford-based head office colleagues the
opportunity to apply to become a fully qualified mental health
first aider. The training was delivered over two days in July 2019
and we now have a group of 22 colleagues that are qualified
mental health first aiders based in Bradford. We also have field
colleagues across the country that are currently undergoing
mental health first aid training, so all areas of our business can
access support. Once we have done this we will have a network
of mental health first aiders across our business who will be a
point of contact if colleagues, or someone they are concerned
about, are experiencing a mental health issue or emotional
distress. They are not therapists or psychiatrists but they can
give colleagues some initial support and help them get more
specialist advice if it is needed.
Investing in the communities we serve
For well over a century Provident Financial has been investing in
the communities it operates in, reflecting the Company’s purpose
of putting people on the path to a better everyday life. In this time,
these communities have undergone significant socio-economic
change. This changing landscape has informed our approach
to community investment and how this is delivered through the
Social Impact Programme we launched two years ago. The
towns and cities where we engage in community investment
activities often have a dynamic third sector, and we recognise
the importance of investing in these organisations to maximise
the impact and benefits that are delivered. We have found that
Community Foundations provide us with a delivery model which
provides a well-tested platform for community investment.
We currently have partnerships with:
• Leeds Community Foundation;
• London Community Foundation;
• Hampshire & Isle of Wight Community Foundation;
• Kent Community Foundation;
• Community Foundation in Wales;
• Foundation Scotland; and
• Essex Community Foundation.
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The Manjit Wolstenholme Fund
Earlier this year, we launched a new fund with the Leeds
Community Foundation in memory of our former Chair and Chief
Executive Officer, the highly esteemed Manjit Wolstenholme, who
sadly passed away suddenly in 2017. Manjit was born in India and
went to school in Wolverhampton. Her life story was one of building
the skills and perseverance to break down barriers to succeed
in business. Manjit became the youngest woman to head an
investment bank in London and went on to become the first
woman from an ethnic minority background to chair a FTSE 100
company – Provident Financial. The Manjit Wolstenholme Fund will
distribute grants of £5,000–£10,000 with the aim of supporting
young people in Bradford to achieve their full potential through
educational and aspirational opportunities, no matter what their
background. Funding will be awarded to organisations which
demonstrate how they will support young people to develop
their confidence, build resilience and raise their aspirations
when considering further education or gaining life skills
to enter the world of work.
Manjit’s own experiences meant
she believed passionately that no
one should be denied the chance to
achieve their true potential as a result
of their background or where they live.
We want to honour this passion.
Neil Wolstenholme
Manjit’s husband
The Tina Cantello Fund
We also worked in partnership with the Essex Community
Foundation to establish a fund in the name of former colleague
Tina Cantello. Tina was a much loved and well respected
colleague who had been with the Company for over 25 years.
The Tina Cantello Fund, which was launched in November 2019,
will provide grants of up to £10,000 to community organisations
and projects in and around Basildon, Essex, which work to tackle
issues which impact social mobility and social inclusion in 2020.
Funding will be given to organisations whose activities seek to
improve people’s personal finance capabilities (debt and
financial advice/education), address physical and/or mental
health wellbeing issues, provide support which enhances,
creates and sustains positive family relationships, deal with
issues of low educational attainment and improve learning
outcomes or provide people with opportunities to reduce
inequality, exclusion and disadvantage, including projects
which increase access to employment.
Colleague volunteering
Through our community investment activities, we have offered
volunteering opportunities and allowed colleagues time for
volunteering for many years. It has, and continues to play, an
important role in the delivery of the good work we get involved in
the communities we serve. Colleague volunteering is also relevant
to our workplace practices as it can help to enhance reward and
recognition schemes, and facilitate the development of professional
and transferable skills. As such, in order to promote and champion
colleague volunteering across our business, our Executive
Committee approved the launch of a new Group-wide Volunteering
Policy which will contribute to supporting the employee brand
objectives of our individual businesses, as well as enabling
colleagues to understand the factors which can prevent customers
from getting onto a path to a better everyday life and demonstrably
live our three Blueprint behaviours.
This policy, which will be launched in early 2020, will:
• allow colleagues one day volunteering or eight hours of
volunteering leave that can be taken flexibly, per annum,
on initiatives of their choice; and
• encourage colleagues to take part in ‘Company-led’
volunteering, subject to the approval of their line manager.
This is volunteering that is offered by Provident Financial and
includes, but is not limited to, becoming a reading volunteer,
being a panellist for community investment funding decisions,
and supporting work experience and mentoring.
Our new Volunteering Policy is
closely tied to the Blueprint as it
allows colleagues who are hungry
for better personal development
opportunities that directly assist in
putting people on a path to a better
everyday life. It is also a hands-on,
meaningful way of putting the
customer on the team by increasing
colleague understanding and
empathy for our customers
and their communities.
Sharon Orr
Social Impact Programme Manager
at Provident Financial
53
colleagues taking part in Community Foundation
grant panels to decide how we distribute funding
to 58 local community organisations
53
colleagues training to become
mental health first aiders
>70
colleagues giving 472 hours of time to support
children and young people through a number
of education initiatives such as the National
Literacy Trust’s Words For Work and Outward
Bound Trust programmes
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Annual Report and Financial Statements 2019
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Our environment
Responding to climate change
With protests taking to many streets of the world throughout 2019,
and the effects of extreme weather events even more visible, it is
clear climate change has moved to the centre of public debate and
is an issue that businesses from all sectors will need to address
by reducing their greenhouse gas emissions (GHG).
We are cognisant of the findings of the Intergovernmental Panel
on Climate Change whose recent reports state that climate change
is progressing faster than anticipated, and that if greenhouse gas
emissions continue at the current rate, the atmosphere will warm
up by as much as 1.5°C above pre-industrial levels by 2040, resulting
in more environmentally and socio-economically damaging impacts.
As such, we also acknowledge that in 2019, the UK Government
passed laws which made the UK the first major economy to end
its contribution to climate change by 2050. These established a
legally binding target that will require the UK to bring all GHG
emissions to net zero by 2050.
To help drive progress within the financial services sectors
towards the UK’s 2050 net zero target, the Green Finance Strategy
was launched by the Government in 2019. The strategy makes clear
that financial risks and opportunities from climate and environmental
factors need to be at the heart of the strategies of financial services
companies. The Government is therefore now expecting all listed
companies and large asset owners to report in line with the
recommendations of the Taskforce on Climate-related Financial
Disclosures (TCFD) by 2022. Our investors and regulators are also
interested in our contribution to climate change and are asking
us to report in line with the TCFD.
The TCFD explained
The TCFD is an industry-led initiative, created to develop
a set of recommendations for voluntary climate-related
financial disclosures. The recommendations are split
across four ‘thematic areas’ that represent core elements
of how organisations operate: governance, strategy, risk
management, and metrics and targets. In order for
companies to assess and disclose the resilience of their
strategies, TCFD recommends that an analysis is undertaken
which take into consideration multiple climate scenarios.
In 2019, Vanquis Bank’s regulator, the Prudential Regulation Authority,
required the bank to allocate responsibility for identifying and
managing financial risks from climate change to the relevant
senior management function(s) (SMF(s)) most appropriate within
its organisational structure and risk profile.
We did this, and the SMF for Vanquis Bank is its Finance Director.
The bank also undertook an initial exercise to understand the
short-term and long-term financial risks that climate change
presents to its business models. In 2020, we will build on this
and undertake a Group-wide scenario analysis as a first step in
meeting the TCFD recommendations. For more information on
this and how Provident Financial seeks to minimise the other
environmental impacts, refer to our 2019 CR report.
Business travel GHG emissions (tonnes of CO2e)
The business travel of our employees continues to make a
significant contribution to Provident Financial Group’s overall
carbon footprint. During 2019, the business-related journeys
made by employees in our home credit business accounted
for 7,298 tonnes of CO2e.
1 Air travel
2 Rail travel
3 Car travel – own vehicles (‘grey fleet’)
4 Company car fuel use
Extracting, refining and transportation of raw fuel
associated with business travel
5
Total
91
77
5,218
434
1,478
7,298
We also monitor the GHG emissions associated with the waste
that is generated by the Group’s business activities. In 2019,
these emissions amounted to 13 tonnes of CO2e.
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Annual Report and Financial Statements 2019
GHG emissions reporting
During 2019, our scope 1 and 2 emissions and associated
scope 3 emissions accounted for 2,702 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 2019 (tonnes of CO2e)1,2
Total 2,702
(2018: 3,852)
26+
Direct CO2 (scope 1) CO2e emissions
2019: 700
(2018: 1,803)
Indirect CO2 (scope 2) CO2e emissions
2019: 1,502
(2018: 1,637)
Associated indirect CO2 (scope 3) CO2e emissions
2019: 500
(2018: 412)
Scope 1 and 2 (and associated scope 3) emissions intensity
ratio (kg of CO2e/per customer) 1.18 (2018: 1.61)
1
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.
2 These are the emissions Provident Financial Group is required
to disclose in order to meet the requirements of the
Companies Act 2006 (Strategic Report and Directors’
Reports) Regulations 2013.
2,702
(2018: 3,852)
Total scope 1 and 2 (and associated scope 3)
emissions in tonnes of CO2e
1.18
(2018: 1.61)
Scope 1 and 2 (and associated scope 3) emissions
intensity ratio (kg of CO2e/per customer)
9,468
overall operational carbon footprint
(tonnes of CO2e)
Carbon offsetting
We continue to offset our direct operational carbon footprint.
We do this by financing renewable energy projects around the
world which help to mitigate the effects our operations have on
climate change. During 2020, we offset 9,468 tonnes of CO2e,
which accounted for all of the Group’s 2019 operational footprint.
These emissions were offset through the purchase of Verified
Carbon Standard-certified carbon credits in a wind power generation
project which operates across various states in India which have
traditionally been reliant on fossil fuel generated electricity.
The project is playing a vital role in India’s shift towards a low
carbon economy by generating electricity from a renewable
resource and supplying it to the state grid. It also has a range of
positive impacts and benefits by providing jobs in local communities
across India, improving the livelihoods of families employed by
the project and reducing India’s reliance on energy generation
from fossil fuels. Through the investment we make to this project,
we are able to contribute to five of the SDGs which relate to
affordable and clean energy, decent work and economic growth,
industry, innovation and infrastructure, and climate action.
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C O R P O R AT E R E S P O N S I B I L I T Y C O N T I N U E D
Find out more in our
2019 Corporate
Responsibility Report
Our stand-alone 2019 CR Report sets out a balanced account
of how Provident Financial’s purpose and strategic drivers are
aligned to the Group’s responsible business strategy, as well as
further details of the progress that has been made during 2019
in delivering against this strategy. It relates to the non-financial
aspects of Provident Financial plc and its operating businesses
in the UK and ROI, and our key stakeholders.
For further details on our
corporate responsibility visit
providentfinancial.com
Our approach to
sustainability
Corporate Responsibility Report 2019
PROVIDENT
VOLUNTEER
INVESTOR
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3
2
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Annual Report and Financial Statements 2019
S E C T I O N 1 7 2
Statement regarding section 172
of the Companies Act 2006
Who does the Board deem to be
the Group’s key stakeholders?
Our purpose, which is predicated on our customers, is
underpinned by a number of strategic drivers and behaviours.
These aim to deliver an appropriate balance between the needs
of our customers, the regulator, equity and debt investors and our
employees in order to ensure that our business is successful and
sustainable for all of our stakeholders. We define our stakeholders
as individuals or groups who have an interest in, or are affected
by, the activities of our business; our key stakeholders are set
out below, and you can read about why we engage with them
in more detail on pages 68 to 70. We seek to engage with them
regularly to ensure that we are aware of their views and concerns
with regard to a wide range of issues. We do this in a number of
ways, as detailed on this, and the next, page. You can read how
we generate and preserve value over the long term on page 11
(reasons to invest); page 12 (our Blueprint); page 13 (our purpose
and business model); pages 14 to 21 (our strategic drivers); and
on pages 42 to 53 (risk management). By balancing the interests
of our stakeholders, lending responsibly, contributing to wider
society and ensuring the appropriate corporate governance
arrangements are in place, we can maintain a reputation for
high standards of business conduct. You can read our Corporate
Governance Report from page 88 and more about how we maintain
a reputation for high standards of business conduct in the following
sections and pages: from page 65 (corporate responsibility);
page 72 (equal opportunities and diversity); page 142 (health
and safety); and page 142 (anti-bribery and corruption).
Our
customers
Our
environment
Our
colleagues
Our
communities
Our
regulators and
government
(and other
bodies)
Our
suppliers
Our
investors
(equity
and debt)
Our customers
See pages 14 to 20 for key KPIs
Why? To determine whether we are delivering our business activities in accordance with our purpose and ensure that we
deliver good outcomes for them throughout their journey with us. See page 68 for more detail.
How? (How management and/or directors engaged with
and considered our stakeholders)
• Our customer-facing colleagues engage with customers on a daily basis and
there are a wide variety of other mechanisms used for measuring customer
engagement across the Group (see page 68). This data is reported to divisional
executive management and boards as appropriate.
What? (What were the key topics of engagement
and consideration?)
• Financial inclusion and financial wellbeing.
• Responsible lending.
• Our products, possible future products and digital.
• Complaint volumes and root-cause analyses are discussed by the Group
• Customer satisfaction, care, service and complaints.
Executive Committee (GEC) regularly and have also been reported to, and
discussed at, the Group Risk Committee (GRC) significantly during 2019.
The Board undertook a complaints ‘deep dive’ during the year and discussed
the causes of complaints and how to address these.
• The Group established a Customer, Culture and Ethics (CCE) Committee to
review the Group’s culture and business processes to ensure they are focused
on delivering fair customer outcomes (see page 106).
• The GEC monitor performance in relation to the delivery of our customer
commitments, and our customer-focused purpose, strategic drivers
and behaviours.
• The GEC, CCE Committee and Board are also required to review new customer
product or channel initiatives.
• The Board undertook customer call listening during its visit to the Bradford Office
during the year and the CCE Committee commenced a rolling programme
of customer call listening.
• Customer affordability and vulnerability.
• Persistent debt.
• ROP restitution.
Key outcomes and actions (What was the
impact of the engagement and/or consideration?)
• Management and Board oversight of delivery of
customer commitments, outcomes and complaints.
• Reviewed and approved the launch of Provident Direct
to modernise the home credit proposition.
• Informed the Group’s review of its strategy,
product offering and customer proposition.
• Board enhanced its understanding of our
customers through call listening, engagement
and customer reporting.
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Our colleagues
See page 73 for key KPIs
Why? To ensure that they understand the Group’s purpose and how they can support its delivery, which we believe helps our
customer base. To maintain high levels of colleague engagement in order to enable us to attract, retain and develop the talent
we need. See page 68 for more detail.
How?
• A Group-wide colleague survey was carried out during the year (see page 73).
What?
• Culture, purpose and behaviours.
• Designated Non-Executive Director who plays a lead role in Board engagement
• Our customers.
with employees and understanding employee interests (see page 108).
• Workforce panels within each division are established, which report
up to Group Executive Committee and Board (see page 108).
• Financial and operational performance.
• The defence of NSF’s unsolicited offer.
• Regular communications with colleagues to keep them appropriately updated
on the Defence and unsolicited offer.
• Colleagues are kept fully informed of the financial and operational performance
of the Group and the divisions through a mixture of mechanisms (see page 141).
• Internal communication and employee engagement was also undertaken in
relation to our Blueprint, including a launch event with 150 senior employees
and dedicated roll-out programmes across the Group (see page 67).
• Redundancies.
• Reward.
• Strategy.
• Employee engagement.
• Leadership.
• Development, training and career opportunities.
• The CCE Committee monitors our progress in relation to our culture through
• Diversity.
oversight of a ‘Blueprint dashboard’ (see page 106).
• We have launched our new Group recognition platform, ‘Better Everyday’
(see page 72).
• The Board undertook direct engagement with colleagues, including
during site visits.
• The Nomination Committee reviewed the Group’s training and succession
plans, including diversity statistics and initiatives.
• Independent whistleblowing line (see page 143).
• Environment and communities.
• Health and safety.
Key outcomes and actions
• Review of colleague survey results.
• Oversight of our health and safety approach,
including the impact on colleagues.
• Review of the Group’s gender pay gap.
• The Board reviewed proposed changes to its health and safety approach in CCD.
• Review of the arrangements for employees
• Executive Director engagement with Pension Trustees regarding defined
benefit pension scheme valuation.
• The Board was kept updated on the voluntary redundancy programme in CCD.
to raise concerns.
• Review of funding and agreement of future
contributions to the defined benefit scheme.
• Review and approval of the new and enhanced
mechanisms for colleague engagement.
• Enhanced talent management and succession plans.
• Oversight of diversity data and progress of diversity
initiatives and approval of Group and Board
diversity policies.
• Membership of Women in Finance Charter.
• CCD’s voluntary redundancy programme (see page 41).
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Annual Report and Financial Statements 2019
Our regulators and government (and other bodies)
Why? To plan for regulatory change with greater certainty and confidence, to maintain our reputation as a responsible lender
and to maintain our sustainable business model. See page 69 for more detail.
How?
• Group Board members and executive management engage proactively
with regulators via regular meetings and membership of trade associations.
• Regulatory risk reporting, including horizon scanning, is carried out and reported
to the GRC and Board.
What?
• Affordability.
• Persistent debt.
• Governance framework.
• Regulatory engagement and correspondence is reported to and discussed
• Product offering, including Provident Direct and ROP.
by the Board.
• ICAAP.
• Our governmental engagement is coordinated by our Group Communications
• Group oversight.
function, with updates provided to the Board regularly.
• Engagement with the Takeover Panel was undertaken during the Defence.
• We continue to assist HMRC on its market-wide review of the self-employed status
of agents. CCD’s senior management engaged with the Financial Ombudsman
Service regarding the complaints and the home credit operating model.
• The Board reviewed preparation for the Senior Managers and Certification
Regime in Moneybarn and CCD.
• Customer proposition improvements.
• Complaints.
Key outcomes and actions
• The views of regulators and the regulatory environment
informed the review of our strategy and product offering.
• Oversight and monitoring of regulatory matters,
including approval of regulatory submissions.
• Compliance with the Takeover Code.
• Oversight of the Group’s approach to engagement
on the Group’s role in society.
• Worked with trade bodies to develop an industry
narrative and engagement plan in relation to the
proposed credit card cost cap and to understand how
to address poor claims management company behaviour.
Our investors (equity and debt)
See pages 1 and 57 for key KPIs
See page 140 for major interests in our shares
Why? To maintain their support and to keep them updated on the Group’s progress in delivering its purpose and generating
sustainable shareholder returns. See page 69 for more detail.
How?
See pages 110 to 113 for further details on how we engage our investors in our investor
relations programme, such as the AGM, stock exchange announcements and the
Annual Report. The Board receives an Investor Relations report at each Board meeting,
which includes investor engagement and feedback. In addition to the above:
What?
• Strategy and long-term value creation.
• Culture.
• Financial and operational performance.
• The Board regularly reviewed, discussed and approved the Board’s position in relation
• The Defence.
to the Defence.
• The Board reviewed and approved the Group’s investor relations strategy.
• A Capital Markets Day (CMD) was held during the year. The Board reviewed
and discussed the proposed CMD materials prior to the event. Further details
are available on page 111.
• The Chairman met major shareholders on a periodic basis, and engaged
particularly during the Defence.
• The Chairman of the Remuneration Committee engaged with shareholders
prior to the AGM during a consultation regarding our Directors’ Remuneration
Policy (DRP) and also engaged with investors regarding concerns raised in
relation to the vote for the 2018 Directors’ Remuneration Report. A shareholder
and proxy advisory body consultation process was conducted and an updated
statement published in November 2019.
• Remuneration.
• Corporate governance.
• Corporate responsibility.
Key outcomes and actions
• The CMD was delivered to shareholders; see page 111.
• Following regular consideration of the interests and
views of shareholders as a whole, the Board determined
not to support the unsolicited offer (see page 87).
• Shareholder views shared during the DRP consultation
informed the Group’s DRP.
• The interests of shareholders informed the Board’s
review of the Group’s strategy.
Provident Financial plc
Annual Report and Financial Statements 2019
85
Strategic report S E C T I O N 1 7 2 C O N T I N U E D
Our investors (equity and debt) continued
How? continued
• The CCE Committee oversaw compliance with the 2018 UK Corporate
Key outcomes and actions continued
• The consultation with shareholders informed changes
Governance Code.
to executive remuneration.
• We engaged the investment community, and our own investors, on corporate
• Approved the dividend policy and dividend payments.
responsibility. See page 74.
• The Board reviewed the Group’s dividend policy. During the year, the Group
Executive Committee and Board reviewed the Group’s rolling credit facility
(RCF) and the Group’s funding arrangements with a view to diversifying access
to funding, such as through securitisation (see page 62).
• Approved the RCF and changes to funding approach
to diversify access to funding.
• Continued inclusion in both the Dow Jones
Sustainability World Index and Dow Jones
Sustainability Europe Index (see page 74).
Our suppliers
See page 75 for key KPIs
Why? To treat our suppliers fairly and develop strong relationships with them which ensure that we only buy products
and services from those who operate responsibly and mitigate risk in our supply chain. See page 69 for more detail.
How?
• There is an established due diligence process to manage supply chain-based
What?
• Prompt payment.
risks and comply with Group policy.
• During the year, management collaborated with suppliers to standardise
the supplier onboarding process and to create a tool that enables buyers
to see the results for common suppliers.
• Modern slavery.
• Data protection.
• Environment.
• The Group is a signatory to the Prompt Payment Code and we publish our
• Supplier on-boarding process.
Payment Practices Reporting at Companies House.
• The Board approved a Delegated Authorities Manual which specifies the level
at which the Board is required to approve contracts with the third parties.
• The Board reviewed our Modern Slavery Act Statement.
• The Board and GRC reviewed effectiveness of anti-bribery and corruption
processes and controls.
• Supplier performance.
• Delegated authorities.
• Anti-bribery and corruption.
Key outcomes and actions
• Approved the Group Delegated Authority Manual
giving clarity of authorities regarding contract approval.
• Board approval of Modern Slavery Act Statement.
• We remain signatories of the Prompt Payment Code
(see page 75). In 2019, 96% of invoices were paid in line
with the Prompt Payment Code terms.
Our communities
See page 76 for key KPIs
Why? To invest in activities and initiatives which seek to address some of the key factors which, on their own or acting together,
may reduce someone’s likelihood to be accepted for credit. See page 70 for more detail.
How?
• Our Board-approved Social Impact Programme delivers community investment
What?
• Community contributions and charitable giving.
in a number of areas (see page 76).
• The CCE Committee received an update on the Group’s approach
to volunteering and reviewed a new Group volunteering policy.
• The Board receives regular updates on community-related matters
and activities.
• Customer vulnerability.
• Volunteering.
Key outcomes and actions
• Established the Manjit Wolstenholme Fund (see page 78).
• Approval of Group volunteering policy (see page 79).
• Board oversight of community matters and the
approach to external engagement regarding the
Group’s purpose and role in society.
86
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Annual Report and Financial Statements 2019
Our environment
See page 80 for key KPIs
Why? To minimise our environmental impacts, in particular to reduce the greenhouse gas emissions associated with our
business activities, thereby lessening our contribution to issues such as climate change. See page 70 for more detail.
How?
• A key tool in helping us to manage our environmental impacts is our
What?
• Climate change, and details of greenhouse gas emissions.
Environmental Management System (EMS). You can read about our greenhouse
gas emissions, and our environmental impact and approach on page 80.
• We report on our environmental performance in our Corporate
Responsibility Report.
• The CCE Committee receives updates on environmental performance as part
of its ‘Blueprint’ dashboard.
Key outcomes and actions
• Board-level oversight of the Group’s
environmental performance.
• We have reduced our scope 1 and 2 emissions to 2,702
tonnes of CO2e and continued to offset the Group’s
operational carbon footprint (see page 81).
• Annual submission to the Carbon Disclosure Project.
In making the following principal decisions, the Board took into account its duties under s.172 of the Companies Act 2006,
including the likely consequences in the long term and the impact on its employees:
Defence of the unsolicited offer by Non-Standard
Finance plc (NSF)
Our budget and profit plan
On 22 February 2019, the Board received an unsolicited firm intention
offer for Provident from NSF. The Board evaluated this unsolicited
offer taking into account each of the factors set out in section 172
of the Companies Act 2006. In particular, the Board considered
how NSF’s proposals to dispose of Moneybarn and to dispose of or
close Satsuma would impact the business going forward including
in relation to its financing arrangements, pension covenant and
future digital offering. The Board also considered the impact of the
offer on its employees, believing it would have a significant impact.
The Board during this time regularly engaged with its key stakeholders
including its employees via timely email updates. In addition, the
Board regularly engaged with its shareholders on the development
and terms of the unsolicited offer, the outcome of which was a number
of shareholders coming out in support of the Board with public
statements of support. The Board was also mindful of its obligations
to its regulators and regularly interacted with them on the key terms
of the unsolicited offer and potential impact on the business and its
regulatory status.
In determining to reject the unsolicited offer, the Board also took into
account the impact a potential takeover would have on its customers.
The outcome of the Board’s decision and continuous engagement
with its key stakeholders was the successful defeat of the unsolicited
offer, which lapsed on 5 June 2019.
The Board approved the Group’s budget and profit plan in
October 2019, having considered the Group’s agreed strategy to
deliver its purpose of ‘helping put people on the path to a better
everyday life’. In determining to approve the budget and profit plan,
the Board considered a broad number of matters, including:
• Risks (and risk appetite) and opportunities
• Financial:
• shareholder and market expectations regarding Group performance;
• financial performance, including revenue, profits and return on
assets across the Group;
• cost efficiency;
• operational performance and growth initiatives;
• our dividend policy, cover and payments;
•
investment requirements and plans;
• our funding plan and policy and meeting our obligations to our
lenders under our committed facilities and our banking covenants;
• the Group’s credit rating and impact on funding costs; and
• funding the Group’s pension scheme.
• Regulatory:
• the Group’s regulatory capital and meeting our total regulatory
capital requirement; and
• the regulatory environment and requirements.
• Customer:
• our customer product proposition, such as personal loans, our
product offering for self-employed customers, white label credit
cards partnerships and Provident Direct;
• pricing structure changes, such as fees and charges
and progressive pricing;
• persistent debt;
• the impact of customer delinquency and impairment; and
• customer complaints.
Following the Board’s consideration of the proposed budget and
profit plan, it was approved. Delivery of the budget and profit plan
will be monitored throughout 2020.
Provident Financial plc
Annual Report and Financial Statements 2019
87
Strategic report G O V E R N A N C E
Chairman’s
introduction
In 2019 we have successfully implemented the 2018
Corporate Governance Code and embedded our Blueprint
culture programme throughout the Group. We understand
that the governance landscape, especially within financial
services, is continually evolving, and we have maintained
our focus on the tools, processes and expertise required to
maintain the highest standards of corporate governance.
Patrick Snowball
Chairman
88 Board leadership and Company purpose
88 Chairman’s introduction
92 Our Board
98
How the Board has promoted long-term sustainable success
103 The Board: driving culture
106 Customer, Culture and Ethics Committee
107 Shareholder and investor relations
107 Effective engagement with shareholders and other stakeholders
112
IR Programme
114 Division of responsibilities
119 Composition, succession and evaluation
119 Board composition
120 Induction for new directors
121 Board evaluation
125 Nomination Committee report
129 Audit, risk and internal control
129 Audit Committee report
135 Group Risk Committee report
138 Directors’ report
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Provident Financial plc
Annual Report and Financial Statements 2019
B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E
We are acutely aware of the broad
impact that our business has upon
our customers and the wider
responsibilities this brings.
Patrick Snowball
Chairman
Dear shareholder
I am pleased to present the Corporate Governance Report for
2019, a year which has seen the Group navigate a variety of
external challenges to successfully achieve its objectives.
As you will be aware, on 22 February 2019, the Board received
an unsolicited takeover bid from Non-Standard Finance plc.
Over the course of the next four months the Board focused its
attention on defending this takeover bid, which it considered to
not be in the best interests of you, the Group’s shareholders, and
other stakeholders. I wrote to you on 23 March 2019 outlining the
reasons you should decline the bid and answered as many of
your bid-related questions as possible at the AGM. With your
support, the takeover bid was successfully defended and lapsed
on 4 June 2019. Further information on the action taken by the
Board in relation to the bid and how the Board has sought to
promote your interests and has had regard to our stakeholders
is contained in our section 172 statement on pages 83 to 87.
Purpose and culture
Provident Financial is a financial services company which fulfils
an essential role in providing services for customers who would
otherwise have difficulty in accessing credit. We are therefore
acutely aware of the broad impact that our business has upon our
customers and the wider responsibilities this brings. Last year we
reported the roll-out of our Blueprint culture programme. This has
been embedded during 2019 via the use of management-led
workshops and the development of a Blueprint key performance
indicator (KPI) dashboard and a customer KPI dashboard, supporting
the Board in monitoring culture and the delivery of customer
outcomes through our Customer, Culture and Ethics Committee.
Progress against the KPIs set by the Board is reported on pages 14
to 20 and a report on the work of the Customer, Culture and
Ethics Committee is available on page 106.
The Board also recognises the need to balance our purpose
of helping put customers on the path to a better everyday life
and the values which underpin this with our strategy to produce
sustainable financial growth for our shareholders. For further
information on our Blueprint and how we ensure this and our
purpose, values and strategy are aligned and embedded
throughout the Group, see pages 12 to 23 of our Strategic
Report. As a listed company and a lender of money, we must
respond to the increasing expectations of business’ role in our
society and we are a proud signatory to the FTSE4Good Index in
recognition of our strong environmental, social and governance
practices. Further information on our social responsibility
programme is available on page 76.
Read more about our corporate responsibility strategy
in our 2019 CR Report at providentfinancial.com
Provident Financial plc
Annual Report and Financial Statements 2019
89
Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
Chairman’s introduction continued
Fighting fit
Act like it’s yours
Risk and governance
The successful governance of a Group with subsidiary companies
has always necessitated the clear division and effective delegation
of responsibilities. This dynamic has required additional
consideration post the implementation of the Senior Managers
and Certification Regime (SMCR) within the Consumer Credit
Division (CCD) and Moneybarn, and we have adapted by enhancing
our Board Governance Manual and Group Delegated Authorities
Manual. Together these provide a clear framework within which
subsidiary directors can fulfil their SMF responsibilities whilst
ensuring the Group Board retains decision making for
appropriate matters.
The Board has continued to capitalise on synergies between our
subsidiary companies and has fostered the sharing of knowledge
and best practice via the merging of the Group and subsidiary
Legal, Audit and IT functions. A good example of this enhanced
and effective cooperation is the Group and Vanquis Bank Risk
Committees working together via a series of successful joint
meetings to oversee the design and approval of the Group ICAAP.
The Board has overseen further enhancement of the Group risk
appetite framework, following its redesign in 2018, to align both
the thresholds and reporting across our subsidiaries, thereby
increasing the quality and consistency of the information we
receive. Further information on the work of the Group Risk
Committee is contained on pages 135 to 137. To ensure that
the Executive Committee has sufficient capacity to effectively
execute the Group’s strategy, an Executive Risk Committee
has been established, to afford management additional time
to consider and mitigate the Group’s risks and to implement
Group Risk Committee decisions.
Our Board
Our Board is responsible to shareholders for the effective
oversight of the Company and its businesses and determining
the Company’s strategic direction and objectives, its viability and
governance structure. The Board remains committed to the
highest standards of corporate governance when delivering in
these areas and in delivering long-term, sustainable value to our
stakeholders. For the year ended 31 December 2019, the Board
considers that appropriate corporate governance standards
were in place throughout the year. For the period under review,
the Board believes we have applied the principles and complied
in full with the provisions of the 2018 UK Corporate Governance
Code (the 2018 Code) by the end of the year.
We have continued to strengthen our Board this year, with the
appointment of Graham Lindsay as a Non-Executive Director on
1 April 2019 and Robert East as Chairman of Vanquis Bank and
Non-Executive Director of the Group on 26 June 2019. Board
member biographies are available on pages 92 to 97. Robert’s
appointment will strengthen the alignment between the Group
Board and that of its largest subsidiary. As was reported in our
announcement on 29 July 2019, Simon Thomas, our CFO, has
decided to step down at the end of March 2020 for personal health
reasons. We will miss Simon, and I thank him for his contribution
to the Board during his tenure. Our search for Simon’s successor
has concluded and Neeraj Kapur was appointed on 9 December
2019 and will join the Board on 1 April 2020. Neeraj joins the Board
from Secure Trust Bank plc, a UK retail and SME bank, and has a
strong retail banking background, including consumer finance
and savings products expertise.
Following the refreshment of the Board in 2018 and 2019, post
the new Non-Executive Directors’ initial 12 months with the Group,
I decided that Board Committee focus and efficiency would be
enhanced by a refined membership of each Committee, ensuring
the continued appropriate balance of skills and experience.
Further details of Committee composition and their work
throughout the year can be found on page 118.
As a Board we evaluated our skills and experience this year
and designed collective training programmes and enhanced
our succession planning. Examples of the key skills of our Board
members are set out on page 96. We believe that diversity
contributes towards a high-performing and effective Board and
our succession plan and Board appointment process have been
prepared in line with the Group’s Diversity Policy as we aim to
produce a diverse talent pipeline with which to secure the Group’s
future management capability. In support of these endeavours,
I am pleased to report that in 2019 we appointed Charlotte Davies
as our Group-wide Equality, Diversity and Inclusion Champion
and signed up to the HM Treasury’s Women in Finance Charter.
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Provident Financial plc
Annual Report and Financial Statements 2019
Put the customer
on the team
Be hungry for better
Stakeholders and section 172
The Board recognises the importance of our wider stakeholders
and takes its responsibilities and duty to them under section 172
(s.172) of the Companies Act 2006 (the Companies Act) very
seriously. Our s.172 statement on pages 83 to 87 explains who
our key stakeholders are, how we engage with them and how
we have considered their interests in our decision making
throughout the year.
As outlined in last year’s report, as part of our compliance with
Provision 5 of the 2018 Code we opted to constitute workforce
panels by extending the work and responsibilities of existing
divisional panels, and these will meet regularly to provide timely
feedback from colleagues to our Group Executive Committee
and Board. In addition to this Graham Lindsay has been appointed
our designated Non-Executive Employee Champion, and will
regularly visit our offices and field sites, spending time with our
colleagues, and feeding back pertinent matters to the Board.
As Chairman, I have ensured Board member visibility and active
engagement with our employees and customers, by rotating the
venue of Board meetings across our offices and arranging time
for directors to floor walk our frontline operations teams, organising
customer call listening sessions and encouraging Board members
to undertake additional engagement activity.
The Board undertook a detailed review of its interactions with its
key stakeholder groups during 2019 and concluded that there
were good levels of stakeholder engagement across the Group,
and that with the addition of new colleague engagement
mechanisms and reporting to the Customer, Culture and Ethics
Committee, we directors received sufficient information to
enable us to effectively undertake our s.172 duty.
I was pleased by the increased level of attendance and
engagement at our 2019 Annual General Meeting (AGM).
Following a significant vote against our Remuneration Report
(which received 79.58% support) the Group has addressed
shareholder concerns, details of which are set out on page 146.
Following comprehensive work by the Remuneration Committee,
details of which are contained on page 147 of our Directors’
Remuneration Report (DRR), our Remuneration Policy
implementation has been further refined in response
to shareholder and expert feedback.
We held our Capital Markets Day (CMD) on 7 November 2019.
Management outlined the Group’s marketplace, strategy and
customer base, and the operational and growth plans of our
divisions, and provided an update on our funding and capital
strategy. Live audio of the live-streamed event is available
on the Investors section of our website.
Board effectiveness
As Chairman, I am responsible for leading the Board and ensuring
the effective performance of all its responsibilities. Achieving the
right Board composition is essential to its effectiveness and following
enhancements to our Board composition in 2018 and 2019, this
year the Board undertook an external evaluation facilitated by
Lintstock. The outputs of this, in conjunction with the results of
our Board Skills Matrix review, will serve as key components of
our director development and succession plans, and we will track
our progress against an agreed action plan throughout 2020.
I am pleased with the outcome of the evaluation which highlighted
the Board’s strengths (such as our understanding of our regulators
and investors) and action areas.
Last year we reported on a number of key areas of Board focus
from our evaluation and I am pleased to report progress on these
on page 121.
Accurate, timely and clear information is central to effective
decision making and as such the Group underwent a Board
reporting review in 2019, aimed at enhancing the quality and
robustness of our Board and Committee papers, including
relevant detail on key stakeholders. Further detail of the process
and outputs of this project is available on page 114.
2018 UK Corporate Governance Code
This year we have structured the report to reflect the five sections
of the 2018 Code to make the information more accessible:
1) Board leadership and Company purpose (pages 89 to 106);
2) Division of responsibilities (pages 114 to 118); 3) Composition,
succession and evaluation (pages 119 to 128); 4) Audit, risk and
internal control (pages 129 to 137); and 5) Remuneration
(pages 145 to 168).
As I look to 2020 and beyond, I believe the Group has a strong
governance foundation, rooted in best practice, upon which we
can sustainably grow and produce attractive long-term returns
for our shareholders.
Patrick Snowball
Chairman
27 February 2020
Compliance with the UK Corporate
Governance Code
For the year ended 31 December 2019, the Board considers
that appropriate corporate governance standards were in
place throughout 2019 and the Company complied in full
with the provisions of the 2018 Code by the end of the
year. You can read our UK Corporate Governance Code
Compliance statement on page 143.
This report explains the main aspects of the Company’s
governance structure to give a greater understanding of
how the Company has applied the principles and complied
with the provisions in the Code. The Corporate Governance
Statement also explains compliance with the FCA’s Disclosure
Guidance and Transparency Sourcebook. The UK Corporate
Governance Code is published by the Financial Reporting
Council (FRC) and available on its website, www.frc.org.uk.
Provident Financial plc
Annual Report and Financial Statements 2019
91
Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
Our Board
Career and experience
Patrick started his career in the Army serving
for almost 20 years and joined Ajax Insurance
(which became part of the Aviva group) in
1988 progressing to hold executive director
roles between 2001 and 2007, including UK
Executive Chairman, where he played a key
role in merging and consolidating a number
of businesses into Aviva General Insurance.
Patrick was CEO of Suncorp Group Limited,
an ASX 20 Australian financial services
group, between 2009 and 2015 where he
successfully led the turnaround of the group
following the global financial crisis. Before
joining the Board, Patrick was Chairman
of IntegraFin Holdings plc between 2017
and 2018 and has been Chairman of Sabre
Insurance Group plc from 2017 onwards.
Prior to this Patrick was a Non-Executive
Director at Jardine Lloyd Thompson Group
plc from 2008 to 2009, Deputy Chairman at
Towergate Partnership between 2007
and 2009 and a member of the FSA
Practitioner Panel from 2006 to 2008.
Contribution to the Board, key strengths
and skills and reasons for re-election
Patrick’s unique career and experiences
bring a wealth of skills to the Board.
Career and experience
Malcolm joined the Group as an independent
Non-Executive Director, becoming Interim
Executive Chairman in November 2017.
Malcolm provided effective leadership to the
Board, working with it to redefine roles and
responsibilities, and initiated a process to
ensure the Board had the right mix of skills,
experience and diversity. Prior to joining the
Group, he held a number of senior positions
within banking, including as Co-Head of
Banking for Barclays in New York; Head of
European Investment Banking at UBS; and
Deputy CEO at Morley Fund Management
(now Aviva Investors). Malcolm’s previous
experience in the boardroom includes being
a Non-Executive Director of RSA plc and
Hastings Group plc, Senior Independent
Director of Pendragon plc, and a Senior Advisor
to Ernst & Young and Heidrick & Struggles.
Contribution to the Board, key strengths
and skills and reasons for re-election
Malcolm’s extensive career, his deep knowledge
of various businesses and sectors, his
understanding of the regulatory environment
and turnaround situations and his proven
leadership skills are considered by the Board
to be invaluable qualities that made him best
placed to lead the business in the development
of its purpose and delivery of its strategy, as
well as effectively contributing to the Board.
In particular, as Chairman, his previous
leadership and demonstrable success in
driving change, strengthening governance,
creating strong and efficient boards, and
instilling stability through a positive culture
are key strengths he brings to the Board.
• Experienced Chairman, Non-Executive
Director and Chief Executive Officer.
• Extensive experience of the financial services
industry and the regulatory environment.
• Wealth of knowledge of the challenges
faced by the financial services sector,
acquired over a 30-year career.
• Long track record in leading companies
to develop and deliver growth plans.
• Change project management, typically
involving digital transformation and
brand building.
• Building strong customer relationships
and leveraging data and insights, as well
as leading and developing the wider
stakeholder engagement.
Current external appointments
• Chairman of Sabre Insurance Group plc.
• A deep knowledge and experience
of the financial services industry
and regulatory environment.
• Driven change by redefining roles and
responsibilities throughout the business.
• Built relationships with key stakeholders,
such as investors and the Group’s banks,
including leading the rights issue process
which has enabled the Group access to
funding from bank and debt capital markets.
• Led the strengthening of the Group’s
governance framework and the realignment
of the Group’s culture more closely to the
developing needs of the customer.
• Re-established and developed an ongoing
and transparent relationship with the
Group’s regulators enabling the Group,
inter alia, to achieve authorisation of its
Consumer Credit Division, the resolution
of the FCA’s investigation into the Vanquis
Bank’s ROP product and the Moneybarn
investigation.
Current external appointments
• Senior Independent Director
of IG Group Holdings plc.
• Trustee of the Grange Festival.
• Partner at Opus Corporate Finance*
and Juno Capital LLP.
• Trustee at Peace at the Crease.
Patrick Snowball (69)
Chairman
Appointed: 21 September 2018
Tenure: 1 year
Committees:
Nomination Committee (Chairman)
Examples of key skills:
LCE
C
AFR
NED
CUS
S
PD
CM
SE
HR
IDI
ED
CMT
PLC
Malcolm Le May (62)
Chief Executive Officer
Appointed as CEO: 1 February 2018
Joined the Board: 1 January 2014
Tenure: 6 years
Committees:
Disclosure Committee (Chairman)
Examples of key skills:
LCE
C
AFR
NED
CUS
S
PD
CM
SE
B
SPL
ED
CMT
PLC
* Non-equity.
Skills key
LCE
Leadership:
culture and ethics
NED
Non-Executive
Director
C
Chairmanship
CUS
Customers
AFR
Audit and
financial reporting
S
Strategy
PD
CM
SE
Product
development
Change
management
Shareholder
engagement
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Provident Financial plc
Annual Report and Financial Statements 2019
B
Banking
IDI
IT and digital initiatives
CMT
Capital management
and treasury
SPL
HR
Sub to near-prime
lending
HR, talent and
employee engagement
ED
Executive Director
PLC
PLC
Career and experience
Prior to joining the Group, Simon was Group
Chief Financial Officer of Just Group plc, a
FTSE 250 financial services company. Simon
began his career at the then Price Waterhouse
in 1985, where he qualified as a Chartered
Accountant. In 1990, Simon joined the
Nationwide Building Society, becoming
Group Financial Controller in 1995. Following
his role at Nationwide, Simon was Head of
Finance at the Equitable Life Assurance
Society and HECM Ltd between 2000 and
2003. He was then approached by Canada
Life UK and joined as Finance Director in 2003,
becoming Finance & Customer Services
Director from 2004 to 2006. In 2006 Simon
joined Just Retirement Ltd as Group Chief
Financial Officer, until its merger with
Partnership Assurance Group plc in 2016,
when it was rebranded to the Just Group.
Contribution to the Board, key strengths
and skills
Simon’s strong financial services background,
including consumer, retail banking and
insurance experience, is central to his role
as Chief Finance Officer. He helped lead
considerable growth and change at Just
Retirement, and through his various roles
he has delivered on both cost and culture
initiatives. At Just Group he led the Group’s
Career and experience
Andrea has extensive board and financial
services experience. She spent her
executive career at Legal & General Group plc,
where she was a member of the group
executive committee and held a range of
senior leadership roles, including Divisional
Chief Financial Officer, Group Financial
Controller, Group Chief Risk Officer and
Strategy & Marketing Director. During 2016
Andrea was a member of William & Glyn’s
pre-IPO board.
Contribution to the Board, key strengths
and skills and reasons for re-election
Andrea brings a wealth of relevant experience,
including her understanding of governance,
the regulatory environment and conduct
risk. She has extensive experience of
strategy and customer marketing, complex
change, finance and reporting, investor
relations and stakeholder management.
initial subordinated debt issuance, successfully
raising £250m, and led the negotiations which
resulted in the completion of a £200m revolving
credit facility and the attainment of the first
credit rating for the business, rated A+.
• Proven public company Chief Finance Officer.
• Experience in both growth and
turnaround situations, contributing to
successful strategic change, including
in challenging environments.
• Deep understanding of the financial
services industry and the challenges faced
in a regulatory environment.
• Extensive experience leading financial
and management reporting, investor
relations, financial systems and reporting
to the regulator.
• Built strong relationships with stakeholders,
including investors, analysts and other banks.
Current external appointments
None.
• Experienced Senior Independent Director,
Non-Executive Director, Board Committee
Chairman and senior leader.
• Deep understanding of the financial
services industry.
• Track record of working with businesses
at different stages of development
and supporting both growth and
recovery strategies.
Current external appointments
• Senior Independent Director at ReAssure
Group Plc.
• Non-Executive Director at Scottish Widows
Group and Lloyds Banking Group’s
Insurance Division.
• Non-Executive Director at The Mentoring
Foundation.
Simon Thomas (56)
Chief Finance Officer
Appointed: 3 December 2018
Tenure: 1 year (as announced on 30 July 2019,
Simon will step down from the Board on
31 March 2020)
Committees:
Disclosure Committee
Examples of key skills:
LCE
C
AFR
S
SE
HR
ED
CMT
PLC
Andrea Blance (55)
Senior Independent Director
Appointed: 1 March 2017
Tenure: 3 years
Committees:
Remuneration Committee (Chairman)
Audit Committee
Nomination Committee
Examples of key skills:
LCE
C
AFR
NED
CUS
S
SE
ED
CMT
PLC
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Annual Report and Financial Statements 2019
93
Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
Our Board continued
Career and experience
Elizabeth is an experienced board director,
senior financial services executive, strategist
and marketing leader in the UK and globally.
Her previous board experience includes
being a Non-Executive Director at Dollar
Financial Group, Hibu plc (formerly Yell
Group) and The Home and Savings Bank,
and an Executive Director of the Western
Union International Bank. Prior to these roles,
Elizabeth served on the boards relating to
consumer finance joint ventures between
Barclaycard and other brands, such as
Littlewoods, Argos and Thomas Cook. She
is currently a Non-Executive Director at
Smith & Williamson, the wealth management
and professional services firm, and Hastings
Group Holdings plc, a major home and auto
insurance provider to consumers and
businesses in the UK. She has extensive
executive experience through roles including
Chief Marketing Officer at Barclays and
Barclaycard; Chief Marketing and Business
Development Officer at Freshfields Bruckhaus
Deringer LLP; Partner at McKinsey & Company;
and recently serving as Chief Strategy, Product
and Marketing Officer at Western Union.
Contribution to the Board, key strengths
and skills and reasons for re-election
Elizabeth brings 35 years of experience
in strategy, marketing and product
development across a range of financial
services. As an executive, she has a long
Career and experience
Paul is an experienced Chief Finance Officer,
Chairman, Non-Executive Director and Audit
Committee Chairman who operates in a
number of different sectors. He is currently
the Chairman of Kintell Limited. Paul’s past
non-executive director roles include chairing
audit committees for Tokio Marine, Kiln,
NEST Corporation, Tesco Bank, Collins
Stewart Hawkpoint, Co-operative Banking
Group, Charles Taylor Plc and GMT Global
Aviation. He is also a past Non-Executive
Director of Playtech plc and past Chairman
of several private equity backed businesses.
He began his executive career in finance
working for over 20 years as a Finance
Director of various companies, culminating
in becoming Deputy Group Chief Executive
and CFO of the Co-operative Group from
2003 to 2007.
Contribution to the Board, key strengths
and skills and reasons for re-election
Paul’s varied and wide-ranging career is built
on a successful career in finance. He has a
track record of creating and realising value
for shareholders and has worked across a
number of sectors including financial
services, technology, healthcare, retail
track record of driving revenue growth and
solving complex business challenges at
major global financial institutions. In various
roles she has led businesses through brand
and reputation transformations, strengthened
customer acquisition and engagement, built
innovative digital businesses, and led
business turnarounds.
• C-suite marketing executive, board
director and strategist.
• Proven people leader.
• Extensive marketing and communications
functional background.
• Broad and deep knowledge of financial
services, including credit cards and
payment products, a wide range of
consumer loan segments and marketing
in a regulated environment.
• Substantial turnaround expertise.
• Wide exposure to international operations
and the unique challenges of leading them.
Current external appointments
• Non-Executive Director of Smith &
Williamson Holdings and its subsidiaries.
• Non-Executive Director of Hastings
Group Holdings plc.
• Non-Executive Director of the University
of Colorado Health Authority.
• Chairman of Group Systems, Inc.
and business services. Through his
non-executive roles he has helped several
management teams adapt their business
models to respond to, and anticipate, changes in
their competitive and regulatory environments.
In both his executive and non-executive
career he has had extensive experience of
transactions and ensuring that businesses
have an appropriate financial structure.
• Experienced Non-Executive Director,
Chairman and Chief Finance Officer.
• Broad experience of the financial services
industry and the regulatory environment.
• Strong track record in delivering good
returns for shareholders.
• Extensive experience of transactions.
• Broad experience as both an executive
and a non-executive of developing and
challenging business strategies.
• Has helped several management teams
adapt business models in anticipation of
changes in their environments and markets.
Current external appointments
• Chairman of Kintell Limited.
• Non-Executive Director of Feebris Limited.
Elizabeth Chambers (57)
Independent Non-Executive Director
Appointed: 31 July 2018
Tenure: 1 year
Committees:
Customer, Culture and Ethics Committee
(Chairman)
Group Risk Committee
Nomination Committee
Examples of key skills:
LCE
C
NED
CUS
S
PD
CM
B
SPL
HR
IDI
ED
PLC
Paul Hewitt (63)
Independent Non-Executive Director
Appointed: 31 July 2018
Tenure: 1 year
Committees:
Audit Committee (Chairman)
Nomination Committee
Group Risk Committee
Examples of key skills:
C
B
AFR
NED
S
SE
IDI
ED
CMT
PLC
94
Provident Financial plc
Annual Report and Financial Statements 2019
Angela Knight (69)
Independent Non-Executive Director
Appointed: 31 July 2018
Tenure: 1 year
Committees:
Group Risk Committee (Chairman)
Audit Committee
Nomination Committee
Remuneration Committee
Examples of key skills:
LCE
C
NED
ED
PLC
Graham Lindsay (61)
Independent Non-Executive Director
Appointed: 1 April 2019
Tenure: Less than 1 year
Committees:
Customer, Culture and Ethics Committee
Remuneration Committee
Nomination Committee
Examples of key skills:
LCE
PD
C
B
NED
CUS
S
SPL
HR
ED
Career and experience
Angela has extensive experience in both
the public and private sectors. Prior to joining
the Board, Angela was Senior Independent
Director of Brewin Dolphin plc from 2008 to
2017 and has held a number of non-executive
directorships at a variety of companies,
including Lloyds TSB plc, South East Water
and Scottish Widows. Her current roles
include being a Non-Executive Director of
Taylor Wimpey plc and Encore Capital Group,
Inc., and Senior Independent Director at
TP ICAP plc. Angela has had a broad range
of executive roles, including a number as
Chief Executive Officer (CEO). She was CEO
at Energy UK, British Bankers Association
(BBA, now UK Finance) and APCIMS (now
Personal Investment Management and
Financial Advice Association). Angela started
her career training as an engineer with Air
Products Limited and set up the specialist
metal heat treatment company Cook & Knight
(Metallurgical Processors) Ltd. She was
previously a Member of Parliament and
Treasury Minister between 1992 and 1997
and was the Chairman of the Office of Tax
Simplification from December 2015 to
March 2019.
Contribution to the Board, key strengths
and skills and reasons for re-election
Angela’s varied career brings a wealth of
knowledge in both the private and public
sectors as a result of over 20 years’ experience
in non-executive director and CEO roles.
Career and experience
Over a 40-year career with Lloyds Banking
Group plc, Graham held a number of senior
executive roles including responsibility for
the Lloyds branch network and as Corporate
Responsibility Director. He has also held
board positions at the Institute of Financial
Services and the Chartered Banker Professional
Standards Board. Graham joined the Wonga
UK board in 2016 as part of the new leadership
team engaged to improve the business and
deliver change. He joined the board of Vista
Communications Ltd in 2015 and helped
transform it to achieve a very successful
sale. Graham sat on the board of the Institute
of Banking & Financial Services and on the
Professional Standards Board.
Contribution to the Board, key strengths
and skills and reasons for election
Graham brings to the Board extensive
experience in commercial and retail banking
following a 40-year career at Lloyds Banking
Group and a deep understanding across
distribution channels. Graham’s roles at
Lloyds Banking Group and Wonga UK
provide him with a strong customer focus,
experience and understanding. Graham
has had demonstrable success in focusing
organisations on their customers, ensuring
Her experience in the public sector means
she has a strong understanding of the
expectations of regulators and other public
stakeholders. This combination means she is
a skilled director who knows how to manage
organisations and how to challenge
management to deliver. Angela’s thought
leadership, technical and policy skills, as well
as a deep understanding of the financial
sector, are demonstrated through her
leadership of the repositioning of Energy UK
in the energy sector and of the BBA through
the banking crisis respectively.
• Experienced government minister, CEO,
Chairman and Non-Executive Director.
• Wealth of knowledge of the financial
services sector.
• Deep knowledge of regulated industries, the
public sector and science and engineering.
• Adept at solving difficult problems
with effective solutions.
• Built strong relationships with wider
stakeholders in a variety of sectors.
• Understanding of public presentation,
in particular as a proficient public speaker.
Current external appointments
• Senior Independent Director of
TP ICAP plc.
• Non-Executive Director of Taylor Wimpey
plc, Encore Capital Group, Inc. and
Arbuthnot Latham & Co.
they are at the heart of decision making and
product design. Graham also has a strong
appreciation of the Group’s regulatory
environment and a track record of engaging
with various stakeholder groups.
• Experienced retail banking and financial
services executive.
• Extensive customer knowledge, strong
customer focus and a track record of
enabling and overseeing businesses to
ensure that they put the customer at the
heart of what they do.
• Understanding of the Group’s
regulatory environment and expectations
of its regulators.
• Significant stakeholder
engagement experience.
Current external appointments
• Senior Independent Director of
OneFamily, where he chairs the remuneration
committee and the customer, member
and product committees.
• Vice Chairman and Trustee of the Brain
Tumour Charity.
• Consultant for Trustees Unlimited.
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Annual Report and Financial Statements 2019
95
Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
Our Board continued
• In-depth knowledge of financial services,
consumer finance, risk management
and leadership.
• Extensive knowledge of the Group’s
regulatory environment and expectations
of the PRA and FCA.
• Track record of driving cultural change to
ensure focus on customers, employees
and value.
Current external appointments
• Chairman of Skipton Building Society.
• Non-Executive Director of Hampshire Trust
Bank Plc.
Contribution to the Board, key strengths
and skills
Charlotte’s legal experience has been
gained predominantly within insurance
before moving into the debt purchasing
space. Charlotte brings extensive experience
in, and knowledge of, the financial services
sector and also has legal experience in
corporate, commercial, risk management,
regulatory and governance advice.
Current external appointments
None.
Career and experience
Robert worked for 32 years in various
leadership roles with Barclays Bank latterly
as Chief Risk Officer of Absa in South Africa.
He joined Cattles Plc, a consumer finance
group, in 2008 where he led its restructuring
from 2009 and was its Chief Executive from
2010 until completion of the wind-down of
the group in 2019. Having joined its board in
2011, Robert became Chairman of Skipton
Building Society in 2017 where he is helping
develop the Society’s strategy, grow its
membership and ensure it remains financially
strong. He is an Associate of the Chartered
Institute of Bankers.
Contribution to the Board, key strengths
and skills and reasons for election
Robert brings experience in, and understanding
of, retail and commercial banking in the UK
and internationally acquired over a 40-year
career. Robert is an experienced Chairman,
Non-Executive Director and Chief Executive
Officer, enabling him to support a culture of
openness and debate on the Board and to
challenge management to deliver for the
Group’s shareholders and other stakeholders.
Career and experience
Charlotte brings a wealth of experience in the
financial services sector and is an experienced
General Counsel and Company Secretary.
Charlotte worked previously at Cabot Credit
Management where she was General Counsel
and Company Secretary and where she
created a new governance framework and
redesigned the regulatory structure in
consultation with the FCA.
Prior to this role Charlotte was an Equity Partner
at Reynolds Porter Chamberlain and General
Counsel at Lockton International. She was
Head of Affinity Legal and Head of Broker
Legal for Royal and Sun Alliance Insurance
from 2006 to 2008 and spent her early career
at National Australia Bank from 2001 to 2006
as Principal Counsel, Wealth Management.
Robert East (59)
Independent Non-Executive Director
and Chairman of Vanquis Bank Ltd
Appointed: 26 June 2019
Tenure: Less than 1 year
Committees:
Customer, Culture and Ethics Committee
Nomination Committee
Examples of key skills:
LCE
C
NED CUS
S
CM
B
SPL
HR
ED
Charlotte Davies
Group General Counsel
and Company Secretary
Appointed: 1 April 2019
This graph shows those Board members with strong or very strong skills or experience in some key skill areas. This graph, together
with the biographies above, shows how our Board members contribute to the long-term success of the Company.
Skills and experience
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96
Provident Financial plc
Annual Report and Financial Statements 2019
Neeraj Kapur
Chief Finance Officer
To be appointed: 1 April 2020
Career and experience
Neeraj is Group Chief Financial Officer of
Secure Trust Bank plc, a UK retail and SME
bank, and will join the Board on 1 April 2020.
He holds a degree in Aeronautical Engineering
from Imperial College London, is a fellow of
the Chartered Institute of Bankers in Scotland,
a fellow of the Institute of Directors, a fellow
and a former member of the Council of the
Institute of Chartered Accountants in England
& Wales (ICAEW), and former Chair of the
ICAEW Financial Services Faculty. He has
over 25 years’ financial services experience
spent in both the accounting and banking
industries and began his accounting career
at Arthur Anderson. In 1992 Neeraj took over
the family accounting business, IMC Partners,
which he ran for 10 years. Between 2001 and
2011 Neeraj held various roles in the Royal
Bank of Scotland, in 2007 being promoted
to Group CFO of Lombard and subsequently
in 2010 as Managing Director Large Corporate
Asset Finance. Neeraj joined Secure Trust
Bank PLC in 2011 where he led its IPO process.
Contribution to the Board, key strengths
and skills and reasons for election
As a qualified accountant, Neeraj is
technically strong and has a diverse
background that commenced as an RAF
fighter pilot, and has included time as an
entrepreneur running his own business and
working in a large-scale regulated bank.
Neeraj has a strong retail banking background,
including consumer finance and savings
products expertise, and has experience in
accounting, finance, professional services,
governance, operations, marketing and risk.
Neeraj is also experienced in building strong
relationships with the key stakeholders, such
as regulators and shareholders.
• Experienced chief financial officer.
• Significant experience in leading end-to-end
finance functions, including for a bank and
other corporates, as well as managing
accounts for individuals and small
business owners.
• Proven ability to build effective working
relationships with key stakeholders, including
regulators, investors and analysts.
• Deep understanding of, and strong
experience in, the Group’s sector.
• Brings versatility, intellectual agility
and commerciality.
Expected external appointments
following appointment date
• Trustee of Turn2Us, a poverty charity.
• Trustee of The Worshipful Company
of Chartered Accountants.
• Trustee and Governor of Edgeborough
preparatory school.
Board from left to right: Graham Lindsay, Angela Knight, Paul Hewitt, Malcolm Le May, Patrick Snowball, Andrea Blance, Robert East, Elizabeth Chambers, Simon Thomas.
Provident Financial plc
Annual Report and Financial Statements 2019
97
Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
How the Board has promoted long-term sustainable success: the Board sets the strategy
This section sets out how our Board
sets our strategy. You can read more
about our market, our business
model and how we create value for
our stakeholders on pages 24 and 11
to 13 respectively. You can also read
how we have performed against our
strategy, including against our KPIs,
on pages 14 to 21.
Our Blueprint
Our new Blueprint provides increased focus on more
sustainable business models and increased customer
centricity and unifies colleagues.
Purpose
We believe our long-term success is based on delivering our
purpose. Our purpose is designed to unify us and as something
everyone can get behind both practically and emotionally. It is
our reason for being. Our purpose puts the customer at the heart
of all we do; we believe putting them on the path to a better
everyday life will build sustainable returns for shareholders.
Strategic drivers
Our purpose is built upon a number of strategic drivers, which
are critical pillars of our strategy and under which sit practical
priorities. They are designed to drive our competitive advantage
and force choices, including regarding our strategy. You can
read more about our strategic drivers as set out below.
Our Blueprint has been designed
to provide sustainable long-term
direction and customer centricity.
Customer progression (see page 14)
Human experiences (see page 16)
Head AND heart decisions (see page 18)
Fighting fit (see page 20)
Strategic initiatives process:
1 Corporate Planning Conference (CPC)
In June, the Group held its annual CPC, with the whole Board, the Executive Committee and members of the senior management team
attending. The purpose of this two-day offsite event was to create an understanding of the emerging and future challenges facing the
Group and to consider and assess the opportunities for the Group’s future success and to identify how we will deliver our ‘Vision for the Future’.
Delegates engaged in a range of discussions and separate mixed team interactive working sessions were arranged, covering competition,
markets, technology and regulation. The Board members played an active role in the sessions and provided clear input on the Group’s
future direction and key strategic decisions throughout the conference.
2 Identification
The CPC confirmed that the Board’s vision is to be the best and most trusted provider of credit to the underserved, delivered across
a broader range of products and distribution channels, in order to help our customers on the path to a better everyday life. At the
CPC the Board identified a number of strategic initiatives to be delivered (our CPC Strategic Programme), which will enable us to
continue to provide customers with credit products aligned with their needs, deliver good customer outcomes and, through this,
generate sustainable shareholder returns. To do this we will:
• deliver a broader product range;
• enhance our distribution capabilities;
• establish a single view of our customers; and
• grow responsibly, delivering sustainable shareholder returns.
Vanquis Bank, which we will look to evolve to become a broader bank for the underserved, as the anchor to our strategy, also gives
us the opportunity to explore funding efficiencies across the Group.
3 Planning
The strategic initiatives identified at the CPC are collated and refined into a CPC Strategic Programme action plan which is then
overseen by the Board and embedded within our budgeting and financial planning process.
4 Monitoring
The Board receives regular updates on the prioritisation and the progress of the delivery of the CPC Strategic Programme action
plan and any risks to delivery.
98
Provident Financial plc
Annual Report and Financial Statements 2019
How our governance contributes to the delivery
of our strategy
Governance is key to the Group achieving its purpose and the
successful delivery of its strategy. Our governance arrangements,
designed to support the delivery of our strategy and purpose,
determine how the Group is directed and controlled and who
has authority and accountability.
Our governance arrangements ensure that our Board determines
our purpose, which enables it to set out the strategy and
objectives for long-term success and value creation, whilst having
regard to the Group’s social, regulatory and market environment
and stakeholder relationships. The Board monitors how the executive
directors, supported by our Executive Committee and wider
senior management teams, deliver against this strategy. Our Board
sets out the responsibilities and authorities for the Group through
the Board Governance Manual and Delegated Authorities Manual.
Another key role of the Board and of our governance framework
in relation to the pursuit of our strategy is the oversight and
management of risk and internal controls. The Board determines
the nature and extent of the principal risks it is willing to take to
achieve the strategy and is additionally responsible for assessing
and monitoring the Group’s risks, including emerging risks, against
the agreed risk appetite to ensure the effective operation of the
Company in achieving its objectives. Risk, our risk management
framework and our internal control framework are overseen by
the Group Risk Committee, the Audit Committee and the Board.
The Group Risk Committee assists the Board by taking an active
role in defining risk appetite; considering the nature and extent
of the risks facing the Group; and monitoring the risk management
systems across the Group. There is focus on the risk culture within
the organisation which is overseen by the Group Risk Committee on
behalf of the Board. The Group Risk Committee is supported by the
Group Chief Risk Officer and the Chief Risk Officers in each division.
The Audit Committee keeps under review the effectiveness of
the Group’s internal financial controls systems that identify, assess,
manage and monitor financial risks, and other internal control
systems. The Audit Committee also assesses the viability of the
Group and the basis for the going concern assumption. Further
details of how the Group’s processes and internal controls work
are set out on pages 131, 132 and 137.
Our governance arrangements ensure that our Board is
responsible for setting the desired behaviours and monitoring
the Group’s culture, seeking to ensure alignment with our
strategy. It is supported by our Customer, Culture and Ethics
Committee in these activities, which you can read more about
on pages 103 and 106. We believe that employee behaviour and
culture are key enablers in achieving our strategy and purpose.
The Remuneration Committee’s role is to ensure that remuneration
policies and practices are designed to support our strategy and
promote long-term sustainable success, encouraging behaviours
consistent with the Group’s purpose, values, strategy and business
model. Further details on remuneration and how the Remuneration
Committee operates are set out on pages 145 and 161.
For our governance arrangements to operate effectively and for
the strategy to be delivered, it is also essential that our Board and
senior management composition is appropriate. Our Nomination
Committee’s role is to ensure that the Board and its Committees
have the right combination of diversity, skills, experience and
knowledge; that appropriate succession planning is in place for
the Board and senior management teams; and that appropriate
arrangements are in place for the development of a diverse
pipeline of succession to the Board and senior management
roles. Further detail on the work of the Nomination Committee
is set out on pages 125 to 128.
As such, our governance provides the framework for the effective
running of the Group, supporting appropriate decision making that
balances the interests of our stakeholders. High-quality decision
making is essential for the effective delivery of our strategy and,
as such, long-term value and success.
Provident Financial plc
Annual Report and Financial Statements 2019
99
Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
How the Board has promoted long-term sustainable success: Board activities
The following pages provide examples of key Board activities during the year. Whilst the table is non-exhaustive, it provides an insight
into the Board’s discussions and how the directors promote the success of the Company. You can read about how the Board sets the
strategy on page 98. One of the key Board priorities during the year was the defence against the unsolicited offer from Non-Standard
Finance plc, and greater detail is set out on page 87. You can also read about principal decisions made during the year in our s.172
statement on page 87.
Link to strategic drivers:
Customer progression
Human experiences
Head AND heart decisions
Fighting fit
Operational and financial performance, funding and capital
• Reviewed operational and financial performance and progress
against the budget at each meeting, with the Chief Executive Officer
and Chief Finance Officer presenting their own reports.
• Reviewed and approved the annual budget.
• Reviewed our approach and progress in relation to cost
management and our strategic cost efficiency programme.
• Reviewed and approved the dividend policy and the final
and interim dividend payments.
• Reviewed and approved the full and half-year results statements
and trading updates.
• Reviewed and approved the refinancing of the Group’s multi-currency
revolving credit facility.
• Reviewed the Group’s financing strategy.
Key outcomes
• Oversight of business performance
Key stakeholders
• Investors
against targets, budget and the
agreed strategy.
• Approved annual budget.
• Oversight of the delivery of the
cost programme.
• Approved dividend policy and the
final and interim dividends.
• Approved the refinancing of the
Group’s revolving credit facility.
• Oversight of the Group’s
financing strategy.
• Customers
• Regulators
• Debt providers
• Employees
Link to
strategic drivers
Governance, stakeholders and risk
• Reviewed the Group’s investor relations strategy and approved
the approach to the Capital Markets Day.
• Received regular investor relations updates, including feedback
from investors and wider updates on engagement activities.
• Reviewed the outcome of the Board and Committee effectiveness
evaluation and monitored progress on actions identified.
• Considered the effectiveness of the directors and recommended
them for election/re-election at the 2019 AGM.
• Considered feedback from investors and proxy advisors on the
Group’s AGM resolutions.
• Received reports from the Chief Risk Officer on key risk matters.
• Reviewed and approved the Group’s risk appetite.
• Reviewed reports from the Group Communications Director
Key outcomes
• Oversight of engagement with
stakeholders, including regulators,
investors and community.
• Confirmation of Board and director
effectiveness and identification of
actions to improve effectiveness.
• Oversight of risk and approved
risk appetite.
• Approved enhancements in the
Group’s delegated authorities
framework and Governance Manual.
• Approved enhancements in Board
and Committee reporting.
Key stakeholders
• Investors
• Customers
• Regulators
• Employees
• Communities
• Government
Link to
strategic drivers
regarding external communication, political and community matters.
• Oversight of the Group’s anti-bribery
and corruption controls.
• Reviewed and approved enhancements to the Group’s delegated
authorities framework and Governance Manual.
• Reviewed and confirmed the effectiveness of the Group’s internal
controls and risk management framework.
• Reviewed and approved a new approach to Board reporting.
• Reviewed the Group’s approach to engaging externally about
the Group’s purpose and role in society.
• Reviewed the Group’s gifts and hospitality policy and
communication approach.
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Provident Financial plc
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People and culture
• Received updates regarding the roll-out and embedding
of the Group’s Blueprint.
• Reviewed and approved the Group’s employee
engagement approach.
• Reviewed the 2019 colleague survey results at its
January 2020 meeting.
• Reviewed the Group’s gender pay gap data and approved
its gender pay gap report.
• Approved the establishment of the Group’s Customer, Culture
and Ethics Committee.
• Reviewed the Group’s Whistleblowing Policy and procedure
and whistleblowing activity.
• Received updates on key management changes in the Group.
• Reviewed the output of a Health and Safety Review during the year,
including the impact on employees.
Key outcomes
• Monitored the embedding of the
Group’s cultural changes.
• Established a Board Committee
with the role of reviewing the Group’s
culture and business processes to
ensure that they are focused on
delivering fair customer outcomes,
providing oversight of management’s
delivery and embedding of the
new Blueprint.
• Oversight of results from Group
colleague survey and action plan.
• Group established new
Whistleblowing Forum.
• Oversight of the Group’s health
and safety approach.
Key stakeholders
• Investors
• Customers
• Employees
Link to
strategic drivers
IT, technology and change
• Reviewed reports from the Group Chief Information Officer,
including reporting in relation to the Group’s information
technology and resiliency; information security; change
programmes; regulatory compliance; IT supplier engagement;
and data protection arrangements.
• Reviewed the establishment of a Group Technology and Change
Oversight Committee.
• Reviewed and approved a new Group Data Protection Policy.
Key outcomes
• Oversight of the Group’s information
technology and change programme.
• Oversight of the Group’s approach to
data protection and approved Group
Data Protection Policy.
• Establishment of a Group Technology
and Change Oversight Committee to
enhance the governance in this area.
Key stakeholders
• Suppliers
• Customers
• Employees
Link to
strategic drivers
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Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
How the Board has promoted long-term sustainable success: Board activities continued
Link to strategic drivers:
Customer progression
Human experiences
Head AND heart decisions
Fighting fit
Regulatory
• Received reports from the Group Chief Risk Officer on regulatory
matters, such as the Vanquis Bank ROP restitution programme, the
evolving regulatory environment and regulatory engagement.
• Received a report from the Group Chief Risk Officer on the
regulatory landscape and potential future changes.
• Received reports on the readiness for the Senior Managers and
Certification Regime (SMCR) in Moneybarn and the Consumer
Credit Division (CCD).
• Reviewed and approved the Regulatory Capital Pillar 3 Disclosures,
Recovery Resolution Plan (RRP) and Internal Capital Adequacy
Assessment Process (ICAAP).
• Reviewed the Group’s approach to customer complaints.
• Reviewed the approach to persistent debt, including the delivery
of good customer outcomes and impact on the Group.
• Annual review and approval of the Wind-Down Plan.
Strategy and products
• Reviewed and approved the Group’s strategy at the Corporate
Planning Conference.
• Monitored the progress of the delivery of the Group’s strategy.
• Reviewed the Group’s product offering, including the evolution of
Vanquis Bank to become a broader bank for the underserved, how
we help customers save, financial fitness and the Group’s approach
to loans.
• Considered the sale of a new ROP product, which remains under
discussion with FCA.
• Discussed the Vanquis Bank pricing structure changes.
• Reviewed the approach to CCD breaking even in 2020.
• Reviewed and approved the launch of Provident Direct,
modernising the home credit proposition.
• Reviewed the Group’s approach to open banking and its data
strategy, including the ‘Provident Knowledge Universe’.
Key outcomes
• Oversight of regulatory engagement
Key stakeholders
• Regulators
and the meeting of regulatory
requirements, including SMCR.
• Approved Pillar 3 Disclosures, RRP
and ICAAP.
• Oversight of the Group’s approach to
customer complaints, persistent debt,
the completion of the ROP restitution
programme and the Group’s approach
to affordability regulation.
• Customers
• Employees
• Investors
Link to
strategic drivers
Key outcomes
• Approval of the Group’s strategy
to meet our purpose and oversight
of its delivery.
• Oversight of the Group’s product
offering and customer proposition.
Key stakeholders
• Investors
• Customers
• Regulators
• Employees
• Oversight of the Consumer Credit
• Debt providers
Division’s path to breakeven and beyond.
• Oversight of the Group’s data strategy.
• Communities
• Suppliers
Link to
strategic drivers
Looking forward, the Board’s focus for 2020 is expected to include:
• review and delivery of our strategy;
• oversight of business performance;
• oversight of the delivery of cost synergies and efficiencies;
• monitor the Group’s culture and customer centricity;
• address all regulatory matters and the continued focus on the working relationship with our regulators;
• oversight of CCD’s path to breakeven; and
• the Group’s growth opportunities.
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The Board:
driving culture
Our Board plays an important leadership role in promoting the
desired culture throughout the organisation and making sure
that good governance, which underpins a healthy culture, is in
place. The Board’s role is to support executive management in
establishing the framework within which the desired culture can
grow: defining and communicating the Company’s purpose and
values; setting the tone from the top monitoring and assessing
whether the desired culture is in place and holding management
to account where it is not; and ensuring that the Group’s incentives
are aligned to and supportive of the desired behaviours and
culture. Our Blueprint, developed in 2018 and 2019, established
our purpose: why we exist as an organisation, framed in the
context of the role we play in our customers’ lives. The Blueprint
sets out what we will deliver, and what behaviours we need to
create the customer-focused, innovative and accountable
culture we need to be successful.
We explain more below and on the next page about the Board’s
role and activities in relation to the Group’s culture.
We believe that healthy corporate culture supports us in building
the trust of our stakeholders, including our customers, regulators
and employees. You can read about how the Board had regard to
the matters in s.172 of the Companies Act 2006 in our s.172
statement on pages 83 to 87. You can also see on page 13 how
our purpose, predicated on our customers and underpinned by
our strategic drivers, drives our strategy and therefore the delivery
of long-term sustainable value.
As reported last year, we have now established the Customer,
Culture and Ethics Committee, a Board Committee charged with
reviewing the Group’s culture and business processes to ensure
that they are focused on delivering fair customer outcomes;
providing oversight of management’s delivery and embedding
of the ‘Blueprint’ (see the next page); and overseeing the
implementation of changes required to align with our
obligations under the 2018 Code.
1
Leading by
example
2
Embedding
our culture
4
4
Aligning
culture and
incentives
3
3
Assessing
and monitoring
culture
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Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
The Board: driving culture continued
Our purpose
Our Board is responsible for establishing the Group’s overall purpose, and the Group has undertaken significant activity over the last
two years to align its culture more closely to the developing needs of the customer, which is articulated in our purpose: ‘We help put
people on the path to a better everyday life.’ We believe that having a clear purpose creates a strong foundation for communicating
with all stakeholders why we exist, and that by establishing a clear purpose the Board is better able to identify the strategy, values
and behaviours that are required to deliver it, and to sustain the Group’s role in wider society. Our Blueprint, which you can read
more about on page 12, is designed to foster a culture where we think ‘customer’ all the time; we constantly innovate and make
things better for all our stakeholders; and we hold ourselves and each other personally accountable for success.
The Board members also attended various ‘Big Blueprint
Conversations’ led by Group Executive Committee members,
involving a wide range of colleagues in dialogue designed to
deepen our collective understanding of our Blueprint and
culture and to make it feel real and relevant to their specific
roles. You can read more about this on page 67.
1 Leading by example
It is key that the tone on culture is set from the top and that
our Board directors act with integrity and lead by example.
The Board plays a key role in influencing culture, and can do
so in a number of ways, for example, through its oversight
and challenge of management and also through active
engagement with customers and employees, displaying
and reinforcing the expected behaviours.
During the year a number of our non-executive directors
spent time visiting our locations, including our Moneybarn
office and our Vanquis Bank operations centre, and also
went on customer visits with Customer Experience Managers
in CCD.
During October the Board undertook employee engagement
activities in our Bradford office, spending time with colleagues
in our Consumer Credit Division and Vanquis Bank contact
centres and listening to customer calls in order to enhance
their understanding of how we support with our customers
throughout their relationship with us.
2 Embedding our culture
Our Board is responsible for ensuring that management
communicates, reinforces and measures its progress on
embedding the desired culture. Our executive directors and
their wider executive leadership team are playing a key role in
this regard. They are supported in this by the Human Resources,
Internal Communications, Internal Audit and Risk and
Compliance teams.
Clear CEO and leadership communications: Our employees
receive regular communications from the Chief Executive
Officer (CEO) and their Divisional Managing Director regarding
business performance and key staff and structural changes,
through ‘town halls’, ‘question and answer’ sessions and
email communications.
This year, our employees were also kept regularly updated
on the defence of the unsolicited offer from Non-Standard
Finance plc throughout the offer period.
Executive leadership and the Blueprint: Internal
communications and employee engagement have helped
support our Blueprint, including a launch event with 150 senior
employees and dedicated roll-out programmes across the Group.
Each of our divisions further cascaded our Blueprint with a large
number of events. We created a ‘Blueprint Zone’ in order to
support the delivery of the Blueprint roll-out and we also
launched our ‘Big Blueprint Conversations’ programme.
We have launched our new Group recognition platform,
‘Better Everyday’, which is designed to help us create a culture
where we say ‘thank you’ or ‘well done’ to colleagues who are
demonstrating our Blueprint behaviours.
Workforce policies and practices: The Board is responsible
for ensuring that workforce-related policies and practices are
aligned to our Blueprint, which sets out our culture and how
we achieve long-term success. You can read more on page 109.
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3 Assessing and monitoring culture
The Board’s role is also to regularly assess whether the
desired culture is operating across the Group and to
challenge where they may find misalignment with values.
The Board is able to monitor culture through its interaction
with management and employees and in a number of ways,
such as:
Blueprint key performance indicators: The Customer,
Culture and Ethics Committee tracks the embedding of the
desired culture through its regular review and discussion of
the Blueprint ‘dashboard’ (a dashboard of key performance
indicators has been developed by the Group Executive
Committee, in conjunction with the Culture, Customer and
Ethics Committee). Regular reviews of metrics and continuous
dialogue with management and other stakeholders enable
the Board to challenge where they may find misalignment
of business practices or actions with our values. You can
read more about this on page 106.
Customer key performance indicators: The Customer, Culture
and Ethics Committee has also overseen the development of
a dashboard of key performance indicators measuring the
continued delivery of our customer commitments, including
measurement of customer service, customer access to products
which perform as we have led them to expect and products
which are designed to meet their needs. You can read more
about our ‘Customer’ dashboard on page 106. During the
year, the Board also considered customer complaint
performance, including a focused Board discussion on
customer complaints at the July 2019 Board meeting.
Whistleblowing: The Board is responsible for ensuring that
employees are able to raise concerns in confidence and, if
desired, anonymously. During the year, the Board reviewed
a report on whistleblowing activity.
Internal and external audit: The Audit Committee reviews the
nature of findings and the steps taken in response to actions
identified in both external and internal audits. The approach
to the closure of such actions is an indicator of the right culture.
The updates to the Audit Committee from the Group Head of
Internal Audit also include an annual assessment on governance,
risk management, internal control and risk culture.
Risk: The Group Risk Committee is responsible for oversight
of risk culture. It receives a report from the Group Chief Risk
Officer at each meeting, which during the year included
status reports on risk culture and governance. You can read
more about the activities of the Group Risk Committee from
page 135 and risk culture on page 42.
Group colleague survey: The first Group-wide colleague
survey was held in 2019 and reported on to the Board in
January 2020. The survey sought to capture colleague views
on the Group’s purpose, behaviours, culture and leadership,
and established a frame for prioritising actions and baseline
for future measurement. You can read more about the
colleague survey on page 73.
Health and safety: The Board reviewed the output of a
Health and Safety Review during the year, including the
impact on employees.
4 Aligning culture and incentives
A key objective for our Remuneration Committee is to
ensure that remuneration policy and practices are aligned to
the culture of the Group and are consistent with the Group’s
purpose, values and strategy. To see how the Remuneration
Committee ensures that executive director, and wider
employee, remuneration is aligned with culture, please see our
Directors’ Remuneration Report on pages 146 and 150 to 152.
The non-financial performance objectives of our executive
directors are aligned to our Blueprint and the Remuneration
Committee has discretion to override formulaic
remuneration outcomes.
The Remuneration Committee reviewed workforce
remuneration and related policies and the alignment
of incentives and rewards with culture.
Governance
By ensuring the right governance framework is in place across
the Group, the Board enables openness and accountability
and exercises appropriate oversight. Good governance enables
the Board to receive the right information and challenge
management on performance, strategy and culture. As reported
last year, the Group has invested substantial time in clarifying
roles and responsibilities, with further work undertaken this year
to refine delegated authorities. Having such clarity, alongside
strong governance, supports a healthy culture, accountability
and compliance with the senior manager regulatory regime.
You can read about our Customer, Culture and Ethics Committee’s
governance role in relation to culture and corporate governance
on the next page.
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Annual Report and Financial Statements 2019
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Governance B O A R D L E A D E R S H I P A N D C O M P A N Y P U R P O S E C O N T I N U E D
Customer, Culture and Ethics Committee
Enhancing our culture
and customer focus
I am pleased to present to you the
inaugural report from the Customer,
Culture and Ethics Committee,
following the formal establishment
of the Committee in April 2019.
Elizabeth Chambers
Customer, Culture and Ethics Committee Chairman
A key focus of the Committee this year has been to enhance the
Board’s oversight of our culture and our customer focus through
the development of Group and division-specific dashboards relating
to both our Blueprint and our customer outcomes. The Committee
reviewed design proposals for the Blueprint and Customer dashboards
and now uses these to monitor and challenge performance in each
line of business and product area. In order to further understand
our customers and how we engage with them, the Committee
has initiated customer call listening at the start of meetings.
Through active participation in Committee meetings by key
senior management members, such as the Chief Executive
Officer, Group General Counsel and Company Secretary, Group
Communications Director and Head of Sustainability, the Committee
is able to effectively challenge and discuss the embedding of
our culture and the delivery of fair customer outcomes.
The 2018 Code emphasises the importance of culture and
stakeholder relationships, and overseeing activities to ensure
compliance with the Code has been another key focus area. I am
pleased that the Group was in compliance with all the provisions of
the Code by the end of the year. You can read about our position
with respect to the Code on page 143.
In order to identify any enhancements that could be made to the
information flows and engagement the directors may require in the
execution of their statutory duties, the Committee considered and
discussed the output of a review of stakeholder engagement and
reporting across the Group. To support the Board in ensuring that
workforce policies and practice are aligned to the Group’s values
and support its long-term success, the Committee received
an update on the activities that provide assurance on this.
At our December meeting, to support the engagement with our
communities, the Committee reviewed the Group’s approach to
volunteering, its Volunteering Policy and how colleagues are
encouraged to volunteer.
We are pleased with our progress in developing the new
Committee’s charter and areas for focus, as well as a new set of
dashboards and communication channels into the Board, and
believe the Committee will provide an important lens and forum
for supporting the delivery of the Group’s purpose over time.
Elizabeth Chambers
Customer, Culture and Ethics Committee Chairman
27 February 2020
Members
Elizabeth Chambers
Robert East
(Chairman)
Graham Lindsay
Allocation of time
23+
Customer
Culture
Corporate governance
and stakeholder engagement
Alignment of executive director
objectives and culture
23%
25%
45%
7%
Key achievements for 2019
• Monitoring of culture and customer outcomes
through ‘Blueprint’ and ‘Customer’ dashboards.
• Overseeing full compliance with the 2018 Code
by the end of 2019.
• Review of stakeholder engagement and reporting
to ensure information flows continue to enable
directors to perform their duties effectively.
Priorities for 2020
• Continue to monitor and challenge the embedding
of the Group’s culture and delivery of positive
customer outcomes.
• Review the Group’s community investment priorities
and initiatives to ensure impact and sustainability.
• Review new product and channel plans against our
purpose and understand how their design and
delivery will support this.
• Review the Board’s engagement with employees to
ensure it is frequent and that their inputs and ideas
are considered in our deliberations.
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25
+
45
+
7
+
N
S H A R E H O L D E R A N D I N V E S T O R R E L AT I O N S
Effective engagement with shareholders and other stakeholders
Effective engagement
with stakeholders
The Board recognises its responsibility to take into consideration
the needs and concerns of the Group’s stakeholders as part of
its decision making process, fulfilling its duty under s.172 of the
Companies Act 2006 to promote the long-term success of the
Company. You can read in detail about why and how our Board
engages with our stakeholders, the impact of the engagement
and how we had regard to the factors in s.172 of the Companies
Act 2006 in our s.172 statement on pages 83 to 87. Our business
model on page 13 shows the role customers and colleagues play
in delivering sustainable returns.
Reviewing our stakeholder engagement
and information
In addition to existing stakeholder engagement and reporting of
this to the Board, a review of our current stakeholder engagement
activities was undertaken and reviewed by the Customer, Culture
and Ethics Committee during the year.
The review considered:
• who the Company’s key stakeholders are;
• our engagement activities with each key stakeholder across
the Group and the appropriateness of this engagement;
• the information each Group and Divisional Board and
Committee receives on our stakeholders, including as to the
outcome of engagement activities;
• that stakeholder engagement is a two-way process and whether
appropriate stakeholder feedback loops are in place; and
• whether there was a need for greater direct engagement with
any stakeholders at Board level.
The Customer, Culture and Ethics Committee discussed the
outcome of the review and whether any changes could be made
to engagement, reporting and feedback processes in order to
further support the directors in conducting their duties under
s.172 of the Companies Act 2006 and to enhance stakeholder
engagement. Following discussion, the Committee agreed that
there were good levels of stakeholder engagement across the
Group and that with the addition of new colleague engagement
mechanisms (as detailed on the next page) and reporting to the
Committee, the directors received sufficient information to enable
them to effectively undertake their s.172 duties. The Committee
approved changes identified to enhance stakeholder engagement
and reporting, such as: changes to the Board reporting templates
to increase focus on stakeholders; a review of stakeholder mapping;
and a roll-out of refresher training for directors of Group companies
on their s.172 duties.
Engaging with our employees
The focus of employee engagement this year related to the launch
and embedding of our Blueprint. You can read about this in detail
on page 67.
You can also read about other employee engagement on page 84,
which included:
• the cascading of our Blueprint across the Group utilising direct
employee engagement; and
• communication with colleagues in relation to the defence
against the unsolicited offer by Non-Standard Finance plc;
and our first Group-wide colleague survey.
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Annual Report and Financial Statements 2019
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Governance S H A R E H O L D E R A N D I N V E S T O R R E L AT I O N S C O N T I N U E D
Effective engagement with shareholders and other stakeholders continued
Engaging with our employees continued
As noted on page 104, during the year the Board undertook employee
engagement activities in our Bradford office, including in relation
to our Blueprint. Our Board members have also undertaken various
other direct employee engagement activity, such as: site visits;
visits with Customer Experience Managers (CEM); and customer
call listening with colleagues at our call centres.
In response to the changes in the 2018 UK Corporate Governance
Code and Board appetite to have greater visibility of the colleague
perspective on key business and cultural matters, the Group has
adopted a model of a combination of workforce panels and a
designated non-executive director to lead employee engagement
and represent the voice of the employee in the boardroom.
The format of elected workforce panels was already well known
and understood by colleagues, with similar forums already in place
to two of our three divisions, and take-up of such groups historically
had been strong. During 2019 the approach to compliance with
the Code requirements was designed and approved by the Board,
with updated terms of reference and the role for the workforce
panels finalised for alignment with the Code. During the year,
workforce panels met and discussed what they would consider
to be the emerging themes from our Group-wide colleague survey.
Open discussions were held and the feedback from the panels
was then reported to our Group Executive Committee and Board.
In order for the mechanisms to succeed, a feedback and reporting
loop has been designed for 2020, as set out in the diagram on the
next page. In order that the workforce panels also discuss key
matters on the mind of the Board, topics will be identified by
senior management for input by the workforce panels.
The structure of workforce panels also works to support our
designated Non-Executive Employee Champion, Graham Lindsay.
Graham’s role will be to lead the Board’s engagement with
employees through a combination of engagement with the
workforce panels and direct employee engagement. Graham
has engaged with employees through multiple channels, including:
• visits to all Group sites;
•
joining a regional meeting in our CCD;
• visiting customers with a CEM, attending a regional briefing
session held by the Managing Director of CCD and participating
in a ‘question and answer’ session;
•
joining a colleague Blueprint session in Bradford and participating
in ‘break-out’ sessions; and
• engaging with the Chairs of the workforce panels in order
to understand how he could best engage with the forums
in 2020.
These Board engagement arrangements support and complement
existing employee engagement mechanisms, ranging from informal
‘Q&A’ opportunities and focus groups to a Group-wide colleague
survey. This mix of activities is deliberate, acknowledging that
colleagues like to give and respond to feedback in a variety of ways.
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Our workforce panel and designated NED model
Board
Group Executive Committee (Group ExCo)
Designated
Non-Executive
Employee Champion
Graham Lindsay, our
designated Non-Executive
Employee Champion,
leads on the Board’s
engagement with the
workforce panels and the
wider workforce
Step one
Step two
Step three
Guidance on some
key topics that an
understanding of
employee views would
benefit the Board
Discussion at each
workforce panel and
then feedback shared
with Group ExCo
and Board
Feedback
to forums
through internal
communications
Consumer
Credit Division
workforce panel
Vanquis Bank
Moneybarn
workforce panel
workforce panel
Workforce policies and practices
Part of the role of the Customer, Culture and Ethics Committee
is to provide oversight that the Group’s policies are aligned
with its Blueprint. During the year, the Committee reviewed the
sources of assurance the Board receives that workforce policies
and practices are aligned with our Blueprint, such as: results of
the colleague survey, our performance management process,
our colleague recognition system, cultural key performance
indicators reported to the Committee and whistleblowing.
Management also monitors key colleague-related performance
indicators, such as length of service, vacancies and turnover
rates. During the year, management commenced a review of its
workforce-related policies to ensure appropriate alignment with
our Blueprint, which is expected to be completed during 2020.
Our approach to investing in and rewarding
our workforce
You can read about how we invest in our workforce on page 141
and also our approach to rewarding our workforce on page 158.
During the year, the Customer, Culture
and Ethics Committee reviewed the
sources of assurance the Board receives
that workforce policies and practices
are aligned with our Blueprint.
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Governance S H A R E H O L D E R A N D I N V E S T O R R E L AT I O N S C O N T I N U E D
Effective engagement with shareholders and stakeholders: investor relations
Key investor engagement themes in 2019
Engagement
overview
The 2018 Code promotes an inclusive approach to stakeholder engagement and encourages boards to
reflect on the way in which decisions are taken and how that might affect the quality of those decisions.
It encourages a broad focus and a willingness to listen to different voices and influences, and supports
openness and accountability in delivering long-term sustainable success. In that spirit, the Group is
committed to engaging in open and honest dialogue with its stakeholders including its investors as shown
below by some of the Board activities undertaken in the year, such as hosting the Capital Markets Day.
The Chairman takes responsibility for ensuring that all directors are aware of any issues and concerns that
major investors may have and also ensures that appropriate engagement mechanisms are maintained and
kept under review so that they remain effective. In that realm, the Group maintains the following mechanisms
to ensure ongoing effective and robust engagement with its investors:
• meetings with major investors to discuss what matters to them;
• the Capital Markets Day;
• the Annual Reports and Accounts;
• the Annual General Meeting (AGM);
• stock exchange announcements (RNS) and press releases;
• a dedicated investor relations team;
•
• the Corporate Responsibility Report; and
• the Investors section of the Group website.
investor roadshows;
How the Board
engages
The Chairman and the Board believe that regular engagement provides investors with an opportunity to discuss
particular areas of interest and raise any concerns. The Group is committed to effectively communicating
its plans and understanding investors’ views on its overall strategy and performance. In turn, this enables
our investors and investment analysts to formulate a strong understanding of our purpose, strategy,
performance and culture.
Our Chairman’s role is to ensure effective engagement with investors, to encourage their participation and to
undertake regular engagement himself with investors in order to understand their views. This is demonstrated
by the various engagement mechanisms listed above. Regular dialogue and direct engagement by Board
members with institutional investors took place in 2019, including meetings after the announcement of
the preliminary and interim results and in relation to the unsolicited offer by Non-Standard Finance plc.
The Chairman and Senior Independent Non-Executive Director and Chairman of the Remuneration
Committee have both held meetings with our investors during 2019. The Chairman also ensures that
the Board as a whole receives feedback and attains a clear understanding of the views of investors.
The Group has a dedicated investor relations (IR) team which is in regular dialogue with our investors and
investor analysts. The IR team presents regular reports for the Board which outline the general nature of
matters communicated and discussed with institutional investors, including feedback and engagement
plans. Feedback from brokers is distributed to the Board and senior management team. Independent
reviews of investor views are also commissioned through perception audits and reviewed by the Board. The
Board reviews and approves quarterly management statements and half and full-year results statements
which helps ensure that our investors are given timely information pertaining to the Group’s performance.
Capital
Markets Day
(CMD)
A Capital Markets Day was held in November which provided a valuable opportunity for the Board to meet
and engage with the Group’s key investors in person and hear their views. Presentations were given on our
marketplace; strategy; funding and capital; investment case; and the progress and plans for our three divisions:
Vanquis Bank, Moneybarn and the Consumer Credit Division. These presentations were delivered by the Chief
Executive Officer, the Chief Finance Officer and also the Managing Directors of each of our three divisions.
The Capital Markets Day enabled the Group to discuss and communicate how the Group will seek to deliver
its purpose, including our strategy and growth ambitions, details of the market in which we operate and the
Group’s funding and capital strategy. The presentation to investors provided a deeper insight of the Group’s
direction of travel and a compelling investment case designed to deliver medium to long-term sustainable
and attractive shareholder returns for the success of the Group as a whole.
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Key investor engagement themes in 2019
Capital
Markets Day
(CMD)
continued
Investors were able to ask questions and seek clarity on certain issues, enabling an open and honest
discussion to take place. To enhance wider engagement and inclusivity, the CMD was also streamed online
and this can be found on the ‘Results, reports and presentations’ page of the Investors section on our website.
Annual
General
Meeting
(AGM)
Session
Marketplace and strategy
Vanquis Bank
Moneybarn
CCD
Funding and capital
Investment case
Presenter
Malcolm Le May
Neil Chandler
Shamus Hodgson
Chris Gillespie
Simon Thomas
Malcolm Le May
The AGM presents investors with an opportunity to ask Board members questions and to cast their votes
for proposed courses of action, including the appointment of Board members, the Directors’ Remuneration
Report (DRR) and the new Directors’ Remuneration Policy (DRP).
Prior to the AGM, the Remuneration Committee undertook a formal and transparent procedure for
developing the Remuneration Policy. This included Andrea Blance (the Chairman of the Remuneration
Committee) engaging with key investors during the end of 2018 and early 2019, consulting and seeking
their views on the changes that were being considered to the DRP for 2019.
Andrea also engaged with investors prior to the AGM regarding points raised by proxy advisors in relation
to the Group’s remuneration. At the AGM, all resolutions were passed. The resolution regarding the DRR
recorded an outcome of 79.58% in favour. As a consequence, and in accordance with the Code, the Group
published a statement when announcing its AGM results acknowledging that shareholder concern had
been expressed through the vote in relation to the DRR. The views expressed by investors were considered
following the AGM and discussed by the Remuneration Committee in order that they could be directly
addressed. A series of changes to executive remuneration to directly respond to the concerns raised in an
appropriate way were developed. In August 2019, Andrea wrote to investors and key proxy advisory groups
to consult on the proposed changes, which had been designed to create clear, stretching, but achievable,
objectives that would motivate executive directors to drive and deliver outstanding performance for our
investors. Following individual dialogue and feedback received from investors during the engagement
process, the proposed changes had been received positively.
After the closure of the consultation process, the Remuneration Committee considered the proposed changes
and the feedback received from shareholders, and it confirmed the changes for 2019 implementation and
beyond where appropriate. You can read the confirmed changes resulting from the review and shareholder
consultation on pages 146 and 147 and you can also read our update statement, which sets out the outcome
of the shareholder consultation and actions taken, on the Investors section of our website. Our Directors’
Remuneration Report, starting from page 149, sets out how we have implemented the Directors’ Remuneration
Policy during the year and the changes following our shareholder consultation.
Provident Financial plc
Annual Report and Financial Statements 2019
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Governance S H A R E H O L D E R A N D I N V E S T O R R E L AT I O N S C O N T I N U E D
IR Programme
In addition to the above activities,
our dedicated investor relations team
maintains a planned IR Programme
throughout the year that ensures
active ongoing dialogue with
our investors. Other investor
engagement activities during
the year include the following:
1 The Annual Report
This is the most significant engagement tool that is intended to
show investors that the Board has set the Company’s purpose
and strategy; and how the Board activities focused on meeting
its objectives and achieving outcomes through the decisions it
has taken. Most importantly, this enables investors to evaluate our
approach to governance arrangements with all information at hand.
2 The Group website
The Group website provides investors with timely information
on the Group’s strategy and performance as well as any other
key Board activities. It also provides investors with details regarding
the composition of the Board, up-to-date financial information,
regulatory news and all released RNS, together with detail
regarding how the Group meets its Code obligations.
3 Investor days
As shown above, the Group held a Capital Markets Day which
outlined the Board’s Vision for the Future and continuing to
deliver for the underserved. These events are a key engagement
tool with our key investors to hear their views and communicate
the plans, risks and opportunities facing the Group.
4 Investor/analyst meetings
The Group takes a proactive approach by inviting investors and
analysts to meet with divisional senior management and to visit
operational facilities.
2019 IR Programme
Trading update
15 January 2019
Annual Report 2018
13 March 2019
Annual General
Meeting and results
statement
21 May 2019
JAN
FEB
MAR
APR
MAY
JUN
Defence against unsolicited offer from NSF
DRP engagement
Late 2018
and early 2019
Final results and
post-results investor
engagement roadshow
13 March 2019
Trading update and
Vision for the Future
3 May 2019
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5 US and European roadshow programmes
The Group is dedicated to facilitating necessary access for
overseas investors to management, enabling them to receive the
same access to information as investors in the UK. Roadshows
are usually attended by the Chief Executive Officer, the Chief
Finance Officer and the Head of IR. The Group did not undertake
overseas roadshow activity in 2019 due to defending the
unsolicited offer from NSF and preparation for the Capital
Markets Day in November 2019. The Group plans to resume
overseas roadshows in 2020.
6 Attending broker conferences
Management regularly attends and presents at various conferences
hosted by brokers to ensure visibility and accessibility by a wide
variety of investors, including those from different geographies.
Attendance at broker conferences was limited to attendance at
the Goodbody conference in Dublin in November 2019 but the
Group plans to increase attendance in 2020.
8 Shareholder correspondence
The Group is committed to engaging and responding to all investor
queries within two working days of receipt of correspondence.
9 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. The
Group did not undertake an investor perception audit in 2019 as
management was heavily engaged with shareholders through
defending the unsolicited offer from NSF and it was considered
appropriate to undertake the Capital Markets Day in November 2019
before obtaining feedback. Following a competitive tender process,
the Group has now engaged a new independent third party to
conduct the next investor perception audit which is scheduled
in the first half of 2020 and will obtain feedback on both the
Capital Markets Day and performance in 2019 as well as strategy,
management and communication.
7 Corporate Responsibility Report (CR Report)
The CR Report offers investors a clear and comprehensive
insight into the Group’s Blueprint and its social purpose of
providing financial inclusion for those who are underserved
and also highlights the Group’s contribution towards reducing
carbon emissions to protect our climate.
2019 interim results
and post-results
investor engagement
roadshow
30 July 2019
Update statement
on 2019 AGM
resolution voting
11 November 2019
JUL
AUG
SEP
OCT
NOV
DEC
Consultation regarding AGM vote for DRR
Trading update and
Capital Markets Day
7 November 2019
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113
Governance D I V I S I O N O F R E S P O N S I B I L I T I E S
Our governance framework
Board of directors
Nomination Committee
• Structure, size and composition
Audit Committee
• Integrity of the financial statements.
Group Risk Committee
• Risk appetite.
of the Board.
• Diversity.
• Succession.
• Leadership needs of the Company.
• Board appointments.
• Independence and effectiveness
of the internal and external auditor.
• Reviews internal control systems
and manage financial risks.
• Monitors the external auditor’s
independence.
• Risk assessment processes.
• Principal and emerging risks.
• Effectiveness of risk
management framework.
• Internal capital adequacy
assessment process.
Read more on pages 125 to 128
Read more on pages 129 to 134
Read more on pages 135 to 137
Remuneration Committee
• DRP and alignment to our purpose
and strategy.
• Level of remuneration for senior
management, executive directors
and the Chairman.
• Oversight of divisions.
• Workforce remuneration-related policies.
Customer, Culture
and Ethics Committee
• Stakeholder engagement.
• Approach to managing impact
on environment.
• Oversees the alignment of policies,
procedures, systems and behaviours
with the delivery of customer
experience and customer outcomes.
• Monitors embedding of purpose,
culture and ethics.
Read more on pages 145 to 168
Read more on page 106
Executive Committee
Disclosure Committee
• Compliance with Market
Abuse Regulation and
disclosure requirements.
• Oversight of processes
for identifying, treating and
disclosing inside information.
• Development and delivery of the Group’s strategic objectives
and delivery of purpose.
• Promotes the Group’s culture and values.
• Reviews and debates matters before consideration by the Board.
• Monitors and manages financial and operations performance.
• Oversight of management of risk within risk appetite.
• Communication strategy and plan.
• Succession planning.
Delegated Authorities Manual
Board Governance Manual
Corporate policies
These governance documents are key components of the Group’s
governance framework and are designed to clearly set out roles,
responsibilities and authorities. The Board reviewed and approved
enhancements to the Group Delegated Authorities Manual and
Board Governance Manual during the year and the Group
corporate policies are periodically reviewed. The divisions are
responsible for embedding the corporate policies with the Board
having oversight.
Information and reporting
The Chairman, Chief Executive Officer and Company Secretary
collaborate on finalising agendas and ensure that there is adequate
time allocated to support effective discussion. The Board and its
Committees receive high-quality, up-to-date information for them
to review at least seven days in advance of meetings.
During the year, the Group Company Secretariat department worked
with senior management and other Board paper authors to renew
and enhance Board and Committee reporting across the Group,
providing training, tools and templates. The templates ensure that
s.172 considerations and our Blueprint are taken into account when
preparing Board papers. The work during the year on Board papers
has resulted in improvements in their content, length and insightfulness
and we believe has promoted better debate and discussion.
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Role of the Board
The Board is responsible to its shareholders and other stakeholders
for the management, performance and long-term success of the
Company. It sets and oversees the Group’s purpose and strategy,
ensuring that the Group is managed effectively by monitoring
internal controls and risk management and acts in the best
interests of its shareholders, whilst having regard to its other
stakeholders. Further details on how we engage with
stakeholders are on pages 83 to 87.
Where a matter is not reserved to the Board or one of its
Committees, it has delegated all other matters to the Group Chief
Executive Officer who is supported by the Executive Committee.
The Board operates within a formal schedule of matters reserved
to it, which is reviewed and updated on a regular basis. The Board
meets regularly and provides direction, oversight and detailed
review and challenge to management.
In order for it to operate effectively and provide the right amount
of time and consideration to relevant matters, the Board delegates
authority to its principal Committees detailed below. Its Committees
then report, and make recommendations, to the Board to ensure
it maintains oversight of the Committees’ activities. The Chairs
of the Board Committees also report to the Board after each
Committee meeting, as appropriate, on key areas of Committee
discussion. More detail on the Committees and their work is
described on pages 125 to 137.
The Board also delegates the execution of the Group’s strategy
and day-to-day management of the Group to its executive directors,
who are supported by the Executive Committee. An effective
working relationship between the Board and senior management
facilitates both support and challenge, with Board awareness
enhanced through regular dialogue including upwards reporting
from senior management. Executive Committee members
attend Board meetings to present on matters that the Board
has requested or requires oversight of.
Key Board reserved matters
• Approve and monitor the implementation of the
corporate strategy.
Clear roles, responsibilities, policies
and processes help create the
conditions for overall Board and
management effectiveness.
Managing the business
The Group Executive Committee (ExCo) is chaired by
Malcolm Le May and its members are the Chief Finance Officer,
the General Counsel and Company Secretary, the Managing
Directors of the divisions, the Group HR Director, the Group Risk
Officer, the Chief Internal Auditor, the Group Chief Information
Officer and the Group Corporate Communications Director.
The ExCo supports the Board by overseeing and delivering the
Group’s strategy and the day-to-day management of the business.
The ExCo meets regularly and reviews all material matters prior
to the Board, making recommendations to the Board and its
Committees for approval. During the year, amongst other
matters, the ExCo:
• reviewed operational and financial performance across the Group;
• reviewed the Group’s succession plans and approach to talent
pipeline development;
• reviewed the colleague survey data;
• reviewed customer complaints data;
• reviewed data relating to persistent debt;
• oversaw the successful completion of the Vanquis ROP
redress programme;
• approved Moneybarn’s move to a new office;
• oversaw the Group-wide Blueprint roll-out;
• approved the Group annual budget submission for Board approval;
• Oversight of the Group’s operations and their performance.
• monitored progress on actions arising from the corporate
• Approval of the annual budgets for the Group and its subsidiaries.
planning conference;
• Oversee the Group’s sound systems of internal controls
• reviewed adequacy of the risk management framework;
and risk management.
• assessed and approved the Group risk appetite framework;
• Approve and monitor the Group’s overall corporate
• reviewed and approved, for recommendation to the Board,
governance arrangements.
• Approval of major changes to the Group’s structure including
the Group Delegated Authority Manual and Board
Governance Manual;
acquisitions and disposals.
• agreed the proposal of the Group-wide recognition platform
• Approval of the Group’s regulatory capital requirements.
• Approve and monitor major investments and divestments,
‘Perks for Work’;
• oversaw CCD’s voluntary redundancy proposal programme;
including cessation of any of the Group’s businesses.
• closely monitored the delivery of our strategic initiatives
• Set, instil and monitor the Group’s purpose, culture, values
programme, including CCD’s progress to breakeven in 2020;
and standards.
• monitored progress on the implementation of SMCR in CCD
The matters reserved for the Board and the terms of reference
of each of its Committees can be found on the Group’s website
at www.providentfinancial.com.
and Moneybarn;
• received regulatory updates;
• approved the ICAAP submission for Board approval; and
• reviewed diversity statistics and diversity strategy and projects.
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Annual Report and Financial Statements 2019
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Governance D I V I S I O N O F R E S P O N S I B I L I T I E S C O N T I N U E D
Division of roles
The roles of the Chairman, Chief Executive Officer and Senior Independent Director are clearly defined and are set out in writing.
The Chairman leads the Board and ensures its effectiveness and the Chief Executive Officer is responsible for running the Company’s
business while leading the Executive Committee. The Senior Independent Director acts as a sounding board for the Chairman
and serves as an intermediary for the Chief Executive Officer, other directors and shareholders.
Details of the roles and responsibilities are summarised below, with full details available on our website, www.providentfinancial.com.
Chairman
Chief Executive Officer
• Provides leadership of the Board.
• Safeguards corporate governance.
• Ensures effective communication with stakeholders.
• Demonstrates ethical leadership and promotes high
standards of integrity.
• Ensures alignment to strategic objectives.
• Encourages and promotes critical discussion
and appropriate challenge.
• Ensures Board decisions are taken on a sound
and well-informed basis.
• Provides leadership and direction to the Group.
• Chairs the Executive Committee and makes decisions
on matters affecting the operation, performance
and strategy of the Group’s businesses.
• Develops and recommends strategy and long-term
objectives of the Group for approval by the Board.
• Responsible for day-to-day management of the Group.
• Ensures that there are appropriate risk management
and internal controls in place.
Senior Independent Director
Chief Finance Officer
• Available to address any concerns of shareholders.
• Leads the Group finance teams.
• Acts as a sounding board for the Chairman.
• Supports the Chief Executive Officer in developing
• Acts as a conduit for the other directors and takes the
and implementing the Group strategy.
initiative to discuss any issues amongst Board members.
• Ensures effective financial reporting, processes
• Responsible for reviewing the effectiveness
of the Chairman.
and controls are in place.
• Deputises for the Chief Executive Officer.
Non-executive directors
Company Secretary
• Provide independent and constructive challenge.
• Responsible to the Board.
• Support the Chairman by ensuring effective governance
• Ensures the information sent to the Board is fit for
across the Group.
purpose and facilitates effective discussions.
• Monitor and review the performance of the
executive directors.
• Provides comprehensive practical legal support and
guidance to directors, both as individuals and collectively.
• Bring experience and knowledge from other sectors
• Provides support for the Board on corporate governance.
which are of relevance to the Group.
• Responsible for communicating with shareholders,
as appropriate.
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Independence of non-executive directors
Independent non-executive directors provide independent
oversight and constructive challenge to executive directors.
As well as independence, they bring impartiality, skills and
experience, knowledge and their own personal qualities
to the boardroom.
Board balance
67+
Independent
Non-Executive Directors 6
Executive Directors
and Chairman
3
The Nomination Committee and Board review the independence
of its directors on appointment and thereafter annually. The reviews
consider factors set out in the 2018 Code, such as tenure and
circumstances, which may impair or could impair independence.
Following consideration and recommendation from the Nomination
Committee, the Board determined that each non-executive director
remained independent except the Chairman, who was independent
on appointment. In determining the independence of Robert East,
the Nomination Committee and Board did take into account that
he is the Chairman of Vanquis Bank and confirmed that he still
remained independent in relation to his appointment of the
Company, particularly given his short tenure. Each of the
non-executive directors appointed during the year was formally
determined to be independent.
All directors are required to disclose to the Board any outside
interests which may pose a conflict with their duty to act in the
best interests of the Company. The Board reviewed and approved
a Conflicts of Interest Policy during the year which applies to all
Group directors and sets out the arrangements for when a director
of any company within the Group has an actual or potential conflict
of interest. Further details on conflicts of interest can be found
in the Directors’ Report on page 139.
Board appointments and time commitment
The Committee reviewed the Board appointment process during
the year to ensure it continued to be transparent and robust. The
process sets out what the Committee needs to consider when
recommending Board appointments which includes directors’
skills, other commitments, diversity, independence and culture.
During the year, Graham Lindsay and Robert East were
appointed as Independent Non-Executive Directors and Robert
was also appointed as Chairman of Vanquis Bank Limited. As
announced on 9 December 2019, Neeraj Kapur was appointed
as Chief Finance Officer and will join the Board on 1 April 2020.
A rigorous appointment process was followed for their
appointments as detailed on page 128.
The Board reviewed the time commitment of each director
during the year, as well as on appointment and on the change
of external time commitments, and determined that they had
sufficient time to discharge their responsibilities having
considered their external time commitments. Directors are
required to ensure that they will have sufficient time to meet
what is expected of them effectively.
The Board will consider appointments that the directors may
wish to take on in order that they do not compromise their
effectiveness and the Code also requires that additional external
appointments should not be undertaken without approval of the
Board. The Board’s External Appointment Policy is designed to
ensure that all directors remain able to effectively discharge their
responsibilities to the Company, whilst recognising the benefit of
external appointments. The contractual appointment documents
for directors and our internal policies require that any proposed
appointment to the board of another company will require the
prior approval of the Board. The Board considers 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;
•
•
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; and
• the Board would not permit an executive director to take
on the chairmanship of a FTSE 100 company.
During the year, the Board considered Angela Knight’s proposed
appointment to Encore Capital Group, Inc., as a Non-Executive
Director. The Board took account of her time commitments and
resolved that she would have sufficient time to discharge her
duties to the Company and, as such, approved the appointment
after noting that she would also be stepping down from the board
of TP ICAP plc in 2020. During 2019, the Board also considered
proposed external appointments for other non-executive directors
which were not significant enough to affect their time commitment
and were therefore approved by the Board.
Member attendance at Board and Committee
meetings in 2019
The Board held nine meetings during 2019. In addition to the
formally scheduled meetings, the Board also met on 13 other
occasions (in person and via telephone conferences) often at
short notice, for example to discuss the unsolicited offer by
Non-Standard Finance plc.
The Board holds meetings at regular intervals when the Group’s
financial and business performance is reviewed, along with risk,
IT, legal, human resources and strategic matters. There is a
comprehensive meeting pack and agenda which are circulated
before both Board and Committee meetings to allow the
directors adequate opportunity to consider the matters to be
discussed. Board and Committee meetings are scheduled more
than a year in advance and if any director is unable to attend a
meeting, they are encouraged to provide their opinions and
comment on the papers and matters to be considered when
circulated before the meeting. Meetings are structured so that
appropriate time is devoted to all agenda items. In addition to
these scheduled meetings, ‘ad hoc’ meetings are held outside
the published cycle where circumstances require – for example,
to approve appointments to the Board, to deal with any material
transactions or to approve regulatory submissions.
Provident Financial plc
Annual Report and Financial Statements 2019
117
Governance33
+
N
D I V I S I O N O F R E S P O N S I B I L I T I E S C O N T I N U E D
Member attendance at Board and Committee meetings in 2019 continued
The table below sets out the Board and Committee attendance during the year. Attendance is shown as the number of meetings
attended out of the total number of meetings possible for each individual director. During 2019, the absences by directors shown
below were all as a result of other pre-planned commitments, urgent personal matters or meetings which were called at short notice.
Board member
Board
Ad hoc
Audit
Committee
Ad hoc
Nomination
Committee
Ad hoc
Remuneration
Committee
Ad hoc
Group Risk
Committee
Ad hoc
Customer,
Culture and
Ethics
Committee
Total number
of meetings
Patrick Snowball
Malcolm Le May7
Simon Thomas8
Andrea Blance6,7
Graham Lindsay2
John Straw1
Robert East3
Paul Hewitt4,7
9
9/9
9/9
7/7
9/9
6/6
1/3
4/4
9/9
13
12/13
13/13
7/7
13/13
8/8
8/11
0/1
13/13
Elizabeth Chambers5
9/9
13/13
Angela Knight7
9/9
13/13
6
—
—
—
6/6
—
1/2
—
6/6
3/3
6/6
2
—
—
—
1/2
—
—
—
2/2
—
2/2
5
5/5
—
—
5/5
3/3
1/2
2/2
5/5
5/5
5/5
1
1/1
—
—
1/1
1/1
—
0/1
1/1
1/1
1/1
5
—
—
—
5/5
2/2
—
—
3/3
3/3
5/5
5
—
—
—
5/5
4/4
—
—
5/5
5/5
5/5
4
—
—
—
2/2
1/1
1/1
—
4/4
4/4
4/4
2
—
—
—
—
—
—
—
2/2
1/2
2/2
3
—
1/1
—
1/1
2/2
—
2/2
1/1
3/3
1/1
1 John Straw stepped down on 20 May 2019.
2 Graham Lindsay was appointed on 1 April 2019.
3 Robert East was appointed on 26 June 2019.
4 Paul Hewitt and Elizabeth Chambers were members of the Remuneration Committee until July 2019.
5 Elizabeth Chambers was a member of the Audit Committee until July 2019.
6 Andrea Blance and Graham Lindsay were members of the Group Risk Committee until July 2019.
7 Malcolm Le May, Andrea Blance, Paul Hewitt and Angela Knight were members of the Customer, Culture and Ethics Committee until July 2019.
8 Simon Thomas took extended leave from April 2019 to July 2019 to have a heart operation.
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C O M P O S I T I O N , S U C C E S S I O N A N D E V A L U AT I O N
Appointing directors who are able
to make a positive contribution to the
Board and the Company is one of the key
cornerstones of Board effectiveness.
Board composition
We believe that it is key to have the right Board composition in
order to ensure Board effectiveness and successful delivery of
the Group’s strategy. In that regard, the Board strives to ensure
that its composition and that of its Committees is appropriate
with a sufficient combination of skills, diversity, experience and
knowledge. In determining this, consideration is given to the
length of service of the Board as a whole to ensure membership
is appropriately refreshed. In addition, outcomes from the Board
evaluation pertaining to Board composition are shared with and
discussed by the Nomination Committee; these are then used to
identify gaps in skills and experiences which would be built into
the Board training and development programme.
A review of the Board to consider its composition, diversity and
how effectively its members work together to achieve the Group’s
objectives is undertaken annually. The Nomination Committee
ensures that a rigorous and transparent appointment procedure
is followed, with a diverse pool of candidates considered for any
vacancy which arises, with any appointments based on merit,
having regard to the skills, competencies and experience of the
candidate. The Committee also ensures that succession plans
are in place for Board and senior management positions and is
also responsible for overseeing the development of a diverse
pipeline of talent. More details on the role of the Nomination
Committee in the Board appointments process can be found
on page 128.
As a result, the last 12 months have seen further Board changes
reflecting the demands on the Board and Group in the delivery
of our purpose. Importantly, the refreshed Board reflects a good
balance of skills, experience and diversity, required for the Board
to remain effective, supporting the delivery of the Group’s
Blueprint purpose, culture and strategic goals.
Directors’ Board tenure as at 26 February 2020
Board changes
Our Board has continued to evolve in 2019 and, following a thorough
search to identify appropriate candidates with the right cultural
fit, skills and experience, the Group was pleased to welcome
Graham Lindsay and Robert East in April and June 2019 respectively
as Independent Non-Executive Directors. The appointments of
Graham and Robert were completed at the recommendation of
the Nomination Committee, providing the Board with a deep wealth
in expertise. The refreshed Board now reflects sufficient size and
independence, which enables the Board to operate effectively.
The Board currently consists of nine members which includes the
Non-Executive Chairman, one Senior Independent Director, five
Independent Non-Executive Directors, and two Executive Directors.
Biographical details of all directors are given on pages 92 to 97.
In addition, the composition of the Committees was also
refreshed during the year to enhance the focus and efficiency
of the Board Committees.
On appointment, non-executive directors receive a formal
appointment letter and executive directors receive a formal
service contract, which identifies the time commitment expected
of them. Further details on the terms and conditions of appointment
of non-executive directors and service contracts of executive
directors are available to investors for inspection at the Group’s
registered office address during normal business hours.
During 2019, the following changes to the Board took place:
• On 20 May, John Straw stepped down from the Board.
• On 1 April, Graham Lindsay was appointed to the Board
as an Independent Non-Executive Director.
• On 26 June, Robert East was appointed to the Board as
an Independent Non-Executive Director and he was also
appointed as the Chairman of the Board of Vanquis Bank
Limited, a subsidiary company of the Group.
More details of their skills and experiences can be found
on pages 92 to 97.
Tenure
0–3 years
3–6 years
8
1
89+
Patrick Snowball
Malcolm Le May
Simon Thomas
Andrea Blance
Elizabeth Chambers
Paul Hewitt
Angela Knight
Graham Lindsay
Robert East
2014
2015
2016
2017
2018
2019
Total tenure
1 year, 6 months
2 years, 1 month
2 months
3 years, 9 months
1 year, 3 months
3 years
1 year, 6 months
1 year, 6 months
1 year, 6 months
11 months
9 months
Malcolm Le May key:
Chief Executive Officer
Interim Executive Chairman
Non-Executive Director
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Annual Report and Financial Statements 2019
119
Governance
11
+
N
C O M P O S I T I O N , S U C C E S S I O N A N D E V A L U AT I O N C O N T I N U E D
Induction for new directors
Board induction
The Chairman and Company Secretary ensure that all newly
appointed directors receive a comprehensive induction
programme that is tailored to their skills and experiences. The
programme is aimed at providing an in-depth understanding of
the business, our purpose, culture and values, and the markets
in which the business operates, as well as providing directors
with the opportunity to meet with employees. The induction
programme comprises a combination of site visits and meetings
with other Group executives and senior management as
illustrated below.
The tailored induction programme
On joining the Board in 2019, Graham and Robert were provided
with a tailored induction programme which was designed to ensure
that they gained a full understanding of the Group. An example
of a programme that is individually tailored to the knowledge
and experience of each director includes the following:
One-to-one meetings
Graham and Robert met with senior management including
the members of the Executive Committee and the Divisional
Managing Directors. A director’s specific induction is tailored
to the role they are appointed to; therefore senior management
induction meetings are also held as appropriate, including with
Group Internal Audit, Group Finance, Divisional Chief Finance
Directors and Divisional Chief Risk Officers. The new director will
also meet key stakeholders relevant to their specific role such as
the Group’s key advisors and brokers, representatives from the
FCA and Prudential Regulatory Authority (PRA), the Group’s
major investors, and the Group’s auditor, Deloitte LLP.
Induction materials
Each new director is provided with full access to an electronic
‘reading room’, which includes induction material, such as various
relevant policies, terms of reference, Group organisational charts,
the latest trading statements, the Annual Report and Accounts,
recent shareholder information and broker notes as well as
recent and relevant regulatory correspondence.
Field and site visits
Relevant arrangements are made for all new appointments to go
on customer visits accompanied by a Customer Experience
Manager. This gives an insight into the Consumer Credit Division
and enables directors to experience how we seek to deliver our
purpose. Each Board member also undertakes a field visit which
includes spending time at a regional home credit office with local
management who give an overview of the home credit operation
and how the team, together with the Customer Experience
Manager, works towards achieving best customer outcomes.
Graham and Robert undertook various site visits as part of their
induction programme. This included a visit to the main offices of
each of the businesses and spending time with key individuals at
different operational levels to gain a thorough understanding of
the business, its culture, its customers and its products. It is crucial
to the Group that the Board understands not only how the business
operates, but how it treats its customers and its employees on a
day-to-day basis. Examples of tailored induction site visits include:
• time spent in the Vanquis Bank call centre meeting a variety of
employees and gaining an understanding of the direct contact
the business has with its customers. Time is also spent with
the customer service team listening to calls, and receiving
presentations which provide an overview on fraud, collections,
analytics and customer services; and
• time spent at Moneybarn’s head office in Petersfield, meeting
the senior management team and gaining an understanding
of the business operations in more depth which includes
having one-to-one sessions with the members of the
Moneybarn Executive Committee.
As Chairman of Vanquis Bank, Robert has undertaken additional
significant engagement across the Vanquis Bank business, including
operations visits, listening to customer calls, and meeting with
Vanquis Bank’s key stakeholders such as the Prudential Regulatory
Authority and the Financial Conduct Authority.
Ongoing Board training and development
The Board believes that continuous director training and
development supports Board effectiveness. Under the direction
of the Chairman, the General Counsel and Company Secretary
takes responsibility to facilitate and arrange Board training, and
assist the Board with professional development.
The ever-evolving regulatory landscape means that there is an
increased need to continuously scan the horizon and identify
any key developments that need the Board’s prioritisation. As
such, the General Counsel and Company Secretary delivers
updates to the Board on any developing regulations and laws
and corporate governance by way of presenting Legal Reports
at each meeting. Regular updates are also provided by the
Chief Risk Officer in relation to emerging regulatory themes
and anticipated regulatory changes.
During the year the Nomination Committee reviewed an updated
Board Skills Matrix, which will enable more targeted training for
our directors and will support the annual director performance
review process. During the year, an enhanced Board training and
deep dive rolling programme was developed and approved by
the Board, which will be led by the General Counsel and Company
Secretary to promote awareness and knowledge amongst the
Board of key thematic and business-specific matters such as
customer vulnerability and financial difficulty.
In addition, the Board also received:
• an advisory briefing from an external advisor during the defence
against the unsolicited offer from Non-Standard Finance plc,
which was primarily focused on its duties and legal obligations
in the context of defending the unsolicited offer;
• a briefing on the SMCR ahead of its implementation for our
Consumer Credit Division and Moneybarn businesses, to
ensure that the directors were kept up to date on the regulatory
regime and its implications for those businesses; and
• training on the regulatory changes in respect of reporting
on how the directors undertake their duties under s.172
of the Companies Act 2006.
• time spent within the operations of CCD in the Group’s head
office in Bradford and with management who are responsible
for the home credit and Satsuma brands;
Directors are also given access to an external online academy
tool which provides a wide array of briefings, education and
bespoke training.
• one-to-one meetings with senior management at Vanquis
Bank’s London office;
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Board evaluation
Board evaluation: continuing to monitor and improve our performance
We fully recognise that a key cornerstone of corporate governance is an effective board. It is therefore important that boards
continuously monitor and improve their performance in order to remain effective, supporting the long-term success of the company.
As such, each year the Board undertakes a formal and rigorous evaluation of its own performance and the performance of its Committees
and individual directors; this gives the Board and the directors an opportunity to identify and reflect upon their strengths and
development areas and, ultimately, improve their effectiveness.
Reflecting his role in ensuring the effectiveness of the Board, our Chairman plays a key role in the design and approach of the annual
Board and Committee effectiveness evaluation and agreed the proposed approach with the General Counsel and Company Secretary.
The Board considered the proposed approach for the 2019 evaluation process at its September 2019 meeting and determined that
following last year’s internally led process and as the majority of the Board had been working together as a unit for over a year, it was
appropriate to undertake an externally facilitated evaluation, led by Lintstock. The Board also determined that the evaluation should
cover a broad range of areas, including composition, diversity and how effectively the Board members work together, including
during the period of defence against the unsolicited offer by Non-Standard Finance plc.
We set out more details about this year’s process and outcome below, together with updates on the actions identified last year. The
conclusions of this year’s externally facilitated review generated 66 individual points for the Board to consider across areas including
Board composition and diversity, dynamics, the oversight of stakeholders, strategy, operations, risk and people, meeting management
and support, as well as lessons from the successful defence of the unsolicited offer. These points informed a proposed plan of action
that the Board considered at the January 2020 meeting, and a number of the meaningful recommendations for enhancement are
reported on pages 123 and 124.
Note: Lintstock also provides the Group with an insider list management system. Lintstock has no other connection with the Company or its directors,
other than offering its services to other companies of which the Company’s directors are also directors.
Our three-year evaluation cycle
2017
2018
2019
External evaluation facilitated
by Lintstock (survey only).
Evaluation facilitated by our
Senior Independent Director.
External evaluation facilitated
by Lintstock (survey and interview).
Board evaluation 2018
As reported last year, given the relative short tenure of the Chairman and Board, the Chairman requested that the Senior Independent
Director facilitate the 2018 Board and Committee evaluation process. Halfway through 2019, the Board reviewed progress made
against the actions identified in the 2018 process to ensure they remained a focus area for continued Board effectiveness. An update
on the actions is set out below:
Area
Activities during 2019
Whilst the view was that the focus of time on the agendas
was appropriate at this point, there was a need to increase
the focus of agendas on the key strategic issues which, it was
agreed, would add value for the Group’s various stakeholders,
as the Board members’ knowledge of the Group and its
businesses began to increase.
Responsibility: Chairman.
New Board members to continue deepening their
understanding of the Group and its businesses.
Responsibility: New Board members.
The Board believes that good progress has been made during
2019, particularly given the amount of Board time that was
committed to defending against the unsolicited offer from
Non-Standard Finance plc. The Board held its first Corporate
Planning Conference, following the significant changes in
composition during 2018, in June 2019 at which it discussed
the emerging and future challenges facing the Group and
identified how it intends to deliver our Vision for the Future.
Notable work has also taken place during the year to enhance
the focus of the Board and Committee agendas and Board
reporting so that the Board spends the appropriate time on
the right matters, including strategy.
Each new director has undertaken a tailored induction plan
which supports them in deepening their understanding of the
Group. The non-executive directors who were appointed
during 2018 have now been in role for over one year, and have
developed their understanding of the business through Board
and Committee meetings and engagement with management
and the wider workforce. During 2019 the Board also identified
key topics for further deep dive and Board training in 2020.
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Board evaluation continued
Board evaluation 2019
As noted on the previous page, Lintstock facilitated this year’s evaluation process. Questionnaires were initially designed in consultation
with the Deputy Company Secretary, Group General Counsel and Company Secretary and Chairman. The questionnaires were designed
to ensure the evaluation focused on a broad range of key aspects of effectiveness, including: Board composition, including diversity;
Board dynamics and the interaction between directors; the quality of Board information and support; and Board Committee effectiveness.
The 2019 process is summarised below:
1 Design of the questionnaire and Board approval
Detailed questionnaires were designed for:
• Board and Committee effectiveness;
• Chairman effectiveness; and
•
individual director effectiveness.
The questionnaires were reviewed and approved by the Board at its September 2019 meeting.
2 Questionnaires issued, completed and returned
Following Board approval, Lintstock issued the questionnaires to the Board. The Group General Counsel and Company
Secretary was also asked to complete the Board and Committee and Chairman effectiveness questionnaires in order to
provide a perspective from outside the Board.
The Board members completed the questionnaires and returned these to Lintstock ahead of the commencement of interviews.
3 Analysis of responses and interviews with Board members
Lintstock undertook a detailed analysis of the responses to the questionnaires, identifying key areas to further explore
with each director at interview stage.
Each director and the Group General Counsel and Company Secretary were interviewed by Lintstock. Interviews enabled
Lintstock to focus on the matters of particular interest to the Board member and on areas in which their perception of the
Board’s performance is notably different to that of the other directors.
4 Reports produced
Following all the interviews, Lintstock prepared an anonymised report on Board and Committee effectiveness. This was
reviewed by the Group General Counsel and Company Secretary and Chairman ahead of the January 2020 Board meeting.
Lintstock prepared an anonymised report on the effectiveness of individual directors. The report was shared with the Chairman.
Lintstock also prepared an anonymised report on the Chairman’s performance, which was shared with the Senior
Independent Director.
5a Board and Committee review of the outcome
The final Board and Committee effectiveness report provided by Lintstock was reviewed and discussed by the Board
at its January 2020 meeting.
5b Consideration of Chairman`s performance
Utilising the Chairman effectiveness report provided by Lintstock, the Senior Independent Director discussed the
Chairman’s performance with the Board, without the Chairman present, in January 2020.
5c Individual director performance discussions
The Chairman utilised the report on individual director effectiveness provided by Lintstock in order to support his
performance and development discussions with each director.
6 Action plans
At its January 2020 Board meeting the Board approved a proposed clear action plan to enhance the effectiveness of the
Board and its Committees. Where there were actions impacting the Board Committees, these were then discussed at the
subsequent Committee meeting.
Feedback on the Chairman’s performance, including areas of strength and enhancement, was provided to the Chairman
by the Senior Independent Director.
The Chairman provided feedback on each director’s performance at the individual performance and development
discussions held.
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Outcome of the evaluation process: Board and Committees
Set out below and on the next page is a summary of the outcome of the Board and Committee evaluation process, including
the action plan identified for 2020.
Conclusions from the 2019 Board and Committee evaluation
The review this year identified 66 main points for the Board to consider, which have informed an agreed plan of action for 2020.
Key conclusions from the Board evaluation included:
How the Board members
work together
Given the relatively young tenure of the Board, it has come together well in a short
period of time, with relationships developing well.
Board composition
The balance of skills and experience, following a period of concentrated recruitment,
was rated very highly. It would be key to ensure that non-executive director succession
was staggered appropriately and there were areas of skills and experience identified
which the Board should consider as part of future appointment processes, including
technological and customer expertise. It was recognised that gender diversity amongst
the directors was strong in comparison to other companies and that a focus on
diversity in its broadest sense should be continued.
Stakeholder oversight
It was noted that during 2020 the Board should seek to drive greater focus on customers.
The value of engaging with the workforce was recognised and it was noted that the
mechanisms to ensure enhanced colleague engagement, such as the Colleague Survey
and designated Non-Executive Director, were put in place during the year.
Board support
Board Committees
Improvements to the quality of Board reporting were recognised, but it was acknowledged
that continued focus was required to ensure continuing improvement. Enhancements
to the structure of Board inductions were identified and acknowledgement of benefits
of the directors` training programme which was developed during the year for
implementation during 2020.
The performance of the Audit, Nomination, Remuneration and Group Risk Committees
was highly rated overall. It was noted that the newly established Customer, Culture and
Ethics Committee had a valuable role to play and it was key that clarity of its remit
was maintained.
Management and focus
of meetings
The Board had addressed a high volume of issues during the year, with decisive leadership
by the Chairman. It was believed that as the Group moved towards a more ‘business as
usual’ environment, more Board discussion time could be spent on key items.
Strategic and
operational oversight
The Board believed it gave sufficient focus to strategy during the year, in the context of
the significant disruption to the Board agenda caused by the offer, and looked forward
to further focusing on the Group’s strategy and delivery plan during 2020.
Defence against
unsolicited offer
Risk and internal control
The overall role played by the Board in relation to the offer was very highly rated.
Risk management remained a key focus area for the Group, with further developments
to be drawn from the work already done in this area. Whilst it was recognised that the
approach to risk and compliance improved further during 2019, 2020 should bring a
greater focus on risk mitigation actions.
Succession planning
and HR management
Board oversight of succession plans for the most senior management received
broadly positive ratings, but this should remain a focus area during 2020. Priorities for
the Group’s new HR Director were identified, including developing a more systematic
Group approach to talent management and development plans.
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Board evaluation continued
Board evaluation 2019 continued
Outcome of the evaluation process: Board and Committees continued
Conclusions from the 2019 Board and Committee evaluation continued
Following the Board’s discussion on the findings of this year’s evaluation of the performance of the Board and its Committees,
the directors agreed that the Board and its Committees were performing effectively, discharging their duties and responsibilities.
Some of the Board strengths identified
Areas of focus for 2020 to enhance performance
• The Board’s role in defending
against the unsolicited offer.
• Understanding of regulators.
• Understanding of investors.
• Quality of the relationships between
the non-executive directors and the
executive directors.
As always, there are some areas that provide room for improvement. You can read
about some of these areas on page 123. Additionally, the following key actions were
also identified for focus during 2020:
• Continue to enhance the Board’s understanding of the Group’s: customer
proposition; key commercial relationships; performance relative to competitors;
and strategic plan.
• Continue to ensure the Board dedicates appropriate time to setting and
overseeing strategy.
• Committee performance.
• Continue to focus on the Board’s understanding of colleagues and oversight
• Board atmosphere.
of talent management and development.
• Increase focus on ensuring that the Board has a clear understanding of the
regulatory agenda and horizon scanning.
The Board will review progress against all actions during 2020.
Outcome of the evaluation process: Chairman
As noted above, each director completed a questionnaire on the
performance of the Chairman. The review of the Chairman’s
performance focused on, amongst other matters, the effectiveness
of his relationship with the Chief Executive Officer and other Board
members, how he manages meetings and how he manages
the input of directors both inside and outside of meetings.
It was concluded that the Chairman was performing his role
of leading the Board effectively. Andrea Blance discussed
the feedback and areas for development with the Chairman.
Individual director performance, independence
and reappointment
As noted above, utilising the report provided by Lintstock, the
Chairman held an individual performance and development
discussion with each director. The Chairman also utilised our
Board Skills Matrix in order to inform his discussions regarding
the directors’ development.
The composition of our Board is reviewed annually by the
Nomination Committee to ensure that there is an effective
balance of skills, experience and knowledge. Having considered
the skills, experience, knowledge and tenure of the Board, and
the independence and time commitment of the directors and
Chairman, the Nomination Committee considered that each
director should stand for re-election at the 2020 AGM and
recommended as such to the Board. Following recommendations
from the Nomination Committee, the Board determined that all
directors continue to be committed to their roles, have sufficient
time available to perform their duties and continue to contribute
effectively. As such, all the directors will be seeking election or
re-election by the shareholders at the 2020 AGM, with the
exception of Simon Thomas who is stepping down from the
Board prior to the AGM.
The independence of the non-executive directors is also considered
at least annually along with their character, judgement, commitment
and performance. The Board took into consideration the 2018
I am pleased with the performance of
the Board and Committees during the
year, particularly given the relatively
recent Board changes and the
externally driven challenges we have
faced. We will remain focused on
enhancing effectiveness during 2020.
Patrick Snowball
Chairman
Code and circumstances which would likely impair, or could
appear to impair, a non-executive director’s independence,
including length of service. At year end, all of the non-executive
directors, with the exception of the Chairman, whose independence
is only determined on appointment, have been determined by
the Board to be independent. In determining the independence
of Robert East, the Nomination Committee and Board did take into
account that he is the Chairman of Vanquis Bank, and confirmed
that he still remained independent in relation to his appointment
of the Company, particularly given his short tenure.
Next year
A rigorous and formal evaluation will also be undertaken next
year. Under the 2018 Code, we are not required to undertake an
external evaluation next year; however, the Chairman and Board
will review and determine the most appropriate evaluation
process at the time.
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Annual Report and Financial Statements 2019
Nomination Committee report
Focused on
leadership
Members
Patrick Snowball (Chairman)
Andrea Blance
Elizabeth Chambers
Paul Hewitt
Angela Knight
Graham Lindsay (member from 1 April 2019)
Robert East (member from 26 June 2019)
Allocation of time
16+
Succession
Diversity
Board composition
(including Board appointments)
Governance
(including 2018 Code)
The Board has been strengthened and the
Nomination Committee can now continue
to focus on overseeing Board and senior
management composition so that it is
optimised to deliver for our customers,
shareholders and other stakeholders.
Patrick Snowball
Nomination Committee Chairman
I am pleased to present my Nomination Committee Report for
2019 and would first like to reflect on the number of changes that
have been made to the Board this year and last year.
2019 has been a year where the new Board members appointed
in 2018 and 2019 have been deepening their understanding of the
Group and its businesses. This year, we have further strengthened
the Board and senior management, with the addition of two
Independent Non-Executive Directors and a new Chairman of
Vanquis Bank, following the appointments of Graham Lindsay
and Robert East respectively. We also recommended to the Board
the appointment of Neeraj Kapur as Chief Finance Officer and,
following Board approval, Neeraj will join the Board on 1 April 2020.
As a Board, we can now continue to focus on operating effectively
and on delivering for our customers, shareholders and other
stakeholders. The appointment processes are detailed
on page 128.
As well as considering the composition of the Board and
its Committees, we considered the independence of the
non-executive directors during the year and concluded that
they all remain independent in character and judgement and
contribute effectively to Board discussions and debate. We are
recommending to shareholders that all directors be either
elected or re-elected at the 2020 AGM (with the exception of
Simon Thomas, who will be stepping down prior to the AGM).
You can read about each director’s contribution to the Board
in their biographies on pages 92 to 97.
In its role of overseeing Board composition and succession
planning and following significant change in Board membership
over the last two years, the Committee oversaw a process to put
in place a new Board Skills Matrix. The Group’s Board Skills Matrix
is designed to assess how key skills and experience (including in
relation to culture, stakeholders and personal and cognitive
strengths) are represented across the Board and thus supports
the Committee in its consideration of the appropriateness of the
Board composition and the combination of skills, experience and
knowledge on the Board. The completed Board Skills Matrix also
supports the Committee and me, as Chairman of the Board, in
relation to Board appointments, the evaluation of Board, Committee
and individual director performance and training and development.
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Annual Report and Financial Statements 2019
125
16%
29%
36%
19%
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+
36
+
19
+
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Nomination Committee report continued
Key achievements in 2019
Committee priorities for 2020
• The recruitment and appointment of Robert East as a Non-Executive
• Continue to work towards having the right mix of
Director and Chairman of Vanquis Bank Limited.
• The appointment of Graham Lindsay as a Non-Executive Director.
• The appointment of Neeraj Kapur as Group Chief Finance Officer.
diversity and skills by working to achieving a target
of 33% female representation on its Executive
Committee (and its direct reports) as well as
maintaining its target at Board level.
• Embedded changes needed to ensure compliance with the
• Continue to focus on succession planning and
2018 Code.
• Reviewed Board Skills Matrix.
• Reviewed diversity and approved an updated Board Diversity Policy
and Equality, Diversity and Inclusion Policy.
• Reviewed the Group’s Board and senior management
succession planning.
leadership development across the Group, including
senior management roles and Board appointments,
to strengthen the diverse talent pipeline and identify
recruitment needs for key roles. Seek to enhance
coordination across the Group in relation to
these matters.
• Continue to strengthen the Board where appropriate.
Key Committee responsibilities
The primary function of the Committee is to monitor the balance
of skills and experience on the Board and its Committees and to
ensure that the Board comprises individuals with the necessary
skills, knowledge, experience and diversity to ensure it is effective.
The Committee’s key responsibilities are detailed on page 114.
How does the Company oversee Board composition
and promote diversity?
The Board oversees its composition through an agreed and
completed Board Skills Matrix which supports Board appointments,
succession planning, training and development and the evaluation
of Board, Committee and director effectiveness.
The Committee reviewed an updated Equality, Diversity and Inclusion
(EDI) Policy in December, which detailed our commitment to
maintaining a safe, welcoming, inclusive and diverse workplace
which nurtures a culture of mutual respect and consideration.
Further details on our EDI Policy can be found on page 72.
The Board is committed to supporting diversity and inclusion
in the boardroom and beyond, and it believes that a wide range
of experience, age, background, skills, knowledge and
cognitive and personal strengths combine to contribute
towards a high-performing and effective Board and colleague
population. The Committee also reviewed, updated and approved
a Board Diversity Policy during the year, which is available on the
Investors section of our website.
Our EDI Policy recognises diversity in its broadest sense and
acknowledges how diversity supports the Group in delivering its
purpose and strategy; it is our ambition to build and sustain an
inclusive culture and diverse workforce which will help us to respond
to our diverse customer base and enable our people to realise
their potential. An effective, diverse Board, senior management
team and wider colleague population have the foundations to be
able to support stakeholder views, challenge each other and
achieve the Group’s overall strategic aims by having a wider range
of perspectives represented at each level of management.
Our EDI Policy also requires that appointments and succession
plans are based on merit and objective criteria and, within this
context, promote diversity of gender, social and ethnic backgrounds,
and cognitive and personal strengths, thus supporting the
development of a diverse pipeline. This is further supported
through all our colleagues being encouraged to maximise their
potential and contribution through personal development to
develop their knowledge and skills in both their current and likely
future roles. Our HR functions across the Group are responsible
for monitoring EDI-related matters throughout our colleagues’
lifecycle with the business.
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Annual Report and Financial Statements 2019
During the year, the Group signed up to the Women in Finance
Charter and set a target to have at least 33% female representation
in the Group’s senior management population by the end of 2020
and 40% by 2024. The progress against the target is detailed below.
Board diversity and EDI Policy
Objective
Progress
Board
appointments will
be made taking
into account
different
backgrounds,
diverse experience,
perspectives,
personalities, skills
and knowledge.
Maintain a balance
of one-third of the
directors being
women as
a minimum.
The Board will
also support
and monitor
Group activities
to increase the
percentage
of senior
management roles
held by women,
and other
underrepresented
groups across
the Group.
The Committee regularly reviews the
composition of the Board. This year,
the Committee also:
• approved an updated Board
Diversity Policy;
• reviewed and approved an enhanced
documented Board appointment
process during the year which
emphasised the importance
of diversity; and
• reviewed and approved a Board
Skills Matrix.
The graph on page 127 shows that
the percentage of women on the
Board is 33%.
The Committee reviewed a report on
gender across the Group of senior
management populations which
showed progress in some areas against
the targets. As set out on page 72, senior
management population is 30% female.
The Committee also reviewed diversity
statistics regarding other underrepresented
groups and approved an updated Group
EDI Policy, which included a commitment
that we would seek that all shortlists,
wherever possible, for our Board and
senior management positions were
balanced from a gender perspective.
Monitor internally set
targets for diversity
and inclusion at all
levels across
the Group.
The Committee kept under review the
progress made regarding the equality,
diversity and inclusion strategy across
the Group, including the delivery
of EDI initiatives.
What was the output of the Board evaluation
regarding composition and diversity?
This year Lintstock was engaged to undertake an external
evaluation of the Board and its Committees. The review process
is described in more detail on page 122. In relation to Board
composition, the balance of skills and experience, following a
period of concentrated recruitment, was rated very highly. The
Board recognised that it would be important for non-executive
director succession to be staggered appropriately and there
were areas of skills and experience identified which the Board
should consider as part of future appointment processes,
including technological and customer expertise. The evaluation
recognised that gender diversity amongst the directors was
strong in comparison to other companies and that a focus on
diversity in its broadest sense should be continued during 2020.
The Committee will consider how these matters raised in the
Board and Committee evaluation should influence Board
composition during 2020.
The performance of the Committee was considered as part
of the annual evaluation process and the evaluation found
the performance of the Committee to be rated highly overall.
Committee calendar in 2019
January
• Reviewed non-executive director independence and
recommended to the Board that all non-executive directors
remained independent.
• Reviewed director time commitment and recommended to
the Board that all directors continued to have sufficient time
to continue their roles.
• Reviewed the composition of the Board, including: the size
and structure; skills; experience; knowledge; diversity; and
tenure. Following review, the Committee recommended
to the Board that the Board and Committee composition
and structure remained appropriate.
• Reviewed Audit Committee composition and recommended
to the Board that it remained appropriate.
• Reviewed and approved changes required to comply
with the 2018 Code.
March
• Reviewed the proposed appointments of Graham Lindsay
and Robert East as Non-Executive Directors of the Company
and recommended their appointment to the Board.
Male
Female
67%
33%
Male
70%
Female
30%
The Board
67+
70+
Executive Committee and direct reports
Following review, the Committee and Board concluded that the
composition of the Board and its Committees was appropriate
and that they have the knowledge, skills and experience to enable
the requirements of the business to be met.
May
• Reviewed the Group’s progress against its Board and senior
management diversity targets and progress of its diversity initiatives.
• Reviewed a proposed approach to developing a Board Skills Matrix.
September
• Reviewed and approved an updated Board Diversity Policy.
• Received an update and discussed the appointment process
for the Chief Finance Officer.
• Reviewed the Board and senior management succession plan,
providing feedback.
• Reviewed an updated Board Skills Matrix.
• Reviewed and approved an enhanced documented Board
appointment process.
December
• Reviewed the proposed appointment of Neeraj Kapur as Chief
Finance Officer and recommended the appointment to the Board.
• Reviewed and approved an updated Board and senior
management succession plan.
• Reviewed the Group’s progress against its Board and senior
management diversity targets and progress of its diversity initiatives.
• Reviewed and approved an updated Group Equality, Diversity
and Inclusion Policy.
• Reviewed the final Board Skills Matrix.
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Nomination Committee report continued
What plans are in place for succession to the Board and senior management?
We believe that succession planning is important to the continued success of the Group and it is achieving its strategic aims. It safeguards
a diverse pipeline of talented individuals and enables the Group to fill vacancies by internal appointments, creating a good balance
with the skillset available through external appointments. As set out in our EDI and Board Diversity Policies, succession plans should
be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds,
and cognitive and personal strength. As the Board believes in its importance, succession planning for the Board and senior
management across the Group is kept under review by the Committee.
During 2019, the Committee reviewed and approved the succession plans of the Board and Group senior management and we,
as a Committee, discussed what support could be given to potential successors to Board and Group Executive Committee roles
to support them in their ongoing professional development. Following the appointment of a Group HR Director during the year,
the Committee will be focused in 2020 on enhancing the coordination across the Group in relation to succession planning.
The Board Diversity Policy, the Board Skills Matrix and the outcome of the Board effectiveness evaluations are utilised by the
Nomination Committee to support its succession planning oversight role.
A number of senior management roles were secured during the year, with the appointment of a new Group General Counsel and
Company Secretary, Group HR Director, Group Chief Internal Auditor, Group Chief Risk Officer and Managing Director of Vanquis Bank.
Does the Company have a rigorous and transparent appointment process?
Appointment of Graham Lindsay
Appointment of Robert East
Appointment of Neeraj Kapur
The selection process was facilitated
by Per Ardua Associates, and three
potential candidates were interviewed
by members of the Group Board
including Patrick Snowball,
Malcolm Le May and Andrea Blance.
Graham Lindsay was identified as
the preferred candidate for the
Non-Executive Director role.
The selection process was facilitated
by Per Ardua Associates, and three
potential candidates were interviewed
by some members of the Group and
Vanquis Bank boards including Patrick
Snowball, Malcolm Le May, Jonathan
Roe and Andrea Blance.
Robert East was identified as the
preferred candidate for the Chairman
of Vanquis Bank.
A role specification was agreed
with Russell Reynolds to commence
the search.
The selection process was then
facilitated by Russell Reynolds.
A list of internal and external candidates
was considered, with seven candidates
initially interviewed by Malcolm Le May.
Three of those candidates were taken
through to the next stage.
These three potential candidates
were interviewed by members of the
Nomination Committee, including Paul
Hewitt, the Audit Committee Chairman.
The preferred candidate was then
interviewed by Patrick Snowball and
Andrea Blance. Neeraj Kapur was
identified as the preferred candidate
for the Chief Finance Officer role.
The Nomination Committee recommended the appointments of Graham Lindsay and Robert East to the Board as Non-Executive
Director, and Chairman of Vanquis Bank and Non-Executive Director of the Company, respectively.
The appointments were approved by the Board on 25 March 2019.
The Committee also recommended the appointment of Neeraj Kapur to the Board as Chief Finance Officer and the appointment
was approved by the Board on 6 December 2019.
The Committee gave consideration to the structure, size and composition of the Board and its Committees, having made a determination
that each of the above directors had sufficient time, skills, knowledge and experience to carry out their proposed roles and responsibilities.
All of the above directors will be standing for election at the 2020 AGM.
Per Ardua is a member of the Association of Executive Search and Leadership Consultants and, as such, is a signatory to its stringent
Code of Professional Practice. Russell Reynolds is accredited for the FTSE 350 category of the Enhanced Voluntary Code of Conduct
for Executive Search Firms, which specifically acknowledges those firms with a strong track record in and promotion of gender
diversity in the FTSE 350 companies against the scope of the Davies Review. Other than in relation to the recruitment as described
above, and for the recruitment of other roles, Russell Reynolds and Per Ardua had no other connection to the Group or directors.
I look forward to reporting to you on the progress we have made in our 2020 Annual Report.
Patrick Snowball
Chairman
27 February 2020
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Annual Report and Financial Statements 2019
A U D I T, R I S K A N D I N T E R N A L C O N T R O L
Audit Committee report
Ensuring integrity of
our internal controls
Members
Paul Hewitt (Chairman)
Andrea Blance
Angela Knight
Allocation of time
28+
Governance
Financial reporting
External audit
Internal audit
28%
32%
13%
27%
At each meeting, the Committee:
• had, on a rotating basis, a discussion with both
the external and internal auditor without any
executive director being present;
• reviewed a Group internal audit activity report;
• reviewed updates from the external auditor; and
• received an update on the activities of the
Vanquis Bank audit committee.
The Audit Committee provides oversight
of the financial reporting and disclosure
process, to enable shareholders to
have confidence in the integrity of
our financial results, the quality of
our audit process and the efficacy
of our system of internal controls.
Paul Hewitt
Audit Committee Chairman
I am pleased to present the Audit Committee’s report for the
year ended 31 December 2019. This report provides a summary
of the activities of the Audit Committee and its key responsibilities
and confirms compliance with the Competition and Markets
Authority’s Statutory Services Order. Furthermore, I look forward
to attending the AGM on 7 May 2020 to answer any questions
on the work of the Committee.
The membership of the Committee has been refined, now
comprising Angela Knight, Andrea Blance and me. The members
have a wide range of business and financial experience which
is evidenced by their biographical summaries on pages 92 to 97.
In compliance with the Code Provision 24, the Committee is
considered to have competence in the sector in which the Group
operates and Andrea Blance and I both have considerable recent
and relevant financial experience, as detailed on pages 93 and 94.
It is considered important given the potential overlap of
responsibilities that Angela Knight, Risk Committee Chairman,
is a member.
Key Committee responsibilities
The main responsibilities and primary role of the Committee
are 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
significant financial reporting judgements contained in them.
In addition, the Committee also reviews:
• the system of internal financial and operational controls on
a continuing basis (the Group Risk Committee reviews the
internal control and risk management systems); and
• the accounting and financial reporting processes, along with
the roles and effectiveness of both the Group Internal Audit
function and the external auditor.
However, the ultimate responsibility for reviewing and approving
the Annual Report and Financial Statements 2019 remains with
the Board. The terms of reference of the Committee can be
found on the Group’s website at www.providentfinancial.com.
Provident Financial plc
Annual Report and Financial Statements 2019
129
Governance32
+
13
+
27
+
N
A U D I T, R I S K A N D I N T E R N A L C O N T R O L C O N T I N U E D
Audit Committee report continued
Key achievements in 2019
Committee priorities for 2020
• Provided oversight of the continued embedding of IFRS 9 and other new
accounting standards into the control-related framework.
• Increased its focus on Group-wide IT issues and an enhanced risk culture, as well as
ensuring that historical internal and external audit control observations were either
remediated or consciously risk accepted by the Committee.
• Monitored the embedding of the changes made to the Group Internal Audit function
during 2019, most notably the merging of the Group and VBL Internal Audit functions.
• Rebased and approved the Group’s H1 2020 internal audit plan following the
merging of the Group and Vanquis Bank Internal Audit functions.
• Continued to monitor developments and recommendations arising from the
reviews into the market and financial reporting requirements in the UK.
• Reviewed the efficacy of screening tools utilised in the identification and
categorisation of those who pose a potential financial crime risk to the Group.
• Sought clarity on the accounting treatment of credit card amortisation within VBL.
• Provide oversight of the continued
embedding of IFRS 9, IFRS 16 and
other new accounting standards
into the control-related framework.
• Provide oversight of the first line of
defence control review which is
being undertaken by VBL.
• Provide continued monitoring of
the closure of historical overdue
internal audit actions.
• Commence preparations for the
external audit tender in readiness
for 2022.
Key Committee responsibilities continued
The Committee is also specifically responsible for:
• conducting the tender process and making recommendations
to the Board in relation to the appointment of an external auditor,
and approving the remuneration and terms of engagement
of the external auditor;
• reviewing and monitoring the external auditor’s independence
and objectivity;
• reviewing the effectiveness of the external audit process;
• developing and implementing policy on the engagement of
the external auditor to supply non-audit services, ensuring
there is prior approval of non-audit services, considering the
impact this may have on independence and reporting to the
Board on any improvement or action required;
• assisting the Board in assessing the Company’s ongoing viability,
the basis of the assessment and the period of time covered;
• reviewing and recommending to the Board quarterly
trading statements;
• approving the Group internal audit plan on a bi-annual basis; and
• keeping under review the effectiveness of the Group’s system
of internal controls by considering Group internal audit activity
reports at each meeting and reporting to the Board on a
regular basis.
The Audit Committee debated and approved the internal audit
plan for H1 2020 and I can confirm that the audit plan is reflective
of both the material risk themes the Group faces, as well as the
Group’s strategic drivers. The Committee is satisfied that the
Group Internal Audit function has the appropriate resources
to deliver the 2020 plan.
Committee calendar in 2019
January
• Reviewed the 2018 financial statements and areas of
significant judgement, including going concern and the
viability statement.
• Received an update on historical IT audit issues (including
the degree of materiality to the Group).
• Reviewed and approved the Committee terms of reference.
• Received an update on non-audit fees.
• Received an update on the 2019 Budget and future
years’ outlook.
• Reviewed and approved the internal audit charter 2019.
• Approved the 2019 Committee agenda planner.
February
• Received an update on historical IT issues.
• Reviewed and approved the Non-Audit Fee Policy
and approved the non-audit fees for 2018.
• Reviewed and approved the viability statement for the
final results.
• Reviewed and recommended that the Annual Report and
Financial Statements 2018 be prepared on a going concern
basis, and recommended that the Annual Report and Financial
Statements 2018 be approved by the Board.
• Reviewed and confirmed that the Annual Report and Financial
Statements 2018 were fair, balanced and understandable.
• Reviewed the Chairman’s annual audit report for inclusion
in the Annual Report and Financial Statements 2018.
• Reviewed and approved the draft preliminary announcement.
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Annual Report and Financial Statements 2019
• Confirmed the internal auditor’s statement of independence
and objectivity.
• Reviewed the 2018 external audit full year report.
• Reviewed external audit’s management letter.
November
• Reviewed and recommended the Q3 Trading Statement
to the Board.
December
• Reviewed and approved the Committee’s terms of reference
• Reviewed and proposed the reappointment of the external
and 2020 forward agenda planner.
auditor to the Board.
• Reviewed and approved the annual internal statement
of governance, risk management and internal control.
• Received an update on the year-end audit and the interim
timetable for 2020 from Finance.
• Confirmed the coordination between the activities of internal
• Approved the internal audit charter.
and external audit.
• Reviewed and confirmed internal audit effectiveness.
• Reviewed and approved the internal audit plan for the first six
May
• Received an update on outstanding internal audit actions,
including a plan for remaining IT audit action remediation.
• Received an update from the CCD Managing Director in
relation to an overdue internal audit action and consciously
risk accepted the finding.
• Reviewed feedback from Group Finance on the external
auditor’s performance.
July
• Received an update on the outstanding internal audit IT findings.
• Reviewed, carefully considered and approved the areas of
significant judgement for the six months ended 30 June 2019.
• Reviewed and approved the going concern paper for the
interim results.
• Reviewed and recommended to the Board the interim results
for the six months ended 30 June 2019.
• Received the external auditor’s interim report and carefully
considered contingent liabilities.
• Approved a revised schedule of non-audit fees for 2018.
September
• Approved, prior to Board approval, the Group Tax Strategy.
• Received an update on the Group’s risk assessment and
implementation plan in relation to the prevention of facilitation
of tax evasion.
October
• Reviewed the Q3 Trading Statement.
• Received an update on IT audit actions.
• Received an update on Special Interest Persons (SIPs)
screening tools.
• Reviewed and approved the 2020 external audit plan.
• Reviewed and approved the external audit fees.
• Ratified the appointment of the Group Chief Internal Auditor.
• Reviewed the Group internal audit update and activity report.
• Received an internal audit plan update.
• Received an update on the external auditor’s External
Quality Assessment.
months of 2020.
• Received the Committee Terms of Reference Adherence Plan.
• Reviewed and approved the Group’s Policy on Non-Audit Work.
• Received a paper detailing the external audit tender process
as Deloitte LLP approaches the end of its 10-year term of
appointment in 2021.
• Received the final results on Deloitte LLP’s External
Quality Assessment.
Is the Annual Report and Financial Statements 2019
fair, balanced and understandable?
At the request of the Board, the Committee considered, as
required by Code Principle N, whether, in its opinion, the Annual
Report and Financial Statements 2019, taken as a whole, is fair,
balanced, and understandable and provides the necessary
information for the reader to assess the Group’s position and
performance, business model and key audit matters.
What is the process for ensuring this?
In justifying this statement the Committee considered the robust
process in place to create the Annual Report and Financial
Statements 2019 including:
• the early involvement of the Committee in the preparation
of the Annual Report and Financial Statements 2019 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 regular review of the Group internal audit activity reports
which are presented at Committee meetings and the opportunity
for the non-executive directors to meet the external auditor
without any executive of the Group being present via the
private sessions of the Committee;
• the Committee meetings reviewed and considered the draft
Annual Report and Financial Statements 2019 in advance
of the final sign-off;
• the reviews conducted by external advisors appointed
to advise on best practice; and
• the final sign-off process by the Board.
Provident Financial plc
Annual Report and Financial Statements 2019
131
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Audit Committee report continued
Is the Annual Report and Financial Statements 2019
fair, balanced and understandable? continued
What are the key considerations when considering
whether the report is fair?
• Is the narrative reporting consistent with the reporting
in the financial statements?
• Are the key messages in the narrative reporting reflective
of the financial reporting?
• Are the KPIs disclosed appropriate to understand the
underlying performance of the Group and its divisions?
What are the key considerations when considering
whether the report is balanced?
• Is there a good level of consistency between the narrative
reporting and the financial reporting and is the messaging
in each consistent when read independently of each other?
• Does the narrative reporting reflect both the positive and
negative aspects of performance?
• Are both the statutory and adjusted financial measures
explained clearly and given equal priority and prominence?
• Are the key judgements referred to in the narrative reporting
and the significant issues reported in this Audit Committee
Report consistent with the disclosures and critical judgements
set out in the financial statements?
• How do these judgements and issues compare with the risks
that the external auditor will include in its report?
What are the key considerations when considering
whether the report is understandable?
• Is there a clear and understandable structure to the report?
• Are the important messages highlighted appropriately and
consistently throughout the document with clear signposting
to where additional information can be found?
• Is the narrative within the Annual Report and Financial
Statements 2019 straightforward and transparent?
What additional steps were undertaken?
• The papers on critical accounting assumptions and key
sources of estimation uncertainty were presented by
management to the Audit Committee, detailing the approach
taken and key sources of estimation uncertainty documented
in the financial statements on page 182. The assumptions and
the going concern statement were carefully reviewed and
challenged by the Committee with the assistance of the
external auditor which also fully analysed and concurred
with the assumptions made as part of the year-end process.
• A review of the consistency between the risks identified
and the issues that were of concern to the Committee
was performed.
What are the main features of the Group’s internal control
and risk management systems in relation to the financial
reporting process?
The effectiveness of the risk management and internal control
systems is reviewed regularly by the Board and the Audit
Committee, which also receives reports of reviews undertaken
by Group Risk and Group Internal Audit. The Audit Committee
receives reports from Deloitte LLP, the Group’s external auditor.
Deloitte LLP also provides a management letter on an annual
basis, which draws significant internal control matters which
have been identified to the Audit Committee’s attention, along
with management’s response. The Audit Committee also has a
discussion with the auditor at least once a year without executives
present, to ensure that there are no unresolved issues of concern.
The Group’s risk management and internal controls systems are
reviewed by the Board and are consistent with the guidance on
Risk Management, Internal Control and Related Financial and
Business Reporting issued by the Financial Reporting Council
and compliant with the requirements of CRD IV. They have been
in place for the full year under review and up to the date of the
approval of the Annual Report.
Annual assessment of risk management and internal
control systems
To assess the effectiveness of the risk management and internal
control systems within the Group, Internal Audit conducted an
analysis of the aggregate outcomes from audits carried out in
2019 and an assessment of open and overdue audit issues. In
addition Internal Audit also worked closely with the second line
of defence to monitor levels of risk awareness across the Group.
Internal Audit confirmed to the Committee that the level of risk
and control awareness had increased within the Group during
2019 and that there was a commitment from management to
maintain momentum with regard to the embedding of a risk
aware culture.
What is the structure and role of Group Internal Audit?
The Group operates an in-house Group Internal Audit function
which is managed by the Group Chief Internal Auditor, who
was appointed on 2 September 2019, with specialist services
provided by third-party consultants where necessary. The Group
Internal Audit function also reports, via the Group Chief Internal
Auditor, to the Committee which ensures the function’s
independence from Group management.
The Committee reviews regular reports on the activity of this
function, and as Chairman of the Audit Committee, I also meet
separately with the Group Chief Internal Auditor on a quarterly
basis. In Q4 2019, the Committee approved the merging of the
Group Internal Audit team with the Vanquis Bank Limited internal
audit team to facilitate a more pan-Group review and assessment
of risks and controls.
• The external auditor’s report on the Annual Report and
Financial Statements 2019 was presented to the Committee.
What is the conclusion of this process?
Following its review, the Committee is of the opinion that the Annual
Report and Financial Statements 2019 is representative of the year,
and presents a fair, balanced, and understandable overview,
providing the necessary information for shareholders to assess
the Group’s position, performance, business model and strategy.
How is internal auditor effectiveness assessed?
The Committee approves the internal audit charter on an annual
basis and reviews, approves and monitors progress against the
annual internal audit plan. As part of this approval process, the
Committee requires confirmation from the Group’s Chief Internal
Auditor that the Internal Audit function has the requisite expertise
and resources to successfully fulfil its role. The Committee also
confirms annually that the activities of internal and external audit
are coordinated.
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Annual Report and Financial Statements 2019
As part of its review of Internal Audit’s effectiveness, the Committee
received Internal Audit’s 2019 self-assessment of its conformance
with the CIIA Financial Services Code, a benchmark against
good practice for internal audit functions operating within the
financial services sector in the UK. The Committee confirmed
Internal Audit’s conclusion that it generally conformed with the
CIIA Financial Services Code and agreed with Internal Audit’s
plan to address those areas where conformance could be
enhanced. Following the outlined process, the Committee
confirmed the effectiveness of the Internal Audit function
for the year ended 31 December 2019.
What is the role of external audit?
Principle M of the Code states that the Board should establish
formal and transparent policies and procedures to ensure the
independence and effectiveness of Internal and External
Audit functions.
How is the external auditor appointed?
Deloitte LLP, the Group’s external auditor, has been the Group’s
auditor for eight years. It is the Group’s policy to undertake a
formal tender process every 10 years, or earlier, if the Audit
Committee feels that this would be in the best interests of the
Group. At February’s meeting it was concluded that Deloitte LLP
was performing in line with expectations and was considered to
be independent of the Group. It was therefore considered that
Deloitte LLP be proposed to be reappointed as the Group’s
auditor for the financial year ended 31 December 2019. An
annual assessment of the performance of Deloitte LLP is
undertaken following finalisation of the Annual Report and
Financial Statements and presented to the Committee in May
each year and the last assessment took place in May 2019.
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.
How does the Committee work with the external auditor?
The Committee held separate sessions with the external auditor
without any executive director or employee of the Group being
present at three of its meetings in 2019. This gave 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. The Committee schedules private sessions
with the internal and external auditors on a rotating basis, with the
option for a private session upon request. In addition I meet with
the external audit partner on a quarterly basis to discuss pertinent
issues. An annual feedback report was provided to the external
auditor and discussed by the Committee at the May 2019 meeting.
How does the Group ensure the independence
and objectivity of its external auditor?
The Committee has in place a policy on the appointment of staff
from the external auditor to positions within the various Group
finance departments. Neither a partner of the audit firm who has
acted as engagement partner, nor the quality review partner, nor
other key audit partners, nor partners in the chain of command,
nor a senior member of the audit engagement team, may be
employed as Group Chief Finance Officer, Group Finance
Director or Divisional Finance Director.
The Committee has considered the independence of the
Deloitte LLP audit team and has deemed that adequate safeguards
have been in place including: separate partners and staff being
responsible for the delivery of this work; the non-audit team
does not prepare anything which would be relied upon in the
audit of the Group; and the work performed is also subject to an
independent Professional Standards Review and Engagement
Quality Control Review process.
What is the Group’s policy on non-audit work?
The Company has a formal policy on the use of the external
auditor for non-audit work which reflects the requirements of
the EU Audit Directive and Regulations. This policy is reviewed
annually by the Committee and was reviewed and approved
at the December 2019 meeting.
The award of non-audit work to the external auditor is managed
and monitored 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. Work is awarded
only when, by virtue of its knowledge, skills or experience, the
external auditor is clearly to be preferred over alternative suppliers.
I am also required to approve in advance any single award of
non-audit work with an aggregate cost of between £50,000
and £250,000 and the Committee must provide prior approval
for items in excess of £250,000. The Committee will always seek
confirmation that Deloitte LLP’s objectivity and independence
are safeguarded.
The level of paid Deloitte LLP fees for non-audit work during
the year was £151,000 (2018: £2,202,000) comprising £70,000
for services related to profit verifications for inclusion within
regulatory capital and £81,000 for the Group interim review.
The ratio of audit to non-audit fees during the year was 8.7:1.
How is external auditor effectiveness assessed?
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 its performance in the previous
year. This is achieved primarily through a questionnaire and
scorecard which is completed by key stakeholders involved in
the annual audit process, including the Audit Committee, and
Heads of Finance in each of the divisions and at Group level.
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.
What were the significant issues and areas of judgement
considered by the Group Audit Committee?
The critical accounting assumptions and key sources of
estimation uncertainty considered by the Committee in relation
to the Annual Report and Financial Statements 2019 are outlined
on page 182. In addition to the matters set out on page 182, the
Committee also considered the going concern statement set out
on page 63. The Committee discussed these with the external
auditor during the year and, where appropriate, these have been
addressed as areas of audit focus as outlined in the Independent
Auditor’s Report on pages 226 to 236.
What were the results of the external auditor’s Audit
Quality Review?
During the year the FRC concluded a review of the audit
performed by Deloitte LLP of the Group’s financial statements for
the year ended 31 December 2018. The focus of the review and
its reporting is on identifying areas where improvements are required.
The Chairman of the Audit Committee received a full copy of the
findings of the Audit Quality Review Team and has discussed these
with Deloitte LLP. Limited matters were identified as requiring
improvement and an action plan was agreed to ensure that the
matters identified were addressed, where relevant, as part of the
audit of the 2019 financial statements. The Audit Committee was
satisfied that there was nothing within the report which might
have a bearing on its audit appointment.
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Annual Report and Financial Statements 2019
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Audit Committee report continued
What are the significant issues and areas of judgement?
Issue
Judgement
Actions
Impairment of receivables
Receivables are impaired on
recognition in accordance with
IFRS 9. The level of impairment
is initially dependent on the
probability of a customer
defaulting (PD) within 12 months
utilising historical repayment data,
the loss incurred if a customer
defaults (LGD) and the exposure
at default (EAD).
Repayment data for home credit
excludes data through 2017 which
is not deemed to be indicative
of future performance given the
operational disruption within the
home credit business.
Lifetime losses are recognised
following a significant increase
in credit risk.
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.
Provisions
The Group makes provisions for
customer remediation if all of the
following are present: (i) a present
obligation (legal or constructive)
has arisen as a result of a past
event; (ii) payment is probable
(more likely than not); and (iii) the
amount can be estimated reliably.
A contingent liability is recognised
if the present obligation is not
probable or the amount cannot
be estimated reliably or there is
a possible obligation dependent
on a future event occurring.
Judgement is applied as to the
level of impairment recognised.
There is a judgement as to whether
past payment performance
provides a reasonable guide as
to the collectability of the current
receivables book, the probability
of default, loss given default and
exposure at default. Accordingly,
this is a primary source of audit effort
for the Group’s external auditor.
Judgement is applied in
formulating each of the
assumptions used in calculating
the retirement benefit asset.
Judgement is applied as to
whether the criteria for recognition
have been met. In addition, if the
criteria for recognition are met,
judgement is applied to determine
the quantum of such liabilities
including making assumptions
regarding the number of future
complaints that will be received
and the extent to which they will
be upheld, average redress
payments and related
administrative costs.
If a contingent liability is
disclosed, judgement is then
required as to the nature of the
event and potential outcomes
included in the disclosure.
In order to assess the appropriateness of the judgements
applied, management produces a detailed report for the
Audit Committee and the external auditor which sets out
the assumptions underpinning the calculations of the
probability of default, loss given default and exposure
at default:
• reviewed management’s report and challenged
management on the results and judgements used
in the test;
• considered the work performed by Deloitte LLP on
validating the data used in the testing performed
by management and its challenge of the
assumptions used;
• considered the findings within the report 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.
The Company’s external actuary, Willis Towers Watson,
proposes the appropriate assumptions and calculates
the value of the retirement benefit asset.
The Committee considered the work performed by
Deloitte LLP on the valuation and its views on the suitable
ranges of assumptions based on its experience.
In order to assess the appropriateness of the judgements
applied, the Committee:
• challenged the assumptions made by management to
determine the provision for redress to be recognised;
• where a provision is not recognised and a contingent
liability is disclosed, the Committee has reviewed the
level of disclosure and sensitivity analysis of the range
of outcomes;
• reviewed the work performed by external consultants in
respect of conduct matters relating to the investigations
where applicable; and
• considered the work performed by Deloitte LLP and
its views on the appropriateness of assumptions used
by management, based on its experience.
Compliance statement
The Group has fully complied with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use
of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 throughout the 2019 financial year.
Paul Hewitt
Audit Committee Chairman
27 February 2020
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Annual Report and Financial Statements 2019
Group Risk Committee report
A proactive approach
to risk management
As the Risk Committee Chairman, I am
pleased to report on the Committee’s
work and achievements in 2019. This
has been a year which has seen the
Committee adopt a more forward-
looking and proactive approach to
the assessment and management
of risk across the Group, providing
a solid basis upon which Provident
Financial can achieve its strategy.
Angela Knight
Group Risk Committee Chairman
2019 has been another year of good progress in the
improvement of the Group’s risk assessment and monitoring
tools and with further alignment achieved between the Group
and divisional methodologies and reporting.
In the year a permanent Group CRO was appointed, who has worked
closely with me and has enabled a renewed focus on our key risk
priorities and improved the planning process and the smooth
operation of the Committee. Further enhancements have been
made to the Group’s risk management framework and methodology,
including the Group’s risk appetite framework, so refining the Group’s
aggregate risk profile and enabling the Board to set a revised overall
risk appetite which reflects the changing dynamic of the Group.
In addition, our reporting capabilities have been strengthened and
with an increased focus on strategic and emerging risks, alongside
regulatory horizon scanning, one result has been that the Committee
is now sponsoring thematic risk assessments of risk across the Group.
The newly established Group Executive Risk Committee provides
greater emphasis and challenge by executive management of
the material divisional and Group risks, enabling greater consistency
of risk assessment and proactive tracking of mitigating actions
prior to reporting to the Committee. This activity is enhancing
the manner in which the Group holistically manages its risks and
I believe this dynamic approach to risk management will enable
the Group to adapt to the evolving macroeconomic environment.
The outputs of this from the Group Executive Risk Committee
will be discussed at the Committee.
Key Committee responsibilities
As a non-regulated Group parent company owning three
individually regulated operating entities, the primary role of the
GRC is to make sure that there is an effective Group-wide risk
framework in operation which enables effective oversight over
the Group’s aggregated risk position.
Provident Financial plc
Annual Report and Financial Statements 2019
135
Members
Angela Knight (Chairman)
Elizabeth Chambers
Paul Hewitt
Allocation of time
32+
Pie chart indicates time
spent during usual
schedule of meetings;
however, two additional
meetings were held during
the year for additional
ICAAP discussions.
Setting Group risk management
and reviewing material risk status
Assessing overall risk appetite,
assessing outcomes and overseeing
management actions
32%
18%
Assessing risk management effectiveness 24%
Approving ICAAP and external reporting
26%
At each meeting, the Committee:
• reviewed and confirmed the overall risk
management status of the Group;
• reviewed and confirmed the key Group risks;
• reviewed and confirmed the risk appetite status
across the Group;
• reviewed minutes and actions from prior
meetings; and
• received a report on the Cross-Divisional Risk
Forum (CDRF).
Governance18
+
24
+
26
+
N
A U D I T, R I S K A N D I N T E R N A L C O N T R O L C O N T I N U E D
Group Risk Committee report continued
Key Committee responsibilities continued
The GRC’s principal areas of responsibility are as follows:
• understanding the Board’s strategy, desired culture and
direction and identifying the key strategic and emerging risks;
• endorsing an overall risk appetite and recommending it to the
Board for approval at least annually;
• through the Group CRO, monitoring the effectiveness of the
divisions in establishing and maintaining risk management
frameworks, policies and procedures;
• 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 management 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;
• carrying out an assessment of the principal risks facing
• reviewing and approving the Group ICAAP, including the stress
the Group;
testing and capital allocation approach; and
• continuous improvement of risk outcomes for the Group
through effective risk management planning.
Key achievements in 2019
Committee priorities for 2020
• The establishment and monitoring of the Group risk management
• Adopt a more harmonised approach to risk
framework and policy to ensure that they operate consistently alongside
those in place at a divisional level.
• The development of an enhanced Group risk appetite framework and
reporting methodology, which utilised the current divisional thresholds
and reporting mechanisms to present a clearer picture of the Group’s
aggregate risk profile.
• The ongoing monitoring of the CDRF and its output, which provided a
mechanism for the review of divisional risks and a clear escalation route
for emerging issues.
• Considering the impact of risk events and risk issues upon executive
director remuneration.
• The sponsoring of thematic risk reviews across the Group into key areas
of concern.
• The performance of a strategic review of the ICAAP via a Joint Risk
Committee with Vanquis Bank.
management between the Group and
divisions by enhancing the efficiency and
effectiveness of our key risk processes,
policies, tools and methodologies.
• Seek further operational alignment of the
separate risk functions in the context of
evolving the Group’s business strategy.
• Support the Board in the execution of
its strategy through the embedding of a
customer-centric risk culture which is aligned
to the Blueprint.
• Maintain a forward-looking focus and ensure
the Group quickly identifies emerging risks
and issues, addressing them with timely and
robust action plans.
Committee calendar in 2019
January
• Reviewed and approved the Committee terms of reference
July
• Reviewed approach for risk management framework (RMF)
(ToR) and noted the corresponding adherence plan.
harmonisation across the Group and divisions.
• Received a CRO report including key risk themes and regulatory
update and agreed the future of risk management information.
• Received an update on the programme governance approach.
• Agreed the working relationship between the GRC and the
• Received divisional risk profile reports.
Customer, Culture and Ethics Committee.
• Reviewed the principal risks and internal control reports
within the 2018 Annual Report and Accounts.
• Received a Group treasury risk thematic review.
• Received an update on the prudential regulation timetable for 2019.
May – Joint Risk Committee with Vanquis Bank
for ICAAP discussion
• Reviewed and approved the ICAAP approach, stress tests
and scenarios.
• Received a CRO report including key risk themes and regulatory
update and agreed the future of risk management information.
• Received divisional risk profile reports.
• Agreed future thematic reviews.
July – additional Joint Risk Committee with Vanquis Bank
for ICAAP discussion
• Reviewed the ICAAP risk scenarios and stress test results.
September – Joint Risk Committee with Vanquis Bank
• Reviewed and endorsed the Vanquis Bank ICAAP for
submission to the Vanquis Bank board for approval
and the Consolidated ICAAP to the Board for approval.
October
• Received a CRO report including key risk themes
and a regulatory update.
• Reviewed the draft Group risk appetite framework
and reporting approach.
• Received divisional risk profile reports.
• Reviewed and approved the Group Wind Down Plan (WDP).
• Reviewed and approved the Business Continuity Planning
approach (BCP).
• Received an IT risk assessment for the years 2019/20.
• Received an update on anti-bribery and corruption.
• Received a CRO report including key risk themes, a regulatory
• Reviewed a future ILAAP and funding approach.
activity update and a regulatory horizon scanning report.
• Received the 2020 GRC Agenda Planner.
136
Provident Financial plc
Annual Report and Financial Statements 2019
Principal and emerging risks
The Committee is responsible for carrying out a assessment of
the principal and emerging risks to the Group, including those
which have the potential to impact its strategy and culture,
business model, future performance, solvency or liquidity. The
Committee received reports from the CRO detailing the Group’s
aggregated risk profile, reviewing this in detail and confirming
its accuracy.
Our principal and emerging risks are set out in the table below.
Principal risks
Emerging risks
• Credit risk.
• Capital risk.
• Liquidity and funding risk.
• Operational risks.
• Information and data
security risk.
• Regulatory risk.
• Conduct risk.
• Business resilience risk.
• People risk.
• Model risk.
Threats to our sector
and business plans:
• Risk governance
and culture.
• Responsible lending
and affordability.
• Challenge to agent
self-employed status.
• Home credit recovery –
financial performance.
• Persistent debt
(Vanquis Bank).
For further details regarding the principal risk assessment and
mitigations, including full details of the Group’s principal and
emerging risks, please see pages 46 to 53.
Committee review of internal controls
In accordance with the 2018 UK Corporate Governance Code
Principle O, the Group Board has a responsibility to establish
procedures to manage risk, oversee the internal control framework,
and determine the nature and extent of the principal risks the
Company is willing to take in order to achieve its long-term
strategic objectives. Provision 29 requires the Board to monitor
the Company’s risk management and internal control systems.
The directors can confirm that the Group’s key risks have been
robustly assessed. This has been achieved through ongoing
review of the emerging and principal risks at the Group Risk
Committee and Board, as well as tracking of the associated
mitigating actions undertaken by management. Internal Audit
has supported the Board in this regard by providing independent
assurance over the key internal control systems.
To manage risk and ensure compliance with regulatory obligations
the Board sets the overall risk appetites of the Group and seeks
to ensure that the divisions (and corporate centre) have designed,
implemented and maintained effective and appropriate risk
management frameworks and processes of their own, consistent
with those set by the Group. The divisions have day-to-day
responsibility for risk management through their regulatory
responsibilities, with key risks aggregated by Group Risk and
closely monitored at the Group Risk Committee. Each division
predominantly adopts a three lines of defence approach, with
the Group continually seeking opportunities to enhance the
model through improved collaboration and integration over time.
The second line of defence consists of independent review and
challenge of first line actions against established risk appetites.
In each division, Risk and Compliance functions constitute the
second line of defence and are responsible for assessing
adherence to risk appetites and providing independent review
and challenge to the first line.
The third line of defence consists of independent assurance.
The Group Internal Audit function constitutes the third line of
defence and is responsible for providing independent assurance
in connection with the identification, assessment and management
of risk and maintenance of appropriate controls. The work of the
Group Internal Audit function is subject to review by the Audit
Committee established by the Board.
Each of the divisions has risk and control self-assessment
processes within the first line. Through this approach, all key
controls are identified, evaluated and monitored by line
management as part of day-to-day activities. All divisions have
continued to enhance these internal control frameworks during
the year, with greater focus on end-to-end processes ensuring
a better articulation of risks and controls.
2020 will be a year to build on the progress made, to consider
whether further Group risk integration steps might be useful,
within regulatory constraints, and to ensure the Committee stays
focused on key risks and takes direct action.
Angela Knight
Group Risk Committee Chairman
27 February 2020
Provident Financial plc
Annual Report and Financial Statements 2019
137
Governance D I R E C T O R S ’ R E P O R T
Our responsibilities
as a listed business
• how the directors have had regard to the need to foster the
Company’s business relationships with suppliers, customers
and others, and the effect of that regard, including on the
principal decisions taken by the Company during the financial
year (pages 83 to 87).
Both the Strategic Report and the Directors’ Report have been
prepared and presented in accordance with, and in reliance
upon, applicable 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 company law. Other information to be disclosed
in the Directors’ Report is given in this section.
Directors
The membership of the Board and biographical details of the
directors at the year end are given on pages 92 to 97 and are
incorporated into this report by reference.
All directors, except as set out below, served throughout 2019
and up to the date of signing the Annual Report and Financial
Statements 2019. The following individuals stepped down from
the Board on the following dates:
• Kenneth Mullen 1 April 2019 (Secretary)
• John Straw
20 May 2019
With effect from the beginning of the 2019 financial year there have
been the following additions to the Board on the following dates:
• Graham Lindsay 1 April 2019
• Charlotte Davies 1 April 2019 (Secretary)
• Robert East
26 June 2019
Further commentary about the Board’s composition, Board
changes and Board tenure can be found on page 119.
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 of association (the Articles).
In accordance with the recommendations of the 2018 UK
Corporate Governance Code (the Code), all directors will offer
themselves for appointment or reappointment, as appropriate,
at the 2020 AGM. This is with the exception of Simon Thomas,
who will step down from the Board as a director with effect
from 31 March 2020.
Articles
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 Act and the FCA’s Disclosure Guidance
and Transparency Rules.
The Group continues to improve
its governance and enhance
Board composition.
Charlotte Davies
General Counsel and Company Secretary
Introduction
In accordance with section 414C(11) of the Companies Act 2006
(the Act), the directors present their report for the year ended
31 December 2019. 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 14 to 41);
•
important events since the balance sheet date throughout
the Strategic Report;
• Viability Statement (page 64);
• greenhouse gas emissions (page 81);
• risk management (pages 42 to 53);
• how the directors have engaged with employees, how they
have had regard to employee interests and the effect of that
regard, including on the principal decisions taken by the
Company in the financial year (pages 83 to 87); and
138
Provident Financial plc
Annual Report and Financial Statements 2019
Directors’ indemnities
The Articles permit the Company to indemnify directors of the
Company (or of any associated company) in accordance with
section 234 of the Act.
The Company may fund expenditure incurred by directors in
defending proceedings against them. If such funding is by means
of a loan, the director must repay the loan to the Company, if
they are convicted in any criminal proceedings or judgement 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:
1.
2.
3.
4.
5.
any liability incurred by the director to the Company or to any
associated company;
any liability incurred by the director to pay a criminal or
regulatory penalty;
any liability incurred by the director in defending criminal
proceedings in which they are convicted;
any liability incurred by the director in defending any civil
proceedings brought by the Company (or an associated
company) in which judgement is given against them; or
in connection with certain court applications under the Act.
No indemnity was provided and no payments pursuant to
these provisions were made in 2019 or at any time up to the
date of this report.
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
Information required to be disclosed by LR 9.8.4R (starting on
page indicated):
Share capital
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, 94,296 ordinary shares in the Company with
an aggregate nominal value of £19,545 were issued to
employees as follows:
• 85,798 shares in relation to the Deferred Bonus Plan (DBP)
at a price of £5.12 in relation to grants made on 1 April 2019; and
• 8,498 shares in relation to the Provident Financial Savings-
Related Share Option Scheme 2013 and the Provident Financial
Employee Savings-Related Share Option Scheme (2003) at
prices ranging between 509p and 575p in relation to grants
made between 30 August 2011 and 29 September 2017.
No new shares were issued to satisfy awards made under the
Provident Financial Long Term Incentive Scheme 2015 (LTIS).
Conflicts of interest
The Act and the Articles require the Board to consider any
potential conflicts of interest of its members.
The Board has a formal policy and operates formal procedures
regarding conflicts of interest in order to identify and manage
conflicts and to maintain independent judgement. All members
of the Board have completed conflict of interest forms which are
reviewed annually. All directors have an ongoing duty to notify
the Company of any changes and to ensure that appropriate
authorisation is sought where required and are required to renew
and confirm their external interests annually.
The Board (excluding the director concerned) 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 duties is affected.
The Board will stipulate, where it deems appropriate, controls
to manage an approved conflict of interest.
Interest capitalised
Not applicable
Publication of unaudited financial information
Not applicable
Records and Board minutes of all authorisations granted by
the Board and the scope of any approvals given are held and
maintained by the Company Secretary.
Details of long-term incentive schemes
Page 153
Waiver of emoluments by a director
Not applicable
Waiver of future emoluments by a director
Not applicable
Non-pre-emptive issues of equity for cash
Not applicable
Item (7) in relation to major
subsidiary undertakings
Parent participation in a placing
by a listed subsidiary
Contracts of significance
Provision of services by
a controlling shareholder
Shareholder waivers of dividends
Shareholder waivers of future dividends
Not applicable
Not applicable
Not applicable
Not applicable
Page 153
Page 153
Agreements with controlling shareholders
Not applicable
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
its 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 Act; 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 2019
139
Governance D I R E C T O R S ’ R E P O R T C O N T I N U E D
Substantial shareholdings
In accordance with the Disclosure Guidance and Transparency
Rules (DTR 5) the Company, as at 19 February 2020 (being the
latest practicable date prior to publication of this report), had
been notified that the following persons hold directly or
indirectly 3% or more of the voting rights of the Company.
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).
Invesco Ltd
Schroders plc
Coltrane Asset Management LP
BlackRock Inc
Marathon Asset Management LLP
The Vanguard Group Inc
Fidelity International Ltd
Standard Life Aberdeen
Interests as at 31 December 2019 were as follows:
Invesco Ltd
Schroders Plc
Coltrane Asset Management
BlackRock Inc
Marathon Asset Management LLP
The Vanguard Group Inc
BlackRock (Transitional Manager)
Standard Life Aberdeen
Fidelity International Ltd
15.97%
15.66%
8.27%
6.55%
4.60%
4.31%
4.03%
3.23%
17.43%
15.09%
8.45%
6.55%
4.76%
4.26%
4.20%
3.28%
3.11%
All interests disclosed to the Company in accordance with DTR 5
that have occurred since 21 February 2020 can be found on the
Group’s website: www.providentfinancial.com.
Directors’ interest in shares
The beneficial interests of the directors in the issued share
capital of the Company were as follows:
Patrick Snowball
Malcolm Le May
Simon Thomas
Andrea Blance
Angela Knight
Elizabeth Chambers
Paul Hewitt
Robert East
Graham Lindsay
Number of shares
31 December
2019
31 December
2018
96,477
528,395
174,384
—
—
12,000
34,205
5,000
9,771
—
204,498
—
—
—
—
—
—
—
There have been no changes to the above interests between
31 December 2019 and the date of this report.
Dividend waiver
Information on dividend waivers currently in place can be found
on page 153.
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 2019 AGM. The Board is
seeking renewal of these powers at the 2020 AGM.
The current scheme for employees resident in the Republic of
Ireland is 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’s schemes
aim to encourage employees’ involvement and interest in the
financial performance and success of the Group through
share ownership.
Around 1,259 employees were participating in the Company’s
save as you earn schemes as at 31 December 2019 (2018: 1,718).
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 matching share for
every four partnership shares purchased.
Around 553 employees were participating in the SIP as at
31 December 2019 (2018: 483).
Executive share incentive schemes
Awards are also outstanding under the LTIS and the DBP and the
Remuneration Committee did not grant any options during the
year under the LTIS or DBP. Further information is set out on
pages 153 to 155.
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,
SG Kleinwort Hambros Trust (CI) Limited, is not a subsidiary of
the Company. The EBT operates in conjunction with the LTIS and
the PSP and either purchases shares in the market or subscribes
for the issue of new shares. 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 awards granted under
the LTIS and awards granted under the DBP. For the purpose of
the financial statements, the EBT is consolidated into the Company
and Group. As a consequence, the loans are eliminated and the
cost of the shares acquired is deducted from equity as set out
in note 26 on page 218 of the financial statements.
In 2019, the EBT agreed to satisfy awards made under the LTIS in
relation to 1,736,159 shares in the Company and subscribed for
the issue of 85,798 new shares in relation to the DBP. The EBT
also agreed a buyout award agreement in relation to 11,254
shares in the Company.
As at 31 December 2019, the EBT held the non-beneficial interest
in 2,853,722 shares in the Company (2018: 2,853,722). 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 beneficiaries.
Provident Financial Employee Benefit Trust
(the PF Trust)
The PF Trust, a discretionary trust for the benefit of executive
directors and employees, was established in 2003 and operated in
conjunction with the PSP. The trustee, Provident Financial Trustees
(Performance Share Plan) Limited, is a subsidiary of the Company.
140
Provident Financial plc
Annual Report and Financial Statements 2019
The PF Trust has not been operated with the PSP since 2012,
when the previous PSP expired. As at 31 December 2019, the
PF Trust had no interest in any shares in the Company (2018: nil).
Provident BAYE Trust (the BAYE Trust)
The Provident BAYE Trust is a discretionary trust which was
established in 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 for participants of the SIP.
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 2019, the BAYE Trust held the non-beneficial
interest in 180,363 shares (2018: 134,417 shares).
Profit and dividends
The profit, before taxation, amortisation of acquisition intangibles
and exceptional items amounts to £162.6m (2018: £153.5m).
The directors have declared dividends as follows:
Ordinary shares (p) per share
Interim dividend
2019
2018 (dividend withdrawn)
Proposed final dividend
2019
2018
Total ordinary dividend
2019
2018
9p
£nil
16p
10p
25p
10p
The final dividend will be paid on 22 May 2020 to shareholders
on the register on 3 April 2020.
Employee engagement and involvement
The Group is committed to employee involvement across the
Group. You can also read about how our directors have engaged
with employees, how they had regard to employee interests
and the effect of that regard on pages 83 to 87.
We provide colleagues with information on matters of concern
to them through a number of mechanisms, including: workforce
panels in each division, Company briefings and updates, the
intranet, mobile applications, ‘town halls’ and internal newsletters
from our CEO and Managing Directors. Colleagues were also kept
up to date during the year in relation to the defence of the unsolicited
offer from Non-Standard Finance plc in 2019. Following external
announcements regarding the Group’s operational and financial
performance, internal communications and engagement are carried
out to keep colleagues up to date on Group performance. Senior
leaders across the Group regularly keep colleagues updated on
financial and operational performance and relevant strategic
issues through frequent updates. A monthly update from the
CEO, Malcolm Le May, highlights our progress and focus on
plans across the Group.
Colleagues are consulted with via our Group-wide colleague
survey and our divisional workforce panels, as well as other local
engagement initiatives.
You can read how we encourage the involvement of UK
employees in the Company’s performance through an
employees’ share scheme on page 140.
Business relationships with suppliers, customers
and others
You can read about how our directors had regard to the need
to foster the Company’s business relationships with suppliers,
customers and others and the effect of that regard, including on
the principal decisions taken by the Company, on pages 83 to 87.
Training
The Group is fully committed to continual personal and professional
development, encouraging employees at all levels to study for
relevant educational qualifications.
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.
The Group is also fully committed to making full use of the
Apprenticeship Levy in 2019 and has plans in place to grow both
its graduate entry and apprenticeship training programmes. The
Group 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 and Diversity Policy
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. In
2017, the Group signed up to the National Equality Standard, and
the initial report identified some key opportunities. Details of our
Diversity Policy are set out on page 72.
Investing in our workforce
We invest in our colleagues through recognition, reward,
development, wellbeing, the working environment and culture.
Colleagues are recognised through our new ‘Better Everyday’
recognition platform (see page 72 for more detail) and our
‘Perks at Work’ scheme, which offers colleagues in-store
rewards and discounts.
Vanquis Bank operates its ‘Make Work Mean More’ proposition,
which is designed to provide a total rewards package to colleagues,
which not only covers financial reward, but also includes lifestyle,
culture, wellbeing and career opportunities, seeking to provide
a suite of benefits to suit the needs of colleagues at every stage
of their personal and professional lives. During the year, Moneybarn
launched its ‘Be Brilliant’ leadership programme and increased
its support for professional qualifications and all divisions offer
new colleagues a comprehensive induction programme. CCD
provides colleagues with the opportunity to find a mentor through
the ‘Mentoring for Success` programme, which supports the
personal development of colleagues. The Group also has mentoring
programmes to focus on the personal development of colleagues
and the apprenticeship levy has enabled CCD to provide
opportunities for our existing workforce to develop their key
technical skills and achieve industry recognised qualifications
which range from digital to accountancy and HR.
Provident Financial plc
Annual Report and Financial Statements 2019
141
Governance D I R E C T O R S ’ R E P O R T C O N T I N U E D
Investing in our workforce continued
Our divisions support colleague wellbeing in a number of ways,
such as through mental health training and mental health first
aiders, and access to gyms and free fruit. 2019 also saw a
Group-wide roll-out of our Blueprint and broad engagement
activities regarding culture, which you can read more about
on page 67.
Health and safety
The Group is committed to achieving high standards of health
and safety in relation to all of its employees, those affected by
its business activities and those attending its premises. Each
division has its own health and safety agenda, policy standards
and mandatory training in place to help colleagues work safely
at all times.
In 2019, we signed up to the Women in Finance Charter with the
aim to increase female senior leadership representation to 33%
for Group Executive Committee members and direct reports
by December 2020 and to 40% by December 2024.
Pensions
The Group operates four pension schemes in the UK.
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. 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.
As at the year end there were three trustees nominated by
members and three trustees appointed by the Company.
The trustees have implemented a de-risking investment strategy
which has been agreed with the Company. The objective of the
strategy is 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.
The Company has put Pension Trustee Indemnity Insurance in
place to cover all of the Group’s pension schemes where individuals
act as trustees. The trustees are also protected by an indemnity
within each scheme’s rules and this insurance effectively protects
the Group against the cost of potential claims impacting on the
solvency of the pension schemes.
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 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. This scheme was not
offered to new entrants after 2015.
In October 2013, the Group auto-enrolled all eligible staff
into a new scheme designed for auto-enrolment.
The Group also operates two defined contribution pension
schemes for employees in the Republic of Ireland.
The CCD division has the particular risk of personal safety whilst
out collecting from customers. CCD has a strong safety culture
and in our 2018 Annual Report and Accounts we made a commitment
to redouble our efforts in the safety space. As a result it has carried
out a number of initiatives to further enhance its safety systems
and processes. The business continues to carry out an extensive
training programme and conduct safety weeks for employees
twice a year; 2019 has also seen a focus on further engagement
with colleagues on safety matters. CCD is constantly looking for
ways to further strengthen its safety culture.
Anti-bribery and corruption
The Group Policy
The Group has a policy on anti-bribery and corruption which
reflects the requirements of the Bribery Act 2010 (the Policy).
The Policy sets out the Group’s zero-tolerance approach to bribery
and corruption and its commitment to acting professionally, fairly
and with integrity in all its business dealings and relationships,
wherever it operates, and implementing and enforcing effective
systems and controls to counter bribery, corruption and other
financial crimes.
The Policy applies to all employees, self-employed agents,
contractors and directors in relation to the business activities
undertaken by, or on behalf of, the Group. It also applies to any
third party which is undertaking business for or on behalf of the
Group, which must comply with the Policy or maintain equivalent
standards and safeguards to prevent bribery and corruption.
Under the Policy, all employees, self-employed agents, contractors,
directors, and relevant third parties of the Group and its divisions
must comply with the following minimum requirements:
• they must not directly or indirectly engage in bribery or
corruption in any form; and
• they also must not accept, solicit, agree to receive, promise,
offer or give a bribe, facilitation payment, kickback or other
improper payment.
The Policy also states that if an employee, self-employed agent,
contractor, director or a relevant third party of the Group or its
divisions becomes aware of a breach of the above minimum
requirements they must immediately comply with applicable
protocols and procedures to inform an appropriate person within
the Group who must as soon as is reasonably practicable report
the incident to the Deputy Company Secretary.
Compliance
The Group Risk Committee and the Audit Committees oversee
compliance and work together to review the systems and
controls for the prevention of bribery. Compliance is also
monitored by the Divisional Boards.
Related policies
Gifts and Corporate Hospitality Policy
The Group also has a Corporate Hospitality Policy which requires
divisional review, approval and documentation of any gifts or
corporate hospitality which is accepted, offered or provided.
The Audit Committee oversees the Corporate Hospitality Policy.
142
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Annual Report and Financial Statements 2019
Whistleblowing Policy
The Group has a Whistleblowing Policy which is overseen
by the Board. The Group is committed to fostering a culture of
openness, honesty and accountability and requires the highest
possible standards of professional and ethical conduct.
A Group Whistleblowing Forum is now in place which oversees
whistleblowing investigations, reviews management information
and takes the opportunity to consider any concerns regarding
persistent trends and shares best practice.
Should any Group employee have any concerns relating
to anti-bribery and corruption or corporate hospitality then
anonymous concerns can be raised through the Group’s
external third-party helpline facility as detailed in the corporate
Whistleblowing Policy. Whistleblowing arrangements are
overseen by the Board.
Training
The Group provides anti-bribery and corruption and whistleblowing
training to all of its employees.
Environmental management
The Group is committed to minimising its impact on the environment
and acting to address specific environmental issues such as climate
change. The Group’s Environmental Management System (EMS)
helps to identify, assess and address key environmental risks
and impacts; set and achieve environmental targets; and ensure
compliance with environmental rules, regulations and policy
requirements. The EMS at the Group’s Bradford head office has
been certified to the international environmental management
standard ISO 14001:2015 since 2011 and in 2018 we extended
the scope of the ISO 14001:2015 certified EMS to include all of
Vanquis Bank’s operations in Chatham and London. Details relating
to the Group’s approach to environmental management and our
direct and indirect greenhouse gas (GHG) emissions, which we
are required to disclose in order to meet the requirements of
the Companies Act 2006 (Strategic and Directors’ Reports)
Regulations 2013, are set out in the Strategic Report section of
this document on page 81. The GHG data has been subjected
to external assurance by the management consultancy,
Corporate Citizenship.
Overseas branches
The Group has an overseas branch in the Republic of Ireland.
Important events since the end of the financial year
(31 December 2019)
The Group successfully signed a bilateral securitisation facility
with NatWest Markets to fund Moneybarn business flows on
14 January 2020. The new facility provides up to £100m of
initial funding and is anticipated to grow to £275m over the next
18 months. The successful completion of this facility builds the
Group’s capability in securitisation, allowing similar funding to be
deployed elsewhere in the Group. As a part of obtaining consent
for the securitisation from the Group’s existing lenders, the Group’s
revolving syndicated credit facility has reduced from £235m to
£211m and the Group has repaid in full the M&G loan facility of
£50m, which was repayable in two equal instalments of £25m
in February 2020 and 2021. Please see page 61.
As announced by the Company on 17 February 2020, the
Financial Conduct Authority (FCA) has issued its final notice in
respect of the investigation into Moneybarn’s historical lending
practices. The Final Notice relates to aspects of Moneybarn’s
previous forbearance and termination practices between April 2014
and October 2017. The FCA imposed a fine of £2.77m on Moneybarn.
Moneybarn worked collaboratively with the FCA during the
investigation, accepted its findings, and put in place clear, effective
and appropriate processes to address the FCA’s concerns by
October 2017. Moneybarn completed a redress programme to
compensate all potentially affected customers in the third quarter
of 2019, and the total cost of the investigation was within the
£20 million provision originally established in 2017.
Please see page 36.
Corporate governance statement
The Group’s Corporate Governance Report is set out on pages
88 to 137. The Group was fully compliant with all the provisions of
the Code by October 2019 and complied with all the provisions
of the Code throughout the whole of 2019 with the exception
of the following:
Provision 5 – workforce engagement mechanism
At its meeting in December 2018, the Board approved the use
of workforce panels as a mechanism to engage with colleagues.
The first workforce panel meetings were held in October 2019.
The Board also determined in October 2019, in order to further
support workforce engagement, that Graham Lindsay would be
the designated Non-Executive Director to lead Board workforce
engagement. Whilst the workforce engagement mechanism
under the 2018 Code did not operate until October 2019, this was
driven by prioritisation of significant colleague engagement prior
to this, focused on the roll-out and embedding of our Blueprint
and in relation to the defence against the unsolicited offer from
Non-Standard Finance plc. You can read about our range of
colleague engagement mechanisms that operated during
the year on pages 68 and 84.
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, cash flow risk, price risk, interest rate risk and foreign exchange
rate risk are included on pages 183 to 187 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
on termination of employment or for loss of office as a
consequence of a takeover of the Company.
Political donations
The Group did not make any political donations nor incur any
political expenditure during the year.
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 226 to 236, is
made to distinguish for shareholders the respective responsibilities
of the directors and of the external 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.
Provident Financial plc
Annual Report and Financial Statements 2019
143
Governance D I R E C T O R S ’ R E P O R T C O N T I N U E D
Directors’ responsibilities in relation to the
financial statements continued
Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and Article 4 of the
IAS Regulation and have also chosen to prepare the parent
company financial statements under IFRSs as adopted by the EU
and 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, International Accounting
Standard 1 requires that directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the entity’s financial position and
financial performance; and
• make an assessment of the Company’s ability to continue
as a going concern.
The directors have also considered and accepted the review
undertaken and the report provided by the Audit Committee,
as set out on pages 129 to 134 of this report, and are satisfied
that the Annual Report and Financial Statements 2019, taken as
a whole, is fair, balanced and understandable and provides the
necessary information for shareholders to assess the Company’s
position and performance, business model and strategy.
The directors are also required by the FCA’s Disclosure Guidance
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, emerging 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;
Responsibility statement
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 2019 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 they face.
Patrick Snowball
Malcolm Le May
Simon Thomas
Andrea Blance
Angela Knight
Elizabeth Chambers
Paul Hewitt
Graham Lindsay
Robert East
Chairman
Chief Executive Officer
Chief Finance Officer
Senior Independent Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Disclosure of information to auditor
In accordance with section 418 of the Act, 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 external 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 external
auditor is aware of that information.
Auditor
Deloitte LLP, the external auditor for the Company, was first
appointed in 2012 and a resolution proposing its reappointment
will be proposed at the 2020 AGM.
2020 AGM
The 2020 AGM will be held at Provident Financial plc,
No.1 Godwin Street, Bradford BD1 2SU, on 7 May 2020 at 3pm.
The Notice of AGM, together with an explanation of the items of
business, will be contained in the circular to shareholders dated
16 March 2020.
• disclose with reasonable accuracy at any time the financial
position of the Company and Group; and
Approved by the Board on 27 February 2020 and signed by order
of the Board.
• enable them to ensure that the financial statements and the
Directors’ Remuneration Report comply with the Act 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 taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The Annual Report and Financial Statements 2019 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 Group’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Charlotte Davies
General Counsel and Company Secretary
27 February 2020
144
Provident Financial plc
Annual Report and Financial Statements 2019
D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T
Our 2019
remuneration
report
Remuneration has an important part to play in
realigning our culture and ensuring best practice.
146 Annual statement by the Chairman of the Remuneration Committee
149 Annual report on remuneration
162 Directors’ remuneration policy
Provident Financial plc
Annual Report and Financial Statements 2019
145
Directors’ remuneration report D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T C O N T I N U E D
Annual statement by the Chairman of the Remuneration Committee
Engaging positively
with our investors
I am pleased to present the report of the
Group Remuneration Committee which
explains how we have engaged positively
with our investors during 2019. As a result,
we have enhanced our reward framework
to strengthen the links with performance,
our strategic agenda, underlying Blueprint
behaviours and cultural transformation.
We have also introduced a post-employment
Share Ownership Requirement policy.
This enhanced framework will continue
to be applied in 2020 and beyond.
Andrea Blance
Chairman of the Remuneration Committee
The report complies with the provisions of the Companies Act
and the Listing Rules of the Financial Conduct Authority (FCA).
The Company also follows the requirements of the UK Corporate
Governance Code (the Code) updated in July 2018.
This has been a complex year including the unsolicited offer
for the Group made by NSF and the 79.63% vote in favour of the
Directors’ Remuneration Report (DRR) at the AGM. Following this
vote, we consulted with investors, to understand and address
their concerns. Throughout this period, the Board remained
focused on meeting shareholder expectations on financial
performance and the wider strategic outcomes.
I want to thank all investors (and their representative bodies) who
provided me with feedback as part of the 2019 DRR consultation.
Investor views have been incorporated into the Committee’s
year-end decision making and will inform our approach in 2020
and beyond.
This report explains our approach to colleague and executive
pay and provides information on how we reward our people.
This year we have sought to use a more constant lens to ensure
a joined-up approach to colleague and executive performance
assessment and pay outcomes.
Members
Andrea Blance (Chairman)
Angela Knight
Graham Lindsay (member from 1 April 2019)
146
Provident Financial plc
Annual Report and Financial Statements 2019
Changes and developments in 2019
As a result of the feedback from the shareholders following the
AGM, we made the following commitments and have now delivered
them all:
Annual bonus – structure
• a change in the split between financial and non-financial
metrics for annual bonus, increasing the financial metrics from
50% to 60% and reducing the non-financial metrics from 50%
to 40%;
Performance in 2019
Adjusted PBT of £162.6m (2018: £160.1m – restated) and a CET1
ratio in excess of 25.5%. In addition, we successfully defended
the unsolicited, hostile bid from NSF and consequently preserved
shareholder value. Further details can be found in the DRR.
The roll-out, and ongoing embedding, of our Cultural Blueprint
(see page 12) has been another successful milestone and
demonstrates our commitment to long term sustainable
shareholder value.
• non-financial objectives are now based upon five qualitative
categories: strategy, regulatory risk and conduct, Investor
Relations, customers and employees;
• within each non-financial category corporate (strategic) measures
of success and KPIs will be clearly distinguished from personal
objective measures of success and KPIs. The weightings,
assessments and outcomes of corporate (strategic) elements
and personal objective elements (set out separately) can be
found in the main body of the DRR;
• Group adjusted PBT (prior to exceptional items and amortisation
of acquisitions and intangibles) – is now the sole financial metric
used for financial performance, accounting for 60% of annual
bonus scorecard weighting; and
• the Common Equity Tier 1 (CET1) metric was removed as a
financial metric in the annual bonus, and was repositioned
as a threshold or ‘gating’ requirement since the maintenance
of capital is a core requirement for the business and not
an objective.
Annual bonus – risk assessment
•
in addition to the assessment of the regulatory risk and
conduct category of the scorecard, the Committee considered
overall risk adjustments for annual bonus outcomes, based
on the Risk Committee overlay report, which provides further
flexibility to reduce bonus in respect of materialised and
non-materialised risks, deficiencies in risk culture and risk
conduct behaviours as well as consideration of audit findings.
Long Term Incentive Scheme (LTIS)
• as part of the wider review on grant levels the Committee used
the risk overlay and also took into consideration the impact on
the share price arising from the trading statement issued in
January 2019 when determining the appropriate grant level.
Share Ownership Requirement (SOR) policy
• a post-employment SOR policy has been adopted. Executive
directors will have a contractual requirement to retain the
in-employment SOR of 200% of base salary or, if lower, the
shareholding position reached at termination for a period of
two years. This covers shareholdings from share grants from
2020 in the Deferred Bonus Plan (DBP, previously PSP) and the
LTIS. Shares purchased by the executive directors are not
included in the post-employment SOR.
We believe that these changes clearly set out our commitment
to improving our processes and provide greater alignment with
the shareholders.
Executive director pay
Salary
The workforce average salary range increase is 2.5%–3.0%.
For 2020, we have decided to award a salary increase of 2.0%
(nil in 2018) with effect from 1 January 2020 to the CEO. This
approach reflects restraint and is within market levels of salary
increases for executive directors. This has the effect of increasing
the CEO’s base salary from £700k per annum to £714k per annum.
There is no change to Simon Thomas’ salary and he will be stepping
down from the Board as set out below. Details about his successor,
Neeraj Kapur, can also be found below.
Annual bonus outcomes in respect of 2019
As approved at the AGM, the CEO bonus opportunity increased
from 120% to 175% of base salary and we have been sensitive to
the need to demonstrate restraint in the quantum uplift (which
consequently means that the bonus awarded for 2019 is a smaller
percentage of the maximum than that awarded in 2018). An important
element of the transition was to increase the importance of the
financials in determining the bonus outcome and the realignment
of those financials around a single measure, adjusted PBT. Further
details on the results can be found below and in the main body
of the DRR.
The adjusted PBT outcome of £162.6m (2018: £160.1m – restated)
is 93.7% of target, hence qualifying for a payment of 45.2% of
maximum payment. With a CET1 ratio in excess of 25.5% the CET1
hurdle has also been met. Finally, the non-financial element is
assessed at 65% achievement (further details in the DRR). Overall
the non-financial assessment was: (i) CEO – 65.2% of maximum
target; and (ii) CFO – 63% of maximum target.
The CRO, and the Chairman of the Risk Committee, advised that,
during 2019, material progress was made in mitigating a number
of the major risks – despite significant uncertainty in the external
environment and regulatory challenges facing the Group. As a
result, the Committee determined that no risk overlay adjustment
was necessary. Therefore, the Committee made an award of:
(i) CEO – 53.2% of maximum award (£651,900) – this equates
to 93% of base annual salary; and (ii) CFO – 52.3% of maximum
award (£300,150) – this equates to 59% of base annual salary
(pro-rated).
To ensure improved shareholder alignment 40% of the value of
executive directors’ annual bonus awards are granted in shares
and deferred for 3 years in the Deferred Bonus Plan. These shares
will contribute towards the SOR from date of grant.
Provident Financial plc
Annual Report and Financial Statements 2019
147
Financial statementsShareholder informationGovernanceDirectors’ remuneration reportStrategic report D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T C O N T I N U E D
Annual statement by the Chairman of the Remuneration Committee continued
LTIS matters in 2019
Vesting of 2017 LTIS
Neither the current CEO, nor CFO, were in role at the grant
for the LTIS 2017 Award.
Grants of LTIS in 2019
As set out in the 2018 DRR, an LTIS grant of 200% of base salary
was made to Malcolm Le May in 2019. This will vest in 2022 subject
to three performance metrics: (i) relative total shareholder return
(TSR) – 30%; (ii) earning per share (EPS) – 60%; and (iii) risk indicators
– 10%. A two-year post-vesting holding period applies to his LTIS
award (net of tax).
Simon Thomas received a grant of 175% of base salary with the
same terms as Malcolm Le May.
Grants of LTIS in 2020
Further to the commitment made as a result of the shareholder
consultation, in making this year’s award we have considered the
share price movement over the year and have decided to make a
reduction in the 2020 LTIS grant value. A 15% reduction has been
approved by the Committee. As a result, Malcolm Le May’s LTIS
grant in 2020 will be reduced from 200% to 170% of salary this year.
Board changes
Simon Thomas’ illness and departure
Simon Thomas, the Chief Finance Officer, took three months
medical leave, starting on 5 April 2019. Upon his return, he
decided to leave the business for health reasons in March 2020,
after the 2019 preliminary results announcement. Simon Thomas is
being treated as a ‘good leaver’. No special departure terms have
been agreed and his bonus has been pro-rated for medical leave
of absence. Departure terms are within the Directors’ Remuneration
Policy (DRP) and in accordance with the plan rules; his 2019
annual bonus has been pro-rated for medical leave of absence
and he will be considered post year end for a pro rated 2020
bonus for the period worked. He will be covered by the new
post-employment SOR policy when he steps down from
the Board.
Appointment of Chief Finance Officer
Neeraj Kapur will be appointed to the Board on 1 April 2020
as Chief Finance Officer. The terms of his appointment are in
accordance with the DRP approved by shareholders in 2019.
His base salary will be £525,000. This represents a 2.9% increase
to the salary of the departing CFO, Simon Thomas, and is broadly
aligned to the workforce salary increase this year. He will be entitled
to a maximum annual bonus and maximum LTIS opportunity of
125% and 150% of salary per annum respectively which is less
than the current office holder. Following appointment, Neeraj will
be granted a 2020 LTIS award subject to performance measured
over a three-year period. His bonus for 2020 will be pro-rated to
reflect actual service during the year. He will be entitled to participate
in pensions arrangements in the same manner as other UK-based
employees with an employer contribution of 10% of base salary.
To secure his appointment in accordance with the DRP approved
in 2019, it was necessary to compensate him for certain cash
and share-based incentive awards that he will forfeit on leaving
his previous employer, Secure Trust Bank.
The buyout award, which has been designed to mirror the time
horizon and value of the remuneration forfeited, will be delivered
in cash (to the extent that this aligns to forfeited awards at the
time of joining) and shares to provide alignment with the Group
and its shareholders. Further details on his package are set out
on page 156.
Full details of the Board changes are set out on page 168.
Details of the remuneration earned by the non-executive
directors, and Malcolm Le May and Simon Thomas as executive
directors, during the year ended 31 December 2019, have been
included in the DRR.
Conclusion
We have made a great number of changes in 2019 to further
align our compensation with shareholder expectations. We are
confident that we now have in place a much improved ‘pay for
performance’ commitment and rigour. No discretion was
exercised by the Committee to override performance outcomes.
I would like to thank shareholders for the support they have given
this year, and I hope you will recognise and approve of the
substantive changes that have been made and support our 2019
DRR at the 2020 AGM.
Andrea Blance
Chairman of the Remuneration Committee
27 February 2020
148
Provident Financial plc
Annual Report and Financial Statements 2019
Annual report
on remuneration
This Annual Report on Remuneration provides an overview of the workings of
the Remuneration Committee (the Committee) during the year, sets out details
of how the approved Directors’ Remuneration Policy (DRP) was applied in 2019,
and explains the total remuneration earned by the directors during the year.
This report, together with the Committee Chairman’s annual statement, will be subject to an advisory vote at the 2020 AGM.
1. Implementation of the approved DRP in 2019
1.1 Directors’ remuneration
The table shows the directors’ emoluments for the 2019 financial year and the 2018 financial year for comparison.
Executive directors’ remuneration
Fixed pay
Variable pay
Share incentive schemes
Total
Salary
Benefits
in kind3
Pension
Total
fixed pay
Annual
bonus4
Vesting
of LTIS5
Vesting
of PSP
Matching
Awards6
PSP
dividends
Total
variable pay
Director’s name
2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Executive directors
Malcolm Le May1 700 692
Simon Thomas2
43
510
Total
1,210 735
42
10
52
29 105
77
1
93 847 814 651 573 — — — —
9
6 597
50 300
— — — — — — — 300
— 660 573 1,507 1,387
50
— 897
30 182
99 1,444 864 951 573 — — — —
9
— 960 573 2,404 1,437
1
Malcolm Le May received an annual salary of £600,000 for the period from 1 January 2018 to 31 January 2018, as the Executive Chairman.
His annual salary as the Chief Executive Officer is £700,000, effective from 1 February 2018.
2 Simon Thomas was appointed the Chief Finance Officer on 3 December 2018.
3 This figure includes amounts in respect of a company car benefit or car cash allowance, and private medical insurance.
4 The annual bonus represents the gross bonus payable to the directors in respect of 2018 and 2019.
5 Amount calculated based on no vesting of the 2017 LTIS.
6 Amount calculated based on no vesting of the 2017 PSP Matching Awards.
Non-executive directors’ fees and benefits
Director’s name
Chairman
Patrick Snowball1
Non-executive directors
Andrea Blance
Elizabeth Chambers2
Paul Hewitt2
Angela Knight2
John Straw3
Graham Lindsay4
Robert East5
Total
Fees
2019
£’000
2018
£’000
Benefits in kind
2019
£’000
2018
£’000
Total
2019
£’000
320
116
103
102
104
30
64
39
877
88
116
43
41
41
78
—
—
407
—
2
16
1
—
1
—
—
21
1
3
5
1
—
3
—
—
13
320
117
119
103
104
31
64
39
898
2018
£’000
89
119
48
42
41
81
—
—
420
Note: The non-executive directors did not receive a pension benefit nor did they receive any bonus or share incentive entitlements.
1 Patrick Snowball was appointed Chairman and joined the Board on 21 September 2018.
2 Angela Knight, Elizabeth Chambers and Paul Hewitt were appointed as directors effective 31 July 2018.
3 John Straw stepped down from the Board on 20 May 2019.
4 Graham Lindsay joined the Board on 1 April 2019.
5 Robert East joined the Board on 26 June 2019. Robert East received an additional fee of £102,500 in respect of his chairmanship of Vanquis Bank Ltd.
Further details on the non-executive directors can be found on page 161.
Provident Financial plc
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Directors’ remuneration report
D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T C O N T I N U E D
Annual report on remuneration continued
1. Implementation of the approved DRP in 2019 continued
1.2 Executive directors’ fixed pay and non-executive directors’ fees in 2019
Executive directors’ salaries
Malcolm Le May received an annual salary of £700,000 for the period between 1 January and 31 December 2019 as the
Chief Executive Officer. This did not change from 2018 based on his CEO role.
Simon Thomas received an annual salary of £510,000 for the period between 1 January and 31 December 2019 as the Chief Finance Officer.
Executive directors’ pension arrangements
The executive directors receive a cash allowance in lieu of pension as do eligible employees affected by the HRMC limits.
For new executive directors appointments, including Neeraj Kapur, under the DRP the pension allowance is capped at 10% of base
salary, in line with the level available to the wider workforce. The Committee carried out a detailed review last year, and it determined
that the maximum pension level of 30% under the previous DRP should be reduced to 15% of salary for incumbents to bring it in line
with market practice at that time and closer in line with employees below executive director level. This will be reviewed again at the
next DRP review in 2022.
Chairman
The fees for the Chairman are set by the Committee. Full details of the Chairman’s fees are set out on page 161.
Other non-executive directors’ fees
Non-executive directors’ fees are designed both to recognise the context of responsibilities, time commitment and the market of
non-executive directors and to attract individuals with the necessary skills and experience to contribute to the strategy and future
growth of the Company. Full details of the fees are set out on page 161. Non-executive directors’ remuneration is set by the Board,
except for the Board Chairman whose fee is set by the Committee. The fees do not include share options or other performance-related
elements for which they are not eligible.
Fees from other directorships
Malcolm Le May has been a non-executive director of IG Group plc since September 2015. He retains the fees from this appointment.
During 2019, the fees amounted to £103,000 (£113,235 for 2018).
Simon Thomas did not hold any external directorship for the period from 1 January to 31 December 2019.
1.3 Annual bonus scheme
1.3.1 Annual bonus opportunities and targets for 2019
A number of changes to the annual bonus plan have been made in 2019. The changes sought to strengthen further our commitment
to stronger pay and performance alignment. As approved at the AGM, the CEO bonus opportunity increased from 120% to 175% of
base salary (with the CFO maximum being 150%) and we have been sensitive to the need to demonstrate restraint in the quantum
uplift (which consequently means that the amount awarded is a smaller percentage of the maximum). An important element of the
transition was to increase the importance of the financials in determining the bonus outcome and the realignment of those financials
around a single measure – Group adjusted profit before tax (prior to exceptional items and amortisation of acquisitions and intangibles)
– or adjusted PBT – set out on page 224.
A new balanced scorecard of non-financial measures was also introduced for the 2019 annual bonus with the aim of increasing focus
on key objectives and the continuing transformation of the business. The scorecard considered performance within five categories:
(i) strategy; (ii) customer; (iii) regulatory risk and conduct (see page 151); (iv) investor relations; and (v) employee. Within each of these
headings the targets were split into corporate/strategic objectives and personal objectives.
The overall weighting was 60% financial (adjusted PBT), 24% non-financial (corporate/strategic) and 16% non-financial (personal).
It should be noted that both non-financial categories were aggregated into a single percentage of achievement. Further details
on the targets and their assessment can be found below.
The maximum bonus opportunity, in respect of 2019, was 175% of salary for the CEO and 150% of salary for the CFO, and was split
as follows:
Performance metric weightings
Adjusted PBT
Non-financial objectives
Total
1 For 2019, the bonus of Simon Thomas was pro-rated to take account of his leave of absence.
Malcolm Le May
Simon Thomas1
% of max
bonus
Max as %
of salary
% of max
bonus
Max as %
of salary
60%
40%
105%
70%
175%
60%
40%
90%
60%
150%
150
Provident Financial plc
Annual Report and Financial Statements 2019
1.3.2 Assessment of performance and pay-outs for 2019 annual bonus
The bonus assessment was as follows:
Financial
The Group achieved adjusted PBT of £162.6m, which is 93.7% of target and hence qualifies for a payment of 45.2% of maximum payment.
The Group achieved a CET1 ratio in excess of 25.5%; thus, the CET1 hurdle has also been met and a bonus is potentially payable.
Adjusted PBT
Performance range
Threshold
85%
Target
100%
Maximum
110%
Actual Weighting
Outcome
£147.6m £173.6m £191.0m £162.6m
60%
45.2%
Non-financial
The non-financial element was assessed at 65% achievement with this broken down as follows:
Category
Weighting Type
Description
Strategy
20%
Corporate
(i) Roll-out of Blueprint across
the Group and embedding
Blueprint principles into PFG
customer culture and the
employee appraisal process;
and (ii) Conceptualisation and
initiation of the CPC strategic
initiatives programme
Individual
weighting
Rating
CEO
CEO
bonus
%
CFO
CFO
bonus
%
15%
On target
63.3% 9.5%
63.3% 9.5%
CEO
CFO
40%
Corporate
Regulatory
risk and
conduct
CEO
Employee feedback action plan
developed with target dates
against all actions
5%
Exceeds
target-
75%
3.75% —
—
Group strategic cost review
and financial strategy
execution
(i) Regulator (PRA, FCA, CBI)
understanding of Group
approach to affordability,
forbearance and complaints;
and (ii) Improving the dialogue
with the regulator and
changing the economic
and political perception
of the business
(i) Quarterly FCA all-Group
forum, and (ii) Expansion of
cross-business forums for
collaboration on areas
including FOS, complaints,
risk, HR and financial crime
5%
On target+ —
—
65%
3.25%
25%
On target
58.75% 14.7%
58.75% 14.7%
15%
Exceeds
target
78.3%
11.75% —
—
CFO
Plan for PRA risk capital add
on reduction
15%
On target+ —
—
65%
9.75%
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Annual report on remuneration continued
1. Implementation of the approved DRP in 2019 continued
1.3 Annual bonus scheme continued
1.3.2 Assessment of performance and pay-outs for 2019 annual bonus continued
Non-financial continued
Category
Weighting Type
Description
Investor
Relations
10%
CEO
CFO
Customer
20%
Corporate
Employee
10%
CEO
(i) Positive investor feedback;
and (ii) Investor perceptions
and feedback improved
from 2018
(i) Renegotiation and
completion of Risk Control
Framework; and (ii) Investor
perceptions and feedback
improved from 2018
(i) Customer, product and
funding strategy defined;
(ii) Proactive price management;
(iii) Optimal legal structure
defined; and (iv) Project plan
for delivery complete
Board and Executive
Committee succession
planning in place
Individual
weighting
Rating
CEO
CEO
bonus
%
CFO
CFO
bonus
%
10%
On target+ 70%
7%
—
—
10%
On target+ —
—
67.5%
6.75%
20%
On target+ 65%
13%
65%
13%
10%
On target- 55%
5.5%
—
—
CFO
Equality, Diversity and Inclusion
Policy taken into account for
all succession planning
10%
On target+ —
—
60%
6%
Total
65.2%
63.0%
Risk overlay
A risk overlay approach was used for potential risk adjustment with a range of factual criteria for assessment agreed with the
Committee. This allowed for a more flexible and holistic approach to be adopted which considers not only the business outcomes
(quantitative), but also how these have been achieved (qualitative).
For 2019, the conclusion was that material progress was made in mitigating a number of the major risks – despite significant uncertainty in
the external environment and regulatory challenges facing the Group. There was evidence of renewed focus and direction from the
Group Board and the Executive Committee (ExCo) through much improved understanding of our Group risk profile, attitude towards
managing risk, and closure of material risk and audit issues. This enabled the organisation to start planning for the future and shifting
the balance away from the historical issues which have severely hamstrung the Group’s performance over the last three years. On this
basis, and with reference to the ‘risk overlay’, the Committee has determined that no further risk adjustment is required at a Group
level which has not already been considered as part of the existing financial and non-financial objectives.
It should be further noted that the Chief Risk Officer (CRO), and the Chairman of the Risk Committee, have also been materially
involved in the process and its advice was sought by the Committee prior to its final deliberations.
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Annual Report and Financial Statements 2019
Conclusion
The CRO and the Chairman of the Risk Committee advised that, during 2019, material progress was made in mitigating a number
of the major risks – despite significant uncertainty in the external environment and regulatory challenges facing the Group. As a result,
the Committee determined that no risk overlay adjustment was necessary.
40% of the value of executive director annual bonus awards will be granted as deferred bonus share awards. These are subject to
continuing employment but not subject to performance criteria and are deferred for 3 years. Deferred bonus share awards are
contributing towards the minimum SOR from date of grant.
Financial
Non-financial
Total
Malcolm Le May
Simon Thomas
45.2% of max
£332,420
65.2% of max
£319,480
53.22% of max
93% of salary
£651,900
45.2% of max
£155,650
63.0% of max
£144,500
52.31% of max
59% of salary1
£300,150
Cash
Deferral
Cash
Deferral
£391,140 £260,760 £180,090 £120,060
1 Pro-rated to take account of Simon Thomas’ three-month medical absence.
1.4 Long-term incentive schemes
In 2019 the Committee granted awards under the LTIS, which have a three-year performance period covering the years from 2019
to 2021. Details of the LTIS grants are provided below.
1.4.1 LTIS – 2020 grant and performance targets
It is intended that LTIS awards of 170% of base salary will be granted to Malcolm Le May. This award level incorporates an adjustment
to acknowledge the reduction in the share price during 2019. A grant will also be made to Neeraj Kapur (see page 156) but no grant
will be made to Simon Thomas. The grants are due to vest in 2023 subject to performance conditions, continued service and a further
two-year holding period.
The performance conditions will be as follows:
Performance metrics
Cumulative EPS
Relative TSR
Risk indicators
Weighting
60%
30%
10%
Threshold
Performance
requirement
% of max
vesting
162.5p
Median
Based on
Committee
assessment
20%
20%
20%
Maximum
Performance
requirement
% of max
vesting
198.6p
Upper quartile
Based on
Committee
assessment
100%
100%
100%
Between
threshold
and max
Straight-
line
vesting
1.4.2 LTIS – 2019 grant and performance targets
LTIS awards of 200% of base salary were granted to Malcolm Le May and 175% of base salary to Simon Thomas in 2019. The grants are due
to vest in 2022 subject to performance conditions, continued service and a further two-year holding period.
For the 2019 LTIS grant, the absolute TSR metric was replaced with relative TSR compared with the constituents of FTSE 250 excluding
investment trusts. The performance targets for 2019 LTIS and the corresponding vesting schedule are provided in the table below.
Performance metrics
Cumulative EPS
Relative TSR
Risk indicators1
Weighting
60%
30%
10%
Threshold
Performance
requirement
% of max
vesting
153.0
Median
Based on
Committee
assessment
20%
20%
20%
Maximum
Performance
requirement
% of max
vesting
187.0
Upper quartile
Based on
Committee
assessment
100%
100%
100%
Between
threshold
and max
Straight-
line
vesting
1
Risk indicators include: (i) relationship with the Company’s regulators; (ii) successful completion of the ICAAP and the ILAAP; (iii) credit risk;
(iv) reduction in operational risk through the divisions working together more productively and the Company being managed more efficiently; and
(v) culture, conduct, governance and adherence to the FCA Handbook, its principles of business and treating customers fairly outcomes.
Dividend waiver
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 would be provided
to the executive directors on vesting. As the awards did not vest during 2019, no dividends were paid.
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D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T C O N T I N U E D
Annual report on remuneration continued
1. Implementation of the approved DRP in 2019 continued
1.4 Long-term incentive schemes continued
1.4.2 LTIS – 2019 grant and performance targets continued
LTIS – 2019 award
Details of the LTIS awards granted to the executive directors during 2019 are summarised below:
Director’s name
Malcolm Le May
Date of
award
Number
of shares
Face
value 1
Percentage
of salary
Performance
condition
Performance % vesting at
threshold
period
01.04.2019 273,544 £1,400,000
200%
See table above
Three consecutive
financial years ending
31 December 2021
20%
20%
Simon Thomas
01.04.2019 174,384 £892,500
175%
1
Face value calculation is based on the share price of £5.1180 on 29 March 2019. 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.
Awards held by the executive directors under the LTIS at 31 December 2019 were as follows:
Date of
award
Awards
held at
01.01.2019
Awards
granted
during
the year
Awards
vested
during
the year
Awards
lapsed
during
the year
Awards
held at
31.12.2019
Market price
at date
of grant
(p)
Market price
at date
of vesting
(p)
Vesting
date
Director’s name
Malcolm Le May
Simon Thomas
01.04.2019 2
— 174,384
16.04.2018 1 204,498
01.04.2019 2
—
— 273,544
—
—
—
— 204,498
— 273,544
684.60
511.80
— 16.04.2021
— 01.04.2022
— 174,384
511.80
— 01.04.2022
1 Details of the performance targets for the 2018 awards were included in the Annual Report on Remuneration in 2018.
2 Details of the performance targets for the 2019 awards are provided in the table ‘2019 grant and performance targets’.
LTIS 2017 and 2018 awards
Neither executive director received a 2017 LTIS award.
1.4.3 DBP – Deferred Bonus Plan (formerly known as the Performance Share Plan)
The DBP was originally a bonus deferral and matching plan. Deferred bonuses vest after three years. As reported previously, to align
with best practice, the facility to grant Matching Awards was discontinued in 2018. There is a mandatory deferral of bonus for
executive directors which is a minimum of one-third of any bonus awarded.
DBP 2019 awards
Details of the awards granted to the executive directors during 2019 are summarised below:
Director’s name
Malcolm Le May
Date of
award
Type of
award
Number
of shares
Face
value 1
Percentage
of bonus
Vesting
date
01.04.2019
Basic –
forfeitable
shares
44,781 £229,190
40% 01.04.2022
1
Face value is calculated based on the share price of £5.1180 on 29 March 2019. The actual value may be greater or lesser depending on the actual
share price at vesting and as a result of any dividend equivalent payable on vesting shares.
Awards held by the executive directors under the DBP as at 31 December 2019 are summarised below:
Basic
Awards
(number
of shares)
held at
01.01.2019
Basic Awards
(number of
shares)
granted
during
the year
Date of
grant
Total Basic
Awards
(number of
shares)
vested
during
the year
Total Basic
Awards
(number
of shares)
held at
31.12.2019
Market
price at
date of
grant
(p)
Market
price at
date of
vesting
(p)
Vesting
date
01.04.2019
—
44,781
—
44,781
511.80
— 01.04.2022
Director’s name
Malcolm Le May
Vesting of DBP 2017 awards
There was no grant in 2017.
DBP dividends
For awards granted under the DBP, the dividends payable on the Basic Award are paid to participants on the normal dividend payment
date. Any dividend payable on the shares comprising the DBP Matching Awards are paid to participants as a dividend equivalent on
the normal vesting date and to the extent of vesting.
No executive directors received any dividends during 2019 in respect of DBP Matching Awards granted in 2017.
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Annual Report and Financial Statements 2019
1.4.4 Other relevant share incentive scheme information
The mid-market closing price of the Company’s shares on 31 December 2019 was £4.57. The range during 2019 was £6.58 to £3.56.
No consideration is payable on the award of conditional shares.
1.4.5 Offshore Employee Benefit Trust
The rules of the LTIS and DBP 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 SG Kleinwort
Hambros Trust (CI) 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.
Previously lapsed shares were used to satisfy the 2019 awards made under LTIS. The trustee transferred the beneficial ownership (subject
to achievement of performance conditions) in 447,928 of the shares for no consideration to the executive directors on 1 April 2019.
1.5 Savings-related share option schemes
The executive directors may also participate in the Provident Financial Savings-Related Share Option Scheme 2013 (the SAYE Scheme)
after six months of service.
The SAYE Scheme does not contain performance conditions, but the employee must remain employed by the Company, as it is
an HMRC-approved scheme designed for employees at all levels. Invitations to join the scheme were issued to eligible employees
in September 2019. No consideration is payable on the grant of an option.
During the year, neither executive director exercised any options.
Options held by the executive directors under the SAYE Scheme at 31 December 2019 were as follows:
Director’s name
Malcolm Le May
Simon Thomas
Total
Options
held at
01.01.2019
5,576
Granted
in 2019
5,572
—
—
5,576
5,572
Exercised
in 2019
—
—
—
Options
held at
31.12.2019
Exercise
price for
options
granted
(£)
Market
value
at date
of exercise
(£)
Range
of normal
exercisable
dates of
options
held at
31.12.2019
5,572
3.23
Lapsed
in 2019
5,576
—
—
5,576
5,572
—
—
— 08.10.2022
to
07.04.2023
—
—
—
—
1.6 Malus and clawback
In accordance with the recommendations within the Code and other best practice guidance, the Committee introduced malus and
clawback provisions into all awards under the annual bonus scheme, the LTIS and the DBP (previously the PSP) from December 2010.
This enabled the Committee, at its discretion, to reduce awards before vesting (malus) or to claw back value overpaid for a period of
three years from the date of vesting/payment 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) 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.
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Annual report on remuneration continued
1. Implementation of the approved DRP in 2019 continued
1.7 Dilution and use of equity
Since 2008, the Company had, with shareholder approval, disapplied the 5% anti-dilution limit on the use of newly issued shares for
the LTIS and DBP and only applied the 10% anti-dilution limit that covers all of the Company’s share plans. The disapplication of the
limit related back to the demerger of the international business in 2007 and the subsequent share consolidation which made it
impossible to operate the LTIS and DBP within the 5% limit if the plans were to act as a motivational tool and reward performance.
In 2018, the Committee undertook to reintroduce the 5% limit when the LTIS and DBP could be effectively operated within that limit
and is pleased to confirm that the 5% limit continues to be applied.
The table below sets out the headroom available for all share schemes (10% in 10 years limit) and shares held in trust, and discretionary
share schemes (LTIS and DBP) (5% in 10 years limit) as at 31 December 2019:
Headroom
All share schemes
Shares held in trust
Executive share schemes
2019
4.9%
3.8%
1.5%
2018
5.6%
3.8%
2.2%
1.8 Simon Thomas’ leaving arrangements
Simon Thomas, the Chief Finance Officer, took three months’ medical leave. Upon his return, he decided to leave the business for
health reasons in March 2020, after the 2019 preliminary results announcement. Simon Thomas is being treated as a ‘good leaver’.
Departure terms are within the DRP and in accordance with the plan rules; his 2019 annual bonus has been pro-rated for medical
leave of absence and he will be considered for a 2020 bonus pro-rated for the period worked during the year assessed following the
year-end outcome on performance. He will be covered by the new post-employment SOR policy when he steps down from the Board.
1.9 Neeraj Kapur’s appointment
Neeraj will be appointed to the Board on 1 April 2020 as Chief Finance Officer. The terms of his service contract have been set in
accordance with the policy approved by shareholders in 2019. On appointment, he will receive a salary of £525,000, with an annual
bonus and LTIS opportunity for 2020 of 125% and 150% of salary respectively which is below that of the current office holder. His
bonus for 2020 will be pro-rated to reflect actual service during the year and he will receive an LTIS award in the grant window
following the date of his joining.
He will also receive a buyout award in compensation for cash and share-based awards forfeited on leaving Secure Trust Bank, his
previous employer. The buyout award, which was designed to mirror the time horizon and value of remuneration forfeited, will be
delivered in cash (to the extent that this aligns to forfeited awards at the time of joining) and shares to provide alignment with the
Group and its shareholders. The grant value of the buyout award will be approximately £776,000.
A pension provision or, where at HMRC limits, a cash equivalent of 10% of basic salary will be provided. This is in line with the structure
in place for the UK employees. Neeraj will receive standard benefits set out in the policy including life cover, permanent health
insurance, private medical insurance, car benefit and participation in all-employee share plans.
1.10 Total shareholder return: Provident Financial plc vs FTSE 250 (excluding investment trusts)
The graph below shows the total shareholder return for Provident Financial plc against the constituents of the FTSE 250 (excl.
investment trusts) for the past ten years. The FTSE 250 has been selected as the Committee considers it the index most relevant
to the Company.
Total shareholder return: Provident Financial plc vs FTSE 250 (excl. investment trusts) – 31.12.2009–31.12.2019
600
500
) 400
d
e
s
a
b
e
r
(
300
)
£
(
e
u
a
V
l
200
100
0
Dec
09
Dec
10
Dec
11
Dec
12
Dec
13
Dec
14
Dec
15
Dec
16
Dec
17
Dec
18
Dec
19
Provident Financial plc
FTSE 250 (excl. investment trusts)
Source: FactSet
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Annual Report and Financial Statements 2019
1.11 Chief Executive Officer pay
The table below shows the total remuneration figure for the Chief Executive Officer over the ten-year period. Peter Crook’s figure is shown
up to the date his employment terminated in August 2017 (Chief Executive Officer data for Peter Crook’s predecessors are also used).
Malcolm Le May’s figure is shown from January 2018, including the period he was in the role of the Executive Chairman. The total
remuneration figure includes the annual bonus paid together with LTIS and PSP Matching Awards which vested based on the relevant
performance targets in those years. The annual bonus, LTIS and PSP Matching Awards percentages show the pay-out for each year as
a percentage of the maximum opportunity.
Chief Executive Officer remuneration 2010 to 2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Single total figure
of remuneration
(£’000)
Annual bonus (%)
LTIS vesting (%)
PSP Matching
Awards vesting (%)
2,727
81
66
3,443
100
49
4,326
98
100
4,985
89
100
6,594
100
100
7,500
98
100
6,315
100
100
100
79
—
100
100
100
100
962
—
—
—
1,387
69
—
1,507
53
—
—
—
Chief Executive Officer relative pay
The table below shows the percentage year-on-year change in salary, benefits and annual bonus earned between the years ended
31 December 2018 and 31 December 2019 for the Chief Executive Officer, 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.
%
Chief Executive Officer
Average corporate office employee
2018/2019
Salary
Benefits
(8)%
4.2%
(46.3)%
1.3%
Annual
bonus
n/a
n/a
It should be noted that the 8% reduction in salary (and 46% in benefits) is based on the change between the current and prior
Chief Executive Officer (Peter Crook).
1.12 Relative importance of spend on pay
The table below shows the total pay (including bonuses) for all the Group’s employees in the 2017, 2018 and 2019 financial years
compared to the distributions made to shareholders in the same periods.
Relative importance of spend on pay
Total employee remuneration (£m)
Total shareholder distributions (£m)
Year ended 31 December
2019
184.5
47.6
2018
205.6
—
2017
177.5
133.4
%
change
2018/2019
%
change
2017/2018
(10.3)
n/a
15.8
(100.0)
Chief Executive Officer to employee pay ratio
For the purposes of the above, we have decided to use Option B for the purposes of calculation. This decision reflects that the hourly pay
metric used in the Group’s gender pay gap reporting continues to provide an accurate comparison of workforce pay to Chief Executive
Officer pay. This is due to the components of remuneration that are not captured in hourly pay being either highly standardised (benefits)
or where more variable (such as bonus awards), being of a relatively low absolute and relative value, as evidenced in the table below.
There are three approved methodologies for reporting:
• Option A – all employees in the organisation listed by descending compensation;
• Option B – leveraging gender pay gap reporting data (hourly pay metric); and
• Option C – other approach – to be defined and explained by the Company.
The current Chief Executive Officer to employee pay ratio is as follows:
PFG Chief Executive Officer pay ratio reporting – 2019 (£’000)
2019 Chief Executive Officer single figure total remuneration:
Year
2019
Year
2019
Method
Option B
Pay measure
Fixed pay
Total pay
P25 pay ratio
62.3:1
P25 pay
£23,700
£24,200
Median pay ratio
P75 pay ratio
53.3:1
Median pay
£27,400
£28,000
44.4:1
P75 pay
£31,600
£32,300
Option B reflects the decentralised nature of multiple payroll systems across the Group, and a short turnaround time to capture and
analyse bonus and total pay data.
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Annual report on remuneration continued
1. Implementation of the approved DRP in 2019 continued
1.13 Remuneration policy for employees
We provide employees across the Group with a competitive reward package. We provide a competitive package which includes:
• salary;
• benefits;
• annual bonus – eligibility is dependent upon market comparisons; and
• Share Purchase Plan.
The purpose of each element is the same for all employees, which creates a consistent approach throughout the organisation.
Each element is based on market comparisons and supports the recruitment and retention of colleagues of the calibre, capability
and experience needed to perform their role.
• Base salary – provides fixed remuneration and reflects the size, scope and complexity of individual role responsibilities. The annual
salary review takes place for all employees at the same time.
• Benefits – a market-competitive level of benefits for colleagues, which enhance the reward package and provide other reasons
to work at the Company, i.e. life assurance.
• Pension – the opportunity to save for retirement, with the employing company providing a match to employee contributions.
• Annual bonus – the opportunity (where appropriate) for employees to receive an annual bonus for the delivery of business and
personal goals (including Blueprint behaviours). It is also a function of a standard scorecard across the business which provides
a consistent lens for all employees. Annual bonus opportunity provides colleagues with a balance between fixed and variable pay
related to market practice based on role. At senior levels a proportion of any bonus is deferred into our shares to provide additional
alignment with shareholders’ experience.
• Share Purchase Plan – an opportunity for all employees to acquire shares through regular savings for alignment with shareholders.
The balance between the different elements of remuneration depends largely on the role and seniority of employees. In more junior
roles remuneration is principally fixed pay, reflecting our principle of helping to support a decent standard of living, where regular pay
levels help with personal budgeting and planning. For more senior employees, remuneration is weighted more towards variable pay,
which can increase or decrease based on the performance achieved against our goals. This approach to pay design also reflects each
individual’s ability to influence our performance and also takes into account behaviour which incorporates the impact on risk –
(to the degree appropriate for each role). We also take account of the requirements of the UK Corporate Governance Code
and the views of our investors and other external bodies.
We have a consistent overall principle that all employees should be paid competitively against the relevant pay benchmark.
1.14 Shareholding requirements
The Company has a SOR policy for executive directors which in 2019 required them to acquire and maintain shares in the Company
with a total value of 200% of basic salary normally within five years from appointment. Executive directors are required to retain 50%
of shares obtained from any share plan, net of tax, until this requirement has been reached.
The Committee reviews the shareholdings of the executive directors in 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
during employment, shares held by a spouse or dependant, or in an ISA or pension scheme are included or whilst unvested LTIS
awards are not.
The current shareholdings of the executive directors under the SOR policy as at 31 December 2019 are as follows:
Share ownership guideline holdings
Director’s name
Malcolm Le May2
Simon Thomas3
1 Net of notional tax.
2 Malcolm Le May was appointed CEO on 1 February 2018.
3 Simon Thomas was appointed CFO on 3 December 2018.
4 Includes shares owned outright, unvested DBP and vested LTIP in the holding period.
Share
ownership
as a
percentage
of salary
Share
ownership
(number
of shares) 1,4
29.2%
—
44,781
—
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Effective for 2020, the Committee reviewed the approach and updated it with a formal policy as follows:
• a post-employment SOR policy has been adopted. Executive directors will have a contractual requirement to retain the in-employment
SOR of 200% of salary or, if lower, the shareholding position reached at termination of office for a period of two years. This covers
shareholdings from share grants made from 2020 onwards in the Deferred Bonus Plan (DBP, previously PSP) and the LTIS. Shares
purchased by the executive directors (including through all-employee share plans) are not included in the post-employment SOR; and
•
in the in-employment SOR policy, it has been updated to include the DBP, for consistency across the policy.
It should be noted that Simon Thomas will be covered by the post-employment SOR policy when he steps down from the Board
for his 2020 DBP award.
1.15 Directors’ share ownership
Details of shares held by the executive directors and their connected persons, are shown in the table below:
Unvested
Director
Malcolm Le May
Total
Simon Thomas
Total
Type
Own name
Held in YBS Trustees (SIP)
LTIS
DBP
Own name
Held in YBS Trustees (SIP)
LTIS
DBP
Owned
outright
Subject to
performance
conditions
Not subject to
performance
conditions
Total as at
31.12.19
—
—
—
—
— 478,042
—
—
—
—
—
—
— 478,042
44,781
44,781
— 478,042
44,781
522,823
—
—
—
—
— 174,384
—
—
—
—
—
—
— 174,384
—
—
— 174,384
— 174,384
Details of shares held by the non-executive directors and their connected persons are shown in the table below:
Director
Andrea Blance
Elizabeth Chambers
Robert East
Paul Hewitt
Angela Knight
Graham Lindsay
Patrick Snowball
Total
Owned
outright
Total as at
31.12.19
—
12,000
5,000
34,205
—
9,771
96,477
—
12,000
5,000
34,205
—
9,771
96,477
157,453
157,453
There have been no changes in the beneficial or non-beneficial interests of the executive directors and non-executive directors
between 1 January and 27 February 2020.
1.16 Audit
The elements of the Directors’ Remuneration Report (including pension entitlements and share options set out on pages 149 to 159
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.
Andrea Blance
Chairman of the Remuneration Committee
27 February 2020
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Annual report on remuneration continued
2. Committee effectiveness and governance
2.1 Committee role
The role of the Committee is set out in its terms of reference
which are reviewed annually and were last updated in
December 2018. 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.
The Committee regularly reviews the approved DRP in the context
of the Group’s strategy and 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 Group Risk Committee, which assist with the monitoring and
assessment of risk management specifically in relation to the
incentives provided under the approved DRP.
The Committee considers remuneration policy across the
Company seeking to ensure that policy is fair and equitable and
supports the Company’s culture and values. When determining
policy, care is taken to ensure that solutions meet the objectives
and are: clear, proportionate, aligned to the culture (and the policy
on risk) and as simple to explain as possible. Recent evidence of
this approach can be found in the evolution of the annual bonus
arrangements in 2019. When we review the DRP in 2022, we will
incorporate these principles further.
This year the Committee has pursued active engagement with
shareholders on policy and the approach to its implementation.
This will be ongoing in future years.
2.2 Membership
The members of the Committee, all of whom are considered to
be independent, are shown in the table below. Their attendance
at meetings during the year on page 118.
Details of the work undertaken by the Committee during the year
are set out below.
Committee members
Notes
Name
Chairman
Andrea Blance
Member
Andrea Blance
Angela Knight
Member
Graham Lindsay Member
Date appointed
27 November 2017
1 March 2017
31 July 2018
1 April 2019
£96,591 (excluding VAT). Aon has also provided support to the
HR team on remuneration implementation, and pension consultancy
and investment advice to the Company. The Committee is satisfied
that these additional services provided by other parts of Aon in
no way compromised the independence of the advice received
from Aon’s Executive Compensation practice.
The terms of engagement for Aon are available from the
Company Secretary on request.
The Company Secretary is secretary to the Committee.
In selecting advisors, the Committee considers a range of
factors, such as independence and objectivity, experience,
technical ability and market knowledge.
Priorities for 2020
Continue to monitor upcoming changes relating to remuneration
and assess the potential impact on the Group’s remuneration
structure and framework.
Continue to engage with shareholders and shareholder advisory
bodies, as appropriate, in relation to further alignment between
shareholder interests and the executive directors’ remuneration.
2.5 Statement of shareholder voting at the AGM
At the 2019 AGM the directors’ Annual Report on Remuneration
received the following votes from shareholders:
For
Against
Total number
of votes 1,2
% of
votes cast
122,617,524
31,366,266
79.63
20.37
Total votes cast (for and against)
153,983,790
100.00
1 The total number of votes withheld was 1,716,728.
2 A total of 73,005 shares were voted at proxy’s discretion, which have
been added to the votes cast for.
At the 2019 AGM, the DRP received the following votes
from shareholders:
For
Against
Total number
of votes 1,2
% of
votes cast
152,767,368
2,921,610
98.12
1.88
2.3 Effectiveness
This year the Board undertook an externally facilitated evaluation
of the effectiveness of the Board and its Committees. You can
read about this process on pages 122 to 124.
2.4 External advisors
In 2019, independent advice on executive remuneration and share
schemes is received from the Executive Compensation practice
of Aon plc. Aon is a member of the Remuneration Consultants Group
and is a signatory to its Code of Conduct, which requires its advice
to be objective and impartial. The total fees paid to Aon in respect
of the provision of advice to the Committee during the year were
Total votes cast (for and against)
153,988,978
100.00
1 The total number of votes withheld was 11,541.
2 A total of 66,739 shares were voted at proxy’s discretion, which have
been added to the votes cast for.
Following the 2019 AGM, the Committee engaged with the
shareholders. The outcomes of this engagement are set out
in the Annual Statement on pages 146 to 148.
2.6 Remuneration Committee key items in 2019
The following sets out the key considerations of the Committee
by meeting:
Governance
Annual bonus
Share plans
General
DRR
Design
Review
Grant
Review
Risk
matters Shareholder
All employee
January
February
June
October
December
Note: There were several additional meetings in connection with the NSF bid.
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3. Implementation of Remuneration Policy
3.1 Executive directors
3.1.1 Developments in 2019
As a result of the feedback from the shareholders post the AGM,
and our improved ability to implement changes due to progress
on the strategic agenda, we made a number of changes in 2019
which are highlighted in the Chairman’s letter – see page 147.
3.1.2 Implementation of Policy for 2020
Annual bonus
Developments in 2020 include the ongoing evolution of the
scorecard for the annual bonus plan. For 2020, the Committee
has agreed the following:
3.2 Non-executive directors
3.2.1 Non-executive directors’ fees
During the year the Board reviewed Committee membership
to enhance the focus and efficiency of the Board Committees.
As part of this review, the Board approved the non-executive
directors’ fees as set out below with effect from 1 July 2019. At
its meeting in December 2019, the Board further reviewed the
non-executive directors’ fees in the context of responsibilities,
time commitment and the market taking due account of the
need to use such benchmarking exercises with caution. After
taking into account the circumstances facing the Company, the
Board determined the fee levels with effect from 1 January 2020
as follows:
• hurdle: minimum level of CET1;
• financial objective: adjusted PBT (60%); and
• non-financial objective: scorecard measures (40%):
• strategy (20%);
• regulatory risk and conduct (40%);
•
investor relations (10%);
• customer (20%); and
• employee (10%).
These non-financial measures are the same as 2019 as this
approach was supported by shareholders. The Committee
has measures of success for each approved objective. These
measures of success have a clear metric and/or narrative-based
system, to enable the accurate tracking and monitoring of each
objective so that an accurate and unambiguous outcome is
determined. This will enable scorecard performance to be
tracked and assessed during 2020. They are all linked to the
strategy set by the Board.
The maximum bonus opportunity in respect of 2020 is as per
the policy at 175% of salary for the CEO and 125% of salary for
the new CFO, and will be split as follows:
Malcolm Le May
Neeraj Kapur
Performance
metric weightings
% of max
bonus
Max as %
of salary
% of max
bonus
Max as %
of salary
60%
105%
60%
75%
• non-executive director base fee: £68,000 (no change);
• supplementary fee for chairing the Group Audit,
Remuneration, Risk and Customer, Culture and Ethics
Committee: £20,000 (no change);
• supplementary fee for Committee membership (except the
Disclosure Committee): £15,000 (previously a supplementary
fee of £5,000 per Committee for membership of the Audit,
Remuneration, Risk and Customer, Culture and Ethics
Committees was paid). This fee is not paid to the chairman
of these Committees. Additional fee information is as follows:
• Angela Knight receives a further supplementary fee
of £5,000 to reflect additional Board Committee
responsibilities, since she sits on more Committees;
• Robert East receives a fee of £10,000 for Committee
membership due to sitting on fewer Board Committees.
He sits on fewer Board Committees due to his additional
time commitment as Non-Executive Chairman of Vanquis
Bank Ltd. He also received an additional fee of £102,500
in respect of his chairmanship of Vanquis Bank Ltd; and
• supplementary fee for the role of Senior Independent
Director (SID): £15,000 (no change).
3.2.2 Chairman’s fee
The Committee reviewed the Chairman’s fee in the context of
responsibilities, time commitment and the market taking due
account of the need to use such benchmarking exercises with
caution. Following review, the Committee determined that the
Chairman’s fee for 2020 should remain at £320,000.
40%
70%
175%
40%
50%
125%
Andrea Blance
Chairman of the Remuneration Committee
27 February 2020
Post-employment SOR
In addition, a post-employment SOR policy has been adopted.
Executive directors will have a contractual requirement to retain
the in-employment SOR of 200% of base salary or, if lower, the
shareholding position reached at termination of office for a
period of two years. This covers shareholdings from share grants
from 2020 in the Deferred Bonus Plan (DBP, previously PSP) and
the LTIS. Shares purchased by the executive directors are not
included in the post-employment SOR.
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Adjusted PBT
Company
non-financial
objectives
Total
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Directors’
remuneration policy
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 and sets the remuneration of
the senior management teams within the
three divisions and the corporate office.
The Chief Executive Officer is consulted on proposals relating to
the remuneration of the other executive directors and the senior
management teams. The Chairman is consulted on proposals
relating to the Chief Executive Officer’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 consulting the Chief Executive Officer and Chairman
about its proposals.
The current DRP was approved by shareholders at the 2019
AGM on 21 May 2019. During 2019, the Committee carried
out a consultation process with the shareholders taking into
account the new circumstances facing the Company, the latest
shareholder feedback and the 2018 UK Corporate Governance
Code. Following the review, the Committee decided to propose
a number of amendments to the current DRP. The proposed
amendments will bring the DRP in line with best practice and
ensure the overall remuneration of executive directors is at
a market-competitive level.
Considerations when setting policy
In setting the remuneration policy for the executive directors
and senior management, the Committee takes into account
the following:
• the need to maintain a clear link between the overall reward
policy and the specific performance of the Group;
• the need to achieve alignment to the business strategy both
in the short and long term;
• the requirement for remuneration to be competitive,
with a significant proportion dependent on risk-assessed
performance targets;
• the responsibilities of each individual’s role and their individual
experience and performance;
• the need to attract, retain and motivate executive directors
and senior management when determining remuneration
packages, including an appropriate proportion of fixed and
variable pay;
• pay and benefits practice and employment conditions both
within the Group as a whole and within the sector in which it
operates; and
• periodic external comparisons to examine current market
trends and practices and equivalent roles in companies of
similar size, business complexity and geographical scope.
How employees’ pay is taken into account
Pay and conditions elsewhere in the Group were considered
when finalising the policy for executive directors and the senior
management teams. 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 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 teams
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.
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 and the Company consulted with its
principal shareholders, as well as the shareholder advisory
bodies, in relation to the renewal of its remuneration policy.
Ongoing and transparent dialogue with our shareholders on
the topic of executive remuneration is very important to us
and the feedback received on the proposed remuneration policy
was carefully considered and discussed by the Committee.
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Executive director remuneration policy
Element
Purpose and link to strategy
Operation including maximum levels
Performance targets and provisions
for recovery of sums paid
Salary
To reflect the responsibilities
of the individual role.
Reviewed annually and effective
from 1 January.
Broad assessment of Group and individual
performance as part of the review process.
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.
Retirement
benefits
Provision of market-competitive
pension benefits.
Annual
bonus
Incentivises annual delivery
of agreed financial and
operational goals.
Rewards the achievement
of an agreed set of annual
financial and operational goals.
Typically set following review of the
budget for the forthcoming year, taking
into account salary levels in companies
of a similar size and complexity.
Typically 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.
Provide either a cash allowance or a
contribution to the defined contribution
plan or a combination of the two.
Pension allowance of up to 15% of
salary per annum is given to all existing
executive directors. For any future
executive director appointments
from the 2019 AGM onwards, pension
allowance will be capped at 10%
of salary, in line with the allowance
available to the workforce.
Financial and operational goals
set annually.
Maximum opportunity of 175% of salary.
40% of the bonus is subject to
compulsory deferral in which case an
award is made under the Deferred
Bonus Plan (formerly PSP).
Remainder of bonus paid in cash.
At the discretion of the Committee,
participants may also be entitled to
receive dividend or dividend equivalent
for the period between grant and
vesting on vested deferred
bonus shares.
Malus and clawback provisions
do not apply.
Not applicable.
A minimum of 60% of any bonus opportunity
will be subject to financial targets, e.g.
adjusted PBT with up to 20% linked to
personal objectives.
A graduated scale operates from threshold
performance through to the maximum
performance level. For financial targets,
25% of the maximum bonus becomes
payable for achieving the threshold
performance target. 60% of the maximum
bonus becomes payable for achieving
on-target performance. 100% of the
maximum bonus becomes payable
for achieving stretch performance. A
straight-line pay-out is operated between
threshold and on-target performance and
between on-target and stretch performance.
In relation to non-financial and 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 exceeding the threshold
performance level as for financial targets.
Malus and clawback provisions apply in
accordance with the strengthened Group
Malus and Clawback policy. The period of
clawback is three years from the date
of payment.
Details of the bonus measures operating
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.
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Directors’ remuneration policy continued
Executive director remuneration policy continued
Element
Purpose and link to strategy
Operation including maximum levels
Long Term
Incentive
Scheme
(LTIS)
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 share 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 scheme rules.
Executive directors are required to
retain vested LTIS shares, net of tax,
for a further period of two years.
Dividend equivalent provisions allow the
Committee to pay dividends on vested
shares at the time of vesting.
Shareholders approved the renewal
of the LTIS at the 2015 AGM.
Performance targets and provisions
for recovery of sums paid
Awards vest based on a three-year
performance period against a challenging
range of EPS, relative TSR targets, and risk
metrics set and assessed by the Committee.
The relative TSR will be measured against
a suitable comparator group. 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
targets remain aligned with the Group’s
strategy and KPIs. Any substantive reworking
of the current performance metrics 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.
The Group Malus and Clawback policy
applies. The period of clawback is three
years from the date of vesting.
Other
benefits
Provision of a range of
insured and non-insured
benefits commensurate
with the role.
Market-competitive benefits, which
may include:
Not applicable.
• life cover;
• permanent health insurance;
• private medical insurance;
• car benefits;
• participation in any all-employee share
plans operated by the Company on
the same basis as other eligible
employees; or
• other benefits that the Committee
may consider appropriate.
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Performance targets and provisions
for recovery of sums paid
Not applicable.
Element
Purpose and link to strategy
Operation including maximum levels
Share
Ownership
Requirement
(SOR)
To ensure alignment of
the long-term interests
of executive directors
and shareholders.
Executive directors are required to build
a holding of 200% of salary in the form
of shares in the Company normally
within a period of five years from the
date of appointment.
Executive directors are required to
retain half of any shares vesting (net of
tax) under the DBP and LTIS until the
guideline is met. Unvested shares held
under the LTIS are not taken into account.
From 2020 this is a contractual requirement
together with a new post-employment
requirement for executive directors to
retain the in-employment SOR of 200%
of salary or, if lower, the shareholding
position reached at termination for a
period of two years. Post-employment
this includes shareholdings from share
grants from 2020 in the Deferred Bonus
Plan (DBP, previously PSP) and the LTIS
(net of tax). Shares purchased by the
executive directors (including from the
all-employee SAYE plan) are not included
in the post-employment SOR. The SOR
ceases to apply in cases of death.
Remuneration Committee discretion
can be applied in implementing the
SOR post-employment.
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 (e.g. 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, adjusted PBT is
calculated on an adjusted basis prior to inclusion of
exceptional items.
Remuneration Committee discretion
In addition to the performance metrics set by the Committee
annually for the incentive plans, the Committee will also assess
the overall, or underlying, performance of the company and its
divisions. In light of this assessment, the Committee may make a
downward adjustment, including to zero, to the vesting outcome
on all or any of the performance metrics.
The Committee will also assess the Company’s and its divisions’
performance against the risk metrics, and may make a downward
adjustment, including to zero, to the vesting outcome on all or
any of the performance metrics, to take account of any material
failures of risk management or regulatory compliance in the
Company and its divisions.
Additionally, Committee discretion can be applied in implementing
the post-employment SOR including in cases of significant
financial hardship, material ill health and conflict of interest.
Provident Financial plc
Annual Report and Financial Statements 2019
165
Financial statementsShareholder informationGovernanceDirectors’ remuneration reportStrategic report D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T C O N T I N U E D
Directors’ remuneration policy continued
Illustrations of application of the DRP
Under the Company’s DRP, a large proportion of the
remuneration received by executive directors depends
on performance. The charts below show how total pay
for the CEO and CFO varies under three different
performance scenarios: minimum, target and maximum.
Minimum: this comprises the fixed elements of pay, being
base salary, benefits and pension allowance. Base salary and
pension are effective as at 1 January 2019 and the benefits
value is an estimate value for the 2019 financial year.
Target: this comprises fixed pay and the target value of
2019 annual bonus (105% of salary for the CEO and 90%
of salary for the CFO) and LTIS (100% of salary for CEO
and 87.5% for CFO).
Maximum: this comprises fixed pay and the maximum
value of 2019 annual bonus (175% of salary for the CEO
and 150% of salary for the CFO) and LTIS (200% of salary
for CEO and 175% for CFO).
Remuneration (£’000)
Chief Executive Officer
Chief Finance Officer
4,160
50%
3,460
40%
2,270
31%
32%
35%
29%
835
100%
37%
25%
21%
608
2,445
48%
2,051
38%
32%
27%
1,395
28%
28%
100%
44%
30%
25%
Maximum plus 50% share price growth: includes the
effect of a share price growth of the LTIS of 50% between
grant and vesting.
Minimum
Target
Maximum Max
+50%
growth
Minimum
Target
Maximum Max
+50%
growth
Fixed pay
Annual bonus
Long-term incentives
Arrangements from prior years
All variable remuneration arrangements previously disclosed
in prior years’ directors’ remuneration reports will remain eligible
to vest or become payable on their original terms and vesting
dates, subject to any related clawback provisions.
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.
The above policy applies to both an internal promotion to the
Board or an external hire.
Regulatory changes
The Committee is mindful that regulatory changes in the financial
services sector may result in a need to rebalance the executive
directors’ pay and, accordingly, 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 DRP 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 DRP. This limit does not include
the value of any buyout arrangements.
Any incentive offered above these limits would be contingent on
the Company receiving shareholder approval for an amendment
to the approved DRP at its next AGM.
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 DRP 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.
166
Provident Financial plc
Annual Report and Financial Statements 2019
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 financial and personal performance.
To the extent that an executive director seeks to bring a claim
against the Company in relation to the termination of their
employment (e.g. 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
by the Committee of financial and personal performance.
Any share-based entitlements granted to an executive director
under the Company’s share incentive schemes will be determined
by reference to the relevant scheme rules. In the case of a ‘bad
leaver’ (e.g. resignation) awards will typically lapse and in certain
‘good leaver’ circumstances (e.g. ill health) awards will remain
eligible to vest subject to assessment of the relevant performance
target and a pro rata reduction (unless the Committee
determines otherwise).
Any buyout arrangements agreed between the Company and
the relevant directors would be treated in accordance with the
terms agreed on finalisation of the buyout arrangement.
Policy on other appointments
Executive directors are permitted to hold non-executive directorships
but may only hold one non-executive directorship in a FTSE 250
company (or unlisted company) – and may retain the fees from
their 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.
Choice of performance metrics
The performance metrics used for the annual bonus scheme
and the LTIS have been selected to reflect the key indicators
of the Group’s financial performance.
After a discussion with shareholders, adjusted PBT is now the
sole financial metric used for financial performance, accounting
for 60% of annual bonus scorecard weighting and the balance
related to non-financial metrics, as set out above.
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 following consideration by the Committee of various
factors prevailing at the time. This approach has been retained
in relation to awards under the LTIS since 2012. Performance
targets will, however, be assessed annually when setting targets
for future awards to take account of prevailing rates of inflation.
In addition, relative TSR in relation to a suitable comparator
group is used to provide an appropriate external balance to the
internal EPS measure used under the LTIS and is consistent with
delivering superior returns to shareholders which remains the
Group’s key, over-arching, long-term objective.
Each year, a number of risk indicators may be used in the areas
of risk management, regulatory performance/compliance, risk
profile and conduct.
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 1 February 2018 for the Chief
Executive Officer and 3 December 2018 for the Chief Finance
Officer. All contracts operate on a rolling basis with 12 months’
notice required to be served by either the executive director
or the Company.
An executive 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 executive 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.
Provident Financial plc
Annual Report and Financial Statements 2019
167
Financial statementsShareholder informationGovernanceDirectors’ remuneration reportStrategic report D I R E C T O R S ’ R E M U N E R AT I O N R E P O R T C O N T I N U E D
Directors’ remuneration policy continued
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 below shows details of the terms of appointment for the non-executive directors. All directors will seek reappointment
at the forthcoming AGM.
Non-executive director remuneration policy
Element
Purpose and link to strategy
Operation including maximum levels
Fees
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 for membership of the Group Risk,
Remuneration, Audit and Customer, Culture and Ethics
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.
Appointment
Date of most
recent term
Expected and actual
date of expiry
1 January 2017
31 July 2018
31 July 2018
31 July 2018
1 January 2017
31 July 2018
31 July 2018
31 July 2018
21 September 2018 21 September 2018
1 April 2019
26 June 2019
1 March 2020
1 April 2019
26 June 2019
1 March 2017
20 May 2019
31 July 2021
31 July 2021
31 July 2021
20 May 2022
1 April 2022
26 June 2022
1 March 2023
Terms of appointment of the non-executive directors
Name
John Straw1
Elizabeth Chambers
Paul Hewitt
Angela Knight
Patrick Snowball
Graham Lindsay
Robert East
Andrea Blance
1 John Straw‘s term was expected to expire on 31 December 2020 prior to him announcing his intention to step down from the Board on 20 May 2019.
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.
Andrea Blance
Chairman of the Remuneration Committee
27 February 2020
168
Provident Financial plc
Annual Report and Financial Statements 2019
F I N A N C I A L S TAT E M E N T S
Our results
The Group continues to operate a financial model
that is founded on investing in customer-centric
businesses that offer attractive returns.
170 Consolidated income statement
170 Consolidated statement of comprehensive income
170 Earnings per share
170 Dividends per share
171 Balance sheets
172 Statements of changes in shareholders’ equity
174 Statements of cash flows
175 Statement of accounting policies
183 Financial and capital risk management
188 Notes to the financial statements
226 Independent auditor’s report
237 Alternative performance measures
Provident Financial plc
Annual Report and Financial Statements 2019
169
Financial statements F I N A N C I A L S TAT E M E N T S
Consolidated income statement
For the year ended 31 December
Revenue
Finance costs
Impairment charges
Administrative and operating costs
Total costs
Profit before taxation
Profit before taxation, amortisation of acquisition intangibles and exceptional items
Amortisation of acquisition intangibles
Exceptional items
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
Items that will not be reclassified subsequently to the income statement:
• actuarial movements on retirement benefit asset
• fair value movement on investments
• tax on items that will not be reclassified subsequently to the income statement
•
impact of change in UK tax rate on items that will not be reclassified subsequently to the income statement
Other comprehensive expense 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 £47.6m (2018: £nil).
170
Provident Financial plc
Annual Report and Financial Statements 2019
Note
1,2
3
15
1,4
1,4
11
1
5
Note
19
16
5
5
Group
2019
£m
2018
(restated)
£m
998.3
1,091.4
(72.0)
(336.9)
(460.6)
(91.7)
(396.8)
(505.6)
(869.5)
(994.1)
128.8
162.6
(7.5)
(26.3)
97.3
160.1
(7.5)
(55.3)
(44.4)
(32.0)
84.4
65.3
Group
2019
£m
84.4
(9.7)
4.5
0.6
(0.1)
(4.7)
79.7
2018
(restated)
£m
65.3
(21.7)
2.2
3.6
(0.7)
(16.6)
48.7
Group
2019
Note
pence
6
6
33.3
33.1
2018
(restated)
pence
27.3
27.2
Group
2019
pence
16.0
25.0
19.0
2018
pence
10.0
10.0
—
Note
7
7
7
Balance sheets
ASSETS
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Right of use assets
Investment in subsidiaries
Financial assets:
• amounts receivable from customers
Retirement benefit asset
Deferred tax asset
Current assets
Financial assets:
•
investments held at fair value through other
comprehensive income
• amounts receivable from customers
• cash and cash equivalents
• trade and other receivables
Current tax asset
Total assets
LIABILITIES
Current liabilities
Financial liabilities:
• retail deposits
• bank and other borrowings
Total borrowings
• derivatives
• trade and other payables
•
lease liabilities
Current tax liabilities
Provisions
Non-current liabilities
Financial liabilities:
• retail deposits
• bank and other borrowings
Total borrowings
lease liabilities
•
Deferred tax liabilities
Total liabilities
NET ASSETS
SHAREHOLDERS’ EQUITY
Share capital
Share premium
Other reserves
Retained earnings
TOTAL EQUITY
At
31 December
2019
Note
£m
Group
At
31 December
2018
(restated)
£m
At
1 January
2018
(restated)
£m
Company
At
31 December
2019
At
31 December
2018
£m
£m
10
11
12
13
14
15
19
20
16
15
21
18
71.2
44.1
19.3
67.1
—
418.3
78.0
25.0
723.0
71.2
55.0
24.6
—
—
364.8
83.9
33.0
632.5
71.2
79.4
30.9
—
—
320.3
102.3
30.1
634.2
—
—
2.7
20.8
395.2
—
78.0
—
—
—
4.5
—
469.7
—
83.9
—
496.7
558.1
16.6
1,794.3
353.6
33.3
—
47.8
1,839.2
387.9
29.8
—
45.8
1,781.2
282.9
28.5
—
2,197.8
2,304.7
2,138.4
—
—
17.4
892.6
—
910.0
—
—
1.0
823.6
1.8
826.4
1
2,920.8
2,937.2
2,772.6
1,406.7
1,384.5
22
22
22
23
24
25
22
22
22
24
20
1
1
26
28
(410.0)
(53.5)
(339.3)
(49.8)
(350.8)
(38.1)
(463.5)
(389.1)
(388.9)
—
(89.3)
(10.2)
(34.7)
(14.5)
—
(91.8)
—
(24.6)
(53.2)
(0.1)
(96.9)
—
(15.9)
(104.6)
—
(51.5)
(51.5)
—
(100.4)
(2.5)
(0.1)
—
—
(47.1)
(47.1)
(86.6)
—
—
—
(612.2)
(558.7)
(606.4)
(154.5)
(133.7)
(935.2)
(564.8)
(1,092.4)
(574.0)
(950.2)
(853.9)
—
(564.8)
—
(574.0)
(1,500.0)
(1,666.4)
(1,804.1)
(564.8)
(574.0)
(68.1)
—
—
—
—
—
(22.4)
(11.6)
—
(13.3)
(1,568.1)
(1,666.4)
(1,804.1)
(598.8)
(587.3)
(2,180.3)
(2,225.1)
(2,410.5)
(753.3)
(721.0)
740.5
712.1
362.1
653.4
663.5
52.5
273.2
295.9
118.9
740.5
52.5
273.2
292.1
94.3
712.1
30.7
273.0
13.4
45.0
362.1
52.5
273.2
290.8
36.9
653.4
52.5
273.2
290.4
47.4
663.5
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 £47.1m (2018: retained loss of £62.2m).
The financial statements on pages 170 to 225 were approved and authorised for issue by the Board of directors on 27 February 2020
and signed on its behalf by:
Malcolm Le May
Chief Executive Officer
Company Number – 668987
Simon Thomas
Chief Finance Officer
Provident Financial plc
Annual Report and Financial Statements 2019
171
Financial statements
F I N A N C I A L S TAT E M E N T S C O N T I N U E D
Statements of changes in shareholders’ equity
Group
At 31 December 2017
Prior year adjustment – directly attributable acquisition costs
At 1 January 2018
Profit for the year (restated)
Other comprehensive income/(expense):
• actuarial movements on retirement benefit asset
• fair value movement on investments
• tax on items taken directly to other comprehensive income
•
impact of change in UK tax rate
Other comprehensive income/(expense) for the year
Total comprehensive income for the year
Transactions with owners:
• proceeds from rights issue
•
• share-based payment charge
• transfer of share-based payment reserve on vesting of share
issue of share capital
awards
At 31 December 2018
Impact of adoption of IFRS 16 ‘Leases’
At 1 January 2019
Profit for the year
Other comprehensive (income)/expense:
• actuarial movements on retirement benefit asset
• fair value movement on investments
• tax on items taken directly to other comprehensive income
•
impact of change in UK tax rate
Other comprehensive income/(expense) for the year
Total comprehensive income for the year
Transactions with owners:
• share-based payment charge
• transfer of share-based payment reserve on vesting
of share awards
• dividends
At 31 December 2019
Note
Share
capital
£m
30.7
—
Share
premium
£m
273.0
—
30.7
273.0
—
—
—
—
—
—
—
21.8
—
—
—
—
—
—
—
—
—
—
—
0.2
—
—
Other
reserves
£m
13.4
—
13.4
—
—
2.2
(0.5)
(0.2)
1.5
1.5
278.2
—
1.1
(2.1)
Retained
earnings
(restated)
£m
34.0
11.0
45.0
65.3
(21.7)
—
4.1
(0.5)
(18.1)
47.2
—
—
—
2.1
94.3
Total
£m
351.1
11.0
362.1
65.3
(21.7)
2.2
3.6
(0.7)
(16.6)
48.7
300.0
0.2
1.1
—
712.1
52.5
273.2
292.1
—
—
—
(5.6)
(5.6)
52.5
273.2
292.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4.5
(1.2)
0.1
3.4
3.4
1.9
(1.5)
—
88.7
84.4
706.5
84.4
(9.7)
—
1.8
(0.2)
(8.1)
(9.7)
4.5
0.6
(0.1)
(4.7)
76.3
79.7
—
1.9
1.5
(47.6)
—
(47.6)
52.5
273.2
295.9
118.9
740.5
19
16
5
5
26
26
27
19
16
5
5
27
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.
In addition, cumulative goodwill of £2.3m has been written off against the merger reserve in previous years.
The rights issue in April 2018 was undertaken through a cash box structure which allowed merger relief to be applied to the issue
of shares rather than recording share premium. The resulting merger reserve of £278.2m is included within other reserves, of which
£228.2m is distributable as the capital was retained for the purposes of the Company with the remaining £50.0m not distributable
as it was used to inject capital into Vanquis Bank. Other reserves are further analysed in note 28.
172
Provident Financial plc
Annual Report and Financial Statements 2019
Share
capital
£m
30.7
Share
premium
£m
273.0
Other
reserves
£m
Retained
earnings
£m
Total
£m
51.1
88.8
443.6
Statements of changes in shareholders’ equity continued
Company
At 1 January 2018
Loss for the year
Other comprehensive (expense)/income:
• actuarial movements on retirement benefit asset
• tax on items taken directly to other comprehensive income
•
impact of change in UK tax rate
Other comprehensive expense for the year
Total comprehensive expense for the year
issue of share capital
Transactions with owners:
• proceeds from rights issue
•
• share–based payment charge
• transfer of share-based payment reserve on vesting of share awards
• share-based payment movement in investment in subsidiaries
• transfer of non-distributable reserve following write down
of investment in subsidiary
At 31 December 2018
Note
19
26
26
27
At 1 January 2019
Profit for the year
Other comprehensive (expense)/income:
• actuarial movements on retirement benefit asset
• tax on items taken directly to other comprehensive income
•
impact of change in UK tax rate
Other comprehensive expense for the year
Total comprehensive income for the year
Transactions with owners:
• share-based payment charge
• transfer of share-based payment reserve on vesting
of share awards
• share-based payment movement in investment in subsidiaries
• dividends
19
27
—
—
—
—
—
—
21.8
—
—
—
—
—
—
—
—
—
—
—
0.2
—
—
—
—
—
—
—
—
—
278.2
—
0.4
(1.0)
(0.4)
14
—
—
(37.9)
52.5
273.2
290.4
52.5
273.2
290.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(62.2)
(62.2)
(21.7)
4.1
(0.5)
(18.1)
(80.3)
—
—
—
1.0
—
37.9
47.4
(21.7)
4.1
(0.5)
(18.1)
(80.3)
300.0
0.2
0.4
—
(0.4)
—
663.5
44.5
47.1
660.6
47.1
(9.7)
1.8
(0.2)
(8.1)
(9.7)
1.8
(0.2)
(8.1)
39.0
39.0
1.3
(1.0)
0.1
—
—
1.3
1.0
—
(47.6)
—
0.1
(47.6)
Impact of adoption of IFRS 16 ‘Leases’
—
—
—
(2.9)
(2.9)
At 31 December 2019
52.5
273.2
290.8
36.9
653.4
Other reserves are further analysed in note 28.
Provident Financial plc
Annual Report and Financial Statements 2019
173
Financial statements (80.2)
(38.3)
—
51.7
—
(66.8)
—
—
(0.1)
0.7
—
—
139.8
140.4
39.0
(42.5)
(2.7)
(47.6)
—
—
(53.8)
19.8
(3.2)
16.6
17.4
(0.8)
16.6
(81.5)
(44.5)
(18.5)
51.4
—
(93.1)
(50.0)
—
(1.7)
0.2
—
76.9
—
25.4
247.7
(518.7)
—
—
300.0
0.2
29.2
(38.5)
35.3
(3.2)
1.0
(4.2)
(3.2)
Group
2019
£m
2018
(restated)
£m
Company
2019
2018
£m
£m
F I N A N C I A L S TAT E M E N T S C O N T I N U E D
Statements of cash flows
For the year ended 31 December
Cash flows from operating activities
Cash generated from/(used in) operations
Finance costs paid
Premium paid on early redemption of senior bonds
Finance income received
Tax paid
Net cash generated from/(used in) operating activities
Cash flows from investing activities
Purchase of shares in subsidiary
Purchase of intangible assets
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Proceeds from the sale of government gilts held as an investment
Long-term loans repaid by subsidiaries
Dividends received from subsidiaries
Net cash generated from/(used in) investing activities
Cash flows from financing activities
Proceeds from bank and other borrowings
Repayment of bank and other borrowings
Payment of lease liabilities
Dividends paid to Company shareholders
Net proceeds from rights issue
Proceeds from issue of share capital
Note
31
1
14
11
12
12
16
29
7
26
190.7
(66.1)
—
—
(24.3)
100.3
—
(7.4)
(6.6)
2.7
35.7
—
—
24.4
288.3
(379.7)
(15.8)
(47.6)
—
—
67.2
(66.1)
(18.5)
—
(22.3)
(39.7)
—
(7.6)
(5.3)
1.5
0.2
—
—
(11.2)
737.1
(885.3)
—
—
300.0
0.2
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, 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
(154.8)
152.0
(30.1)
101.1
380.9
350.8
279.8
380.9
21
22
353.6
(2.8)
387.9
(7.0)
350.8
380.9
Cash at bank and in hand includes £321.9m (2018: £384.9m) in respect of the liquid assets buffer, including other liquidity resources,
held by Vanquis Bank in accordance with the PRA’s liquidity regime. As at 31 December 2019, £138.2m (2018: £106.5m) of the buffer
was available to finance Vanquis Bank’s day-to-day operations.
174
Provident Financial plc
Annual Report and Financial Statements 2019
S TAT E M E N T O F A C C O U N T I N G P O L I C I E S
General information
The Company is a public limited company incorporated
and domiciled in the UK. The address of its registered office is
No. 1 Godwin Street, Bradford, England BD1 2SU. The Company
is listed on the London Stock Exchange.
Basis of preparation
The financial statements of the Group and Company 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 investments held at fair value
through other comprehensive income. 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
have been consistently applied to all the years presented with
the exception of: (a) the adoption of IFRS 16 ‘Leases’ and IFRIC 23
‘Uncertainty over Income Tax Treatments; (b) a change in treatment
of directly attributable deferred acquisition costs in the recognition
of revenue on credit impaired receivables; and the treatment
of directly attributable acquisition costs in Moneybarn.
(a) The impact of new standards adopted by the Group
from 1 January 2019
IFRS 16
IFRS 16 ‘Leases’ has been adopted by the Group and Company
from the mandatory adoption date of 1 January 2019. IFRS 16
replaces IAS 17 ‘Leases’ and provides a model for the identification
of lease arrangements and the treatment in the financial statements
for both lessees and lessors.
The standard distinguishes leases and service contracts on the
basis of whether an identified asset is controlled by the customer.
Distinctions between operating leases and finance leases are
removed for lessee accounting, and have been replaced by a
model where a right of use asset and a corresponding liability
are recognised for all leases where the Group is the lessee,
except for short-term assets and leases of low-value assets.
The Group and Company has applied the following practical
expedients available on transition:
• not to reassess whether a contract is or contains a lease.
The definition of a lease in accordance with IAS 17 will continue
to be applied to those contracts entered or modified before
1 January 2019;
• reliance on previous assessment on whether leases are
onerous instead of performing an impairment review;
• exclusion of initial direct costs from the measurement
of the right of use asset at the date of adoption;
• continue to account for short-term leases with less than
12 months from 1 January 2019 as operating leases; and
• the use of hindsight in determining the lease term if the
contract contains an option to extend or terminate the lease.
incremental borrowing rate at 1 January 2019. The incremental
borrowing rates applied to individual leases ranged from 2.3% to
3.4%. Subsequently the lease liability is adjusted for interest and
lease payments, as well as the impact of lease modifications,
amongst others. The classification of cash flows is affected as
under IAS 17 operating lease payments were presented as operating
cash flows, whereas under IFRS 16, the lease payments will be
split into a principal and interest portion which is presented as
operating and financing cash flows respectively.
The adoption of IFRS 16 into the Group’s opening balance sheet
on 1 January 2019 resulted in an increase in assets of £81.9m
and liabilities of £89.0m. Net of deferred tax of £1.5m, this has
resulted in a reduction in net assets of £5.6m which has been
reflected through opening reserves at 1 January 2019. The Group
has taken the modified retrospective approach, as permitted by
IFRS 16. Accordingly, comparative information has therefore not
been restated.
The adoption of IFRS 16 has not had a material impact on profit
in 2019.
A reconciliation from the closing operating lease commitments
disclosed in 2018 and the opening IFRS 16 lease liability is
shown below:
Undiscounted future minimum lease
payments under operating leases at
31 December 2018
Impact of discounting
Removal of VAT from operating lease
calculations
Short-term leases
Use of hindsight to reflect break in lease
Other reconciling items
Lease liability recognised on adoption
at 1 January 2019 (see note 24)
Group
£m
Company
£m
117.4
(11.7)
(14.6)
(0.9)
(1.2)
—
37.2
(4.9)
(6.3)
—
—
1.1
89.0
27.1
IFRIC 23
The Group and Company has adopted IFRIC 23 ‘Uncertainty
over Income Tax Treatments’ from the mandatory adoption date
of 1 January 2019. The interpretation sets out how to determine
the accounting tax position when there is uncertainty over income
tax treatments and requires the Group and Company to:
(i) determine whether uncertain tax positions are assessed
separately or as a group; and (ii) assess whether it is probable
that a tax authority will accept an uncertain tax treatment used,
or proposed to be used, in its income tax filings. If it is considered
probable the accounting tax position should be consistent with
the tax treatment used or planned to be used in the income tax
filing. If it is not considered probable the effect of the uncertainty
in determining the accounting tax position should reflect the most
likely amount or the expected value method. The interpretation
has not had a material impact on either the Group or Company.
There has been no other new or amended standards adopted in
the financial year beginning 1 January 2019 which had a material
impact on the Group or Company.
The right of use asset is initially measured at cost and
subsequently measured at cost less accumulated amortisation
and impairment losses, adjusted for any remeasurement of the
lease liability. The lease liability is initially measured at the present
value of future minimum lease payments discounted using the
The impact of new standards not yet effective and not
adopted by the Group from 1 January 2019
There are no new standards not yet effective and not adopted
by the Group from 1 January 2019 which are expected to have
a material impact on the Group.
Provident Financial plc
Annual Report and Financial Statements 2019
175
Financial statements S TAT E M E N T O F A C C O U N T I N G P O L I C I E S C O N T I N U E D
Basis of preparation continued
(b) Changes in accounting treatment in 2019
Changes in treatment of directly attributable acquisition
costs in Vanquis Bank
As part of a refresh of contractual terms with affiliates during 2019,
the Group has reviewed the treatment of directly attributable
acquisition costs paid by Vanquis Bank to third parties upon
acceptance of new credit card customers introduced by those
third parties. Historically, such costs were charged to the income
statement as incurred on the basis that the credit card customer
is not required to use the credit card. Upon review of this policy,
it has been determined that the expected use of the issued
credit cards can be reliably predicted and it is probable that the
issued credit cards would be used resulting in the recognition of
credit card receivables with the associated benefits flowing to
Vanquis Bank. Accordingly, directly attributable acquisition costs
are now capitalised as part of credit card receivables and amortised
over the expected life of customer accounts. Directly attributable
acquisition costs represented approximately 70% of total acquisition
costs in 2019 compared with approximately 30% in 2017. This
reflects the progressive shift in mix of new customer bookings
towards internet affiliates as opposed to other channels such as
direct marketing or direct mail where costs are not directly
attributable to individual customer bookings. Under this revised
treatment the acquisition costs are recognised over the same term
as when the benefits from credit cards (i.e. interest income) are
received by Vanquis Bank. The new treatment results in a reduction
in the interest income recognised on credit card receivables and
a reduction in administrative and operating costs.
The Group has concluded that the new treatment represents a
change in accounting policy on the 2018 financial statements
and accordingly has restated the 2018 consolidated income
statement, statement of comprehensive income, balance sheet
and statement of changes in shareholders’ equity. The prior year
restatement has resulted in an increase in receivables of £21.3m
at 31 December 2018 and an increase in profit before tax in 2018
of £6.6m, comprising a reduction in costs of £12.0m and a
reduction in revenue of £5.4m. The prior year adjustment to
retained earnings at 1 January 2018 amounted to £11.0m.
Change in treatment of revenue recognition on credit
impaired receivables and directly attributable acquisition
costs in Moneybarn
In preparing the 2019 financial statements, the Group has made
two changes in accounting treatment in Moneybarn relating to
(i) revenue recognition on the conditional sale agreements within
Moneybarn, which are classified as credit impaired (i.e. stage 3
assets under IFRS 9), following adoption of IFRS 16 on 1 January
2019; and (ii) the treatment from a disclosure perspective of directly
attributable acquisition costs to align with the rest of the Group.
(i) Revenue recognition on credit impaired receivables
In 2018, revenue on Moneybarn’s credit impaired receivables was
recognised ‘gross’ of the impairment provision with this additional
revenue reflected as an impairment charge resulting in a gross-up
in the income statement. On reviewing its accounting policies in
preparing the 2019 financial statements, the Group has determined
that revenue on Moneybarn’s credit impaired receivables should
be recognised ‘net’ of the impairment provision to align the
accounting treatment under IFRS 16 with IFRS 9 and also with
the treatment in both Vanquis Bank and CCD.
A summary of the impact of the changes in treatment set out above in respect of Vanquis Bank and Moneybarn on the Group’s
primary statements is set out below:
2019
2018
Revenue
Finance costs
Impairment charges
Administrative and operating costs
Total costs
Profit before tax
Tax charge
Profit for the year attributable
to equity shareholders
Total comprehensive income
for the period
Basic earnings per share (pence)
Diluted earnings per share (pence)
Previous
policy
£m
1,045.6
(72.0)
(358.2)
(497.1)
(927.3)
118.3
(41.8)
76.5
71.8
30.3
30.1
Amounts receivables from customers
Deferred tax
Trade and other receivables
2,156.2
32.9
57.9
Share capital
Share premium
Other reserves
Retained earnings
Total equity
52.5
273.2
295.9
95.0
716.6
(7.8)
—
—
18.3
18.3
10.5
(2.6)
7.9
7.9
3.0
3.0
31.8
(7.9)
—
—
—
—
23.9
23.9
Vanquis
Bank
£m
Moneybarn
£m
As
restated
£m
(5.4)
(27.6)
1,091.4
Vanquis
Bank
£m
Moneybarn
£m
As
reported
£m
(39.5)
998.3
—
21.3
18.2
(72.0)
(336.9)
(460.6)
Previously
disclosed
£m
1,124.4
(91.7)
(410.4)
(531.6)
39.5
(869.5)
(1,033.7)
128.8
(44.4)
90.7
(30.4)
—
—
12.0
12.0
6.6
(1.6)
84.4
60.3
5.0
—
—
—
—
—
—
79.7
33.3
33.1
24.6
—
(24.6)
2,212.6
25.0
33.3
—
—
—
—
—
52.5
273.2
295.9
118.9
740.5
43.7
25.2
25.1
2,162.9
38.3
49.6
52.5
273.2
292.1
78.3
696.1
5.0
2.1
2.1
21.3
(5.3)
—
—
—
—
16.0
16.0
—
13.6
14.0
(91.7)
(396.8)
(505.6)
27.6
(994.1)
—
—
—
—
—
—
97.3
(32.0)
65.3
48.7
27.3
27.2
19.8
—
(19.8)
2,204.0
33.0
29.8
—
—
—
—
—
52.5
273.2
292.1
94.3
712.1
176
Provident Financial plc
Annual Report and Financial Statements 2019
Basis of preparation continued
(b) Changes in accounting treatment in 2019 continued
Change in treatment of revenue recognition on credit
impaired receivables and directly attributable acquisition
costs in Moneybarn continued
(i) Revenue recognition on credit impaired receivables
continued
The Group has concluded that the new treatment reflects a change
in accounting policy required to be applied retrospectively and
accordingly has restated the 2018 income statement balances
in the 2019 financial statements. The restatement results in a
reduction in Moneybarn’s revenue and impairment in 2018 of
£13.6m with no impact on profit before tax, earnings per share,
retained earnings or carrying values in the balance sheet.
(ii) Disclosure of directly attributable acquisition costs
Historically, directly attributable deferred acquisition costs in
respect of Moneybarn’s broker commissions were deferred
within trade and other receivables and amortised through
administrative and operating costs over the expected life
of the associated customer contract.
Following the change in treatment of directly attributable
acquisition costs in Vanquis Bank, and to align the treatment
across the Group, the Group has concluded that directly
attributable acquisition costs in Moneybarn should be deferred
as part of amounts receivable from customers with amortisation
therefore being treated as a deduction from revenue.
The change has been applied retrospectively and accordingly
the 2018 income statement and balance sheet have been restated
in the 2019 financial statements. The restatement results in a reduction
in Moneybarn’s 2018 revenue of £14.0m with a corresponding
reduction in administrative and operating costs of £14.0m. There
is no impact on profit before tax, earnings per share or retained
earnings. The carrying value of receivables at 31 December 2018
has increased by £19.8m with a corresponding reduction in trade
and other receivables.
Basis of consolidation
The consolidated income statement, consolidated statement of
comprehensive income, balance sheet, statement of changes in
shareholders’ equity, statement of cash flows and notes to the
financial statements include the financial statements of the
Company and all of its subsidiary undertakings drawn up from
the date control passes to the Group until the date control ceases.
Control is achieved when the Group:
• has the power over the investee;
•
is exposed, or has rights, to variable returns 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 Moneybarn and interest income earned by CCD.
Group revenue excludes value added tax and intra-group
transactions.
Company revenue includes intra-group transactions
and dividends received.
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
the performance obligation 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. For CCD this reflects
estimated cash flows, being contractual payments adjusted for
the impact of customers who either repay early, to term or beyond
term, but do not trigger the IFRS 9 default arrears stage during
the full life of the loan. 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 until revenue equal to the
loan’s original service charge has been fully recognised.
Revenue is recognised on the gross receivable when accounts
are in IFRS 9 stages 1 and 2 and on the net receivable for accounts
in stage 3. Accounts can only move between stages for revenue
recognition purposes at the Group’s interim or year-end balance
sheet date.
Directly attributable acquisition costs are capitalised as part of
receivables and amortised over the expected life of customer
accounts as a deduction to revenue.
Finance costs
Finance costs principally comprise the interest on retail deposits,
bank and other borrowings and, for the Company, on intra-group
loan arrangements, and are recognised on an effective interest
rate basis.
Dividend income
Dividend income is recognised in the income statement when
the Company’s right to receive payment is established.
Goodwill
All acquisitions are accounted for using the purchase method
of accounting.
Goodwill is an intangible asset and is measured as the excess
of the fair value of the consideration over the fair value of the
acquired identifiable assets, liabilities and contingent liabilities
at the date of acquisition. Gains and losses on the disposal of
a subsidiary include the carrying amount of goodwill relating
to the subsidiary sold.
Goodwill is allocated to cash-generating units for the purposes of
impairment testing. The allocation is made to those cash-generating
units or groups of cash-generating units 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 Company’s
latest budget projections and the discount rate is based on the
Company’s risk-adjusted 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.
Provident Financial plc
Annual Report and Financial Statements 2019
177
Financial statements S TAT E M E N T O F A C C O U N T I N G P O L I C I E S C O N T I N U E D
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.
The Group and Company as a lessor
Moneybarn is considered a lessor for its conditional sale agreements
to customers; however, both revenue and impairment are
accounted for under IFRS 9.
The Company has not entered into any arrangements as a lessor.
Other intangible assets
Other intangible assets include acquisition intangibles in respect
of the broker relationships at Moneybarn, standalone computer
software and development costs of intangible assets 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 and impairment. Amortisation is charged to the
income statement as part of administrative and operating costs.
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.
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. The consolidated and the
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.
Leases
The Group and Company as a lessee
The Group and Company assesses whether a contract contains
a lease at inception of a contract. A right of use asset and a
corresponding liability is recognised with respect to all lease
arrangements where it is a lessee, except for short-term leases
(leases with a lease term of 12 months or less) and leases of
low-value assets. For these leases, the lease payment is recognised
within administrative and operating expenses on a straight-line
basis over the lease term.
The lease liability is initially measured at the present value of the
lease payments at the commencement date, discounted using
the rate implicit in the lease. If this rate cannot be readily determined,
the incremental borrowing rate is used. This is defined as the rate
of interest that the lessee would have to pay to borrow, over a
similar term, and with similar security the funds necessary to
obtain an asset of a similar value to the right of use asset in a
similar economic environment. For Vanquis Bank, this would
represent an average retail deposit rate; for all other companies
this would be based on the Group’s non-bank funding rate.
The lease payments included in the measurement of the lease
liability comprise:
• fixed lease payments;
• variable lease payments; and
• payment of penalties for terminating the lease, if the lease
term reflects the exercise of an option to terminate the lease.
The lease liability is subsequently measured by increasing
the carrying amount to reflect interest on the lease, using the
effective interest rate method, and reducing the carrying amount
to reflect the lease payments made.
The lease liability is remeasured whenever:
• the lease term has changed, in which case the lease liability is
remeasured by discounting the revised lease payments using
a revised discount rate;
• the lease payments change due to changes in an index or rate,
in which case the lease liability is remeasured by discounting
the revised lease payments using the initial discount rate; and
• the lease contract is modified and the modification is not
accounted for as a separate lease, in which case the lease
liability is remeasured by discounting the revised lease
payments using a revised discount rate.
The Group or Company did not make any such adjustments
during the year.
The right of use asset comprises the initial measurement of the
corresponding lease liability and is subsequently measured at
cost less accumulated depreciation and impairment losses.
Right of use assets are depreciated over the shorter period
of lease term and useful life of the underlying asset.
The lease liability and right of use asset are presented as
separate line items on the balance sheet. The interest on the
lease and depreciation are charged to the income statement and
presented within finance costs and administrative and operating
costs respectively.
178
Provident Financial plc
Annual Report and Financial Statements 2019
Amounts receivable from customers
Customer receivables are initially recorded at fair value
representing the amount advanced to the customer plus directly
attributable issue costs. Subsequently, receivables are increased
by revenue and reduced by cash collections and deduction for
impairment. Impairment provisions are recognised on inception
of a loan based on the probability of default (PD) and the loss
arising on default (LGD).
On initial recognition, all accounts are recognised in IFRS 9 stage 1.
When an account is deemed to have suffered a significant increase
in credit risk, such as missing a payment, but they have not
defaulted, they move to stage 2. When accounts default, after
missing further payments or moving to a payment arrangement,
they move into stage 3.
Vanquis Bank
Vanquis Bank has developed PD/LGD models which focus on
forecasting customer behaviour to calculate an expected loss
impairment provision in accordance with IFRS 9.
Losses are recognised on inception of a loan based on the
probability of a customer defaulting within 12 months. This is
determined with reference to the customer’s application score
used in underwriting the credit card. The LGD for Vanquis Bank
card customers represents the current balance on the card plus
future expected spend and interest. It does not include any
credit line increases which a customer may become eligible
for after the balance sheet date.
A customer is deemed to have defaulted when the customer
would typically no longer be eligible to be re-served with a
subsequent loan which is considered to be 5 missed weekly
payments in the last 12 weeks. Home credit customers are fully
written off from the field following 12 consecutive missed
payments and transferred to a central recoveries team.
For certain loans, the presumption of 30 days in respect of the
definition of significant increase in credit risk and 90 days for
the definition of default has been rebutted. This is supported
by historical data which supports payment recency as a better
indicator of the degree of impairment than overall days past due.
Customers under forbearance
Customers are moved to IFRS 9 stage 3 and lifetime losses are
recognised for all divisions where forbearance is provided to the
customer and alternative payment arrangements are established.
Customers under temporary 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, discounted at the original effective interest rate.
Macroeconomic scenarios
Separate macroeconomic provisions are recognised to reflect
the expected impact of future economic events on a customer’s
ability to make payments on their accounts and the losses
incurred given default, in addition to the core impairment
provisions, already recognised.
Lifetime losses are recognised when a significant increase in
credit risk is evident, either from a missed monthly payment or
an increase in credit score.
For Vanquis Bank, the provision reflects the potential for future
changes in unemployment under a range of unemployment
forecasts provided by the Bank of England.
A customer is deemed to have defaulted when they become
three minimum monthly payments in arrears, they enter a
temporary payment arrangement or there is evidence of a
further significant increase in credit score. A customer is written
off in the following cycle after being six minimum monthly
payments in arrears.
Moneybarn
Moneybarn has created a PD/LGD model to calculate an
expected loss impairment provision in accordance with IFRS 9.
Losses are recognised on inception of a loan based on the probability
of a customer defaulting within 12 months. This is determined
with reference to historical customers data and outcomes.
Lifetime losses are then recognised when a significant increase
in credit risk is evident from a missed monthly payment.
A customer is deemed to have defaulted when they are no
longer able to sustain payments under their agreement and
the agreement is subsequently terminated.
CCD
CCD has created a PD/LGD model for customers who are up to
date or have missed one payment in the last 12 weeks to calculate
an expected loss impairment provision in accordance with IFRS 9.
Losses are recognised on inception of a loan based on the
probability of a customer defaulting within 12 months utilising
historical repayment data excluding data since 2017 which is not
deemed to be indicative of future performance given the operational
disruption at that time within the home credit business.
Lifetime losses are then recognised using a discounted cash
flow model when a significant increase in credit risk is evident
from 2 missed weekly payments in the last 12 weeks.
For Moneybarn, both changes in unemployment and
the used car sales market are used to calculate a separate
macroeconomic provision.
CCD customers are not considered to be reflective of the wider
economy as they are less indebted and are therefore not impacted
by the same macroeconomic factors or to the same degree.
Consequently there is no evidence of any meaningful correlation
between the impairment charge and any macro employment
statistics; a separate macroeconomic provision is therefore not held.
The assumptions are reviewed at each reporting date and trigger
points linked to inflation are assessed at least annually the business.
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
Short leasehold buildings
Equipment (including
computer hardware)
Motor vehicles
%
Method
Nil
Over the
lease period
10 to 33 1/3
—
Straight line
Straight line
25
Reducing balance
Provident Financial plc
Annual Report and Financial Statements 2019
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Financial statements S TAT E M E N T O F A C C O U N T I N G P O L I C I E S C O N T I N U E D
Property, plant and equipment continued
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 and operating costs.
Investments
Investments held at fair value through other
comprehensive income (OCI)
Visa Inc. shares classed as equity investment holdings are
measured at fair value in the balance sheet as a reliable estimate
of the fair value can be determined.
Fair value changes including any impairment losses and foreign
exchange gains or losses are recognised directly in equity through
other comprehensive income. The amounts accumulated within
equity are not reclassified to the income statement at derecognition.
The fair value of monetary assets denominated in foreign currency
are determined through translation at the spot rate at the
balance sheet date.
Dividends on equity instruments are recognised in the income
statement when the Group’s right to receive the dividends
is established.
Dividends paid
Dividend distributions to the Company’s shareholders are recognised
in the Group and the Company’s financial statements as follows:
• final dividend: when approved by the Company’s shareholders
at the Annual General Meeting; and
•
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
and operating 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. 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.
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
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.
Past service costs are recognised immediately in the
income statement.
Defined contribution pension schemes
Contributions to defined contribution pension schemes are
charged to the income statement on an accruals basis.
Intercompany
Expected credit losses on intercompany balances are assessed
at each balance sheet date. The PDs and LGDs are determined
for each loan based on the subsidiary’s available funding
and cash flow forecasts.
Borrowings
Borrowings are recognised initially at fair value, being issue
proceeds less any transaction costs incurred. Borrowings are
subsequently stated at amortised cost; any difference between
proceeds less transaction costs and the redemption value is
recognised in the income statement over the expected life
of the borrowings using the effective interest rate.
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.
Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new shares are shown
in equity as a deduction, net of tax, from the proceeds.
Merger reserve
The rights issue completed in 2018 was transacted through a
‘cash box’ structure. The proceeds would ordinarily be recognised
as share capital and share premium. However, as the proceeds
were generated through a cash box structure, the proceeds are
held as share capital and a merger reserve.
The share capital generated is in line with the 20 8/11 par value of the
shares with the additional amounts credited to the merger reserve.
All fees are recognised on an accruals basis and have been deducted
from the merger reserve with the net credit being deemed
distributable, subject to the capital injected into Vanquis Bank.
The merger reserve is considered to be a distributable reserve.
180
Provident Financial plc
Annual Report and Financial Statements 2019
Share-based payments
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 entity
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
adjustment to the share-based payment reserve within equity.
The cost of options and awards is based on their fair value. For
PSP schemes, where there are performance conditions, these
are based on earnings per share (EPS). Accordingly, the fair value
of options and awards is determined using a binomial option
pricing model which is a suitable model for valuing options with
internal related targets such as EPS. A binomial model is also
used for calculating the fair value of SAYE options which have
no performance conditions attached. The value of the charge
is adjusted at each balance sheet date to reflect lapses and
expected or actual levels of vesting, with a corresponding
adjustment to the share-based payment reserve.
For LTIS schemes, performance conditions are based on EPS,
total shareholder return (TSR) versus a peer group and risk metrics.
Employees of Vanquis Bank, CCD and Moneybarn also have
targets relating to profit before tax of their division. 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 and expected
or actual levels of vesting. 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.
Cash-settled schemes
The Company also previously granted 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 or EPS and TSR growth compared to a comparative
group. The scheme is cash settled.
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.
Taxation
The tax charge represents the sum of current and deferred tax.
Current 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
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 substantively 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.
Provisions
Provisions are recognised when the Group has a present obligation
(legal or constructive) as a result of a past event, it is probable
that the Group will be required to settle that obligation and a
reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate
of the consideration required to settle the present obligation
at the balance sheet date, taking into account the risks and
uncertainties surrounding the obligation. Where a provision is
measured using the cash flows estimated to settle the present
obligation, its carrying amount is the present value of those cash
flows (when the effect of the time value of money is material).
Contingent liabilities
Contingent liabilities are possible obligations arising from past
events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events
that are not recognised because either an outflow of economic
benefits is not probable or the amount of the obligation cannot
be reliably measured. Contingent liabilities are not recognised in
the balance sheet but information about them is disclosed
unless the possibility of any economic outflow in relation to
settlement is remote.
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 underlying results.
Provident Financial plc
Annual Report and Financial Statements 2019
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Financial statements S TAT E M E N T O F A C C O U N T I N G P O L I C I E S C O N T I N U E D
Critical accounting judgements and key sources
of estimation uncertainty
In applying the accounting policies set out above, the Group
and Company make judgements (other than those involving
estimates) that have a significant impact on the amounts
recognised and to make estimates and assumptions that affect
the reported amounts of assets and liabilities. The estimates and
judgements are based on historical experience; actual results
may differ from these estimates.
Amounts receivable from customers (Group: £2,212.6m
(2018: £2,204.0m))
Critical accounting assumptions:
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 IFRS 9 stages and cohorts
which are considered to be the most reliable indication of future
payment performance. The Group makes assumptions to
determine whether there is objective evidence that credit risk
has increased significantly which indicates that there has been
an adverse effect on expected future cash flows.
A significant increase in credit risk for customers in Vanquis Bank
is when there has been a significant increase in behavioural
score or when one contractual monthly payment has been
missed. In Moneybarn and on the Satsuma monthly product
a significant increase in credit risk is deemed to be when one
contractual monthly payment has been missed. In CCD, credit
risk is assumed to increase significantly when the cumulative
amount of two or more contractual weekly payments has been
missed in the previous 12 weeks, since only at this point do the
expected future cash flows from loans deteriorate significantly.
Key sources of estimation uncertainty:
• 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.
Sensitivity analysis of the Group’s main assumptions are set out
in note 15.
Retirement benefit asset (Group and Company: £78.0m
(2018: £83.9m))
Key sources of estimation uncertainty:
• The valuation of the retirement benefit asset is dependent
upon a series of assumptions, the key assumptions being
mortality rates and the discount rate applied to liabilities.
The most significant assumption which could lead to
material adjustment is a change in mortality 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.
Sensitivity analysis of the Group’s main assumptions is set out
in note 19.
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Provident Financial plc
Annual Report and Financial Statements 2019
Provisions for customer redress (Group: £14.5m
(2018: £53.2m))
Critical accounting assumptions:
Provisions for customer redress are established based on the
following conditions being present: (i) a present obligation (legal
or constructive) has arisen as a result of a past event; (ii) payment
is probable (more likely than not); and (iii) the amount can be
estimated reliably. A contingent liability is disclosed if the present
obligation is not probable or the amount cannot be estimated
reliably, or if there is a possible obligation dependent on a future
event occurring.
Judgement is applied to determine whether the criteria for
establishing and retaining a provision have been met, or whether
a contingent liability should be recognised including obtaining
legal advice from the Group’s lawyers.
Current provisions established are in respect of future claims
which may arise in Vanquis Bank as a result of ongoing ROP
claims outside the settlement agreement reached with the FCA.
Judgement is applied to determine the quantum of such liabilities,
particularly those relating to future claims volumes, including
making assumptions regarding the number of future complaints
that may be received and the extent to which they may be upheld,
average redress payments and related administrative costs. Past
experience is used as a predictor of future expectations with
management applying overlays where necessary depending on
the nature and circumstances of any restitution programme. The
cost could differ from the Group’s estimates and the assumptions
underpinning them, and could result in a further provision
being required.
Key sources of estimation uncertainty:
• There is significant uncertainty around the impact of the
proposed regulatory changes, FCA media campaign and
claims management companies and customer activity.
Sensitivity of the Group’s main assumptions are set out in note 25.
Carrying value of investments (Company: £395.2m
(2018: £469.7m))
Critical accounting assumptions:
• The Company reviews its carrying value of subsidiary
investments at each balance sheet date. The carrying value is
compared to the higher of the net assets at the balance sheet
date or cash flow forecasts.
• Where cash flow forecasts are used, IAS 33 requires the future
value in use to be assessed over the useful remaining life of
the asset. A terminal growth rate is applied to cash flows from
Board-approved budgets which project out for a minimum
of four years from the balance sheet date. These are then
discounted back to a net present value based on a credit
risk-adjusted discount rate.
• Any difference between the carrying value of the investments
and either the net assets or cash flow forecasts are booked as
an impairment charge in the income statement. The impairment
provision is subsequently released when the assets increase or
the cash flow forecasts support a higher valuation.
Key sources of estimation uncertainty:
• Under IAS 36, the terminal growth rate must be the average
growth rate for the ‘products, industry or countries in which
the entity operates’. UK GDP in 2020 is assumed to be an
appropriate rate to be used to extrapolate future growth.
• Future cash flows should be discounted at a credit-adjusted
discount rate. External advice is taken to provide a suitable
range of credit risk-adjusted discount rates for the Group.
Sensitivity of the Company’s main assumptions is set out in note 14.
F I N A N C I A L A N D C A P I TA L R I S K M A N A G E M E N T
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, foreign exchange rate risk and market 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 Group Risk Committee.
Further details of the Group’s risk management framework are
described on pages 42 to 53.
(a) Credit risk
Credit risk is the risk that the Group will suffer loss in the event of
a default by a customer, bank counterparty or the UK Government.
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 2019 is the
carrying value of amounts receivable from customers of
£2,212.6m (2018: £2,204.0m).
Vanquis Bank
The Risk Committee is responsible for setting the credit policy.
The CRO 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. The CRO discharges
and informs this decision making through the Credit Committee.
The Credit Committee meets quarterly, or more frequently
if required.
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 historical 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/expenditure and employment, and data from
external credit bureaux. Initial credit limits are low, typically
as low as £250. 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. 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.
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 historical 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 profile, 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 loan
repayments are affordable.
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.
CCD
Credit risk within CCD is managed by the Credit Forum, which
meets at least eight times per year, and which is responsible
for reviewing credit risk and performance of the portfolio and
for making recommendations on credit model, lending and
collections strategy changes, based on a majority vote, to
the CCD Managing Director for approval.
Credit risk is managed using a combination of lending policy
rules, credit scoring (including behavioural scoring), individual
lending approval limits, central underwriting, affordability
assessment processes, 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 £600. The loans are
underwritten in the home by a Customer Experience Manager
(CEM) based on consideration of any previous lending experience
with the customer, affordability and the CEM’s assessment of the
credit risk based on a completed application form and the home
visit, in conjunction with central decisioning enhanced through
the use of credit bureau data. Once a loan has been made, the
CEM typically visits the customer weekly, to collect payment.
The CEM 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 CEM has
with the customer allows them to manage customers’ repayments
effectively even when the household budget is tight. This
forbearance can be in the form of taking part-payments, allowing
missed payments or other payment arrangements in order to
support customers with their repayments.
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Annual Report and Financial Statements 2019
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Financial statements F I N A N C I A L A N D C A P I TA L R I S K M A N A G E M E N T C O N T I N U E D
Financial risk management continued
(i) Amounts receivable from customers continued
CCD continued
Affordability is reassessed by the CEM each time an existing
customer is re-served.
Arrears management within the home credit business is a
combination of central letters, text messages, emails, 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,
based on an affordability assessment where required.
The loans offered by the Satsuma business are short term,
with a contractual period of between 3 and 12 months, or weekly
equivalent, and an average value of around £450. The loans are
underwritten using credit decisioning, enhanced with the use
of external credit bureau data, and regularly refined as the
business grows. An affordability assessment is performed
on all lending decisions.
Satsuma collections processes are undertaken utilising the
collections capabilities at Vanquis Bank. Contact Centre
representatives are engaged at an early stage to optimise
collections performance and work closely with customers and,
for those customers whose circumstance have changed,
representatives utilise their extensive range of forbearance
measures, based on an affordability assessment where required.
(ii) Bank and government counterparties
The Group’s maximum exposure to credit risk on bank and
government counterparties as at 31 December 2019 was
£347.8m (2018: £427.3m).
Counterparty credit risk arises as a result of cash deposits placed
with banks and central government.
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 within CCD and
Moneybarn and contractual maturities on its bank, private placement
and bond funding for at least the following 12 months. As at
31 December 2019, the Group’s committed borrowing facilities
including retail deposits had a weighted average period to
maturity of 2.2 years (2018: 2.3 years) and the headroom
on these committed facilities amounted to £69.1m.
Vanquis Bank is a PRA-regulated institution and is fully funded
via retail deposits. It is required to maintain a liquid assets buffer,
and other liquid resources, based upon daily stress tests, in order
to ensure that it has sufficient liquid resources to fulfil its operational
plans and meet its financial obligations as they fall due. It also
maintains an operational buffer over such requirements in line
with the Bank’s risk appetite. As at 31 December 2019, the liquid
assets buffer, including other liquid resources and the operational
buffer, held by Vanquis Bank amounted to £321.9m (2018: £420.6m),
comprising £321.9m (2018: £384.9m) held within cash and cash
equivalents and £nil (2018: £35.7m) held as an investment.
Both the Group and Vanquis Bank are 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. The Group’s LCR at
31 December 2019 amounted to 224% (2018: 688%). Both the
Group and Vanquis Bank continue to meet the LCR requirements.
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. The Group’s
funding strategy is to maintain diversification in its funding and,
as such, currently accesses three main sources of funding
comprising: (i) the syndicated revolving bank facility; (ii) market
funding, including retail bonds, institutional bonds and private
placements; and (iii) retail deposits which fully fund the ring-fenced
Vanquis Bank. The Group will continue to explore further funding
options as appropriate including, but not limited to, the refinancing
of the syndicated revolving bank facility and further private
placements and institutional bond issuance.
A maturity analysis of the undiscounted contractual cash flows
of the Group’s bank and other borrowings is shown overleaf.
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. Retail deposits’
maturity within Vanquis Bank is also matched to the average life
of a credit card customer. In the table overleaf, 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.
184
Provident Financial plc
Annual Report and Financial Statements 2019
Financial risk management continued
Financial liabilities
2019 – Group
Retail deposits
Bank and other borrowings:
• bank facilities
• senior public bonds
• private placement loan notes
• retail bonds
Total borrowings
Trade and other payables
Lease liabilities
Total
Financial assets
2019 – Group
Trade and other receivables
Total
Financial liabilities
2018 – Group
Retail deposits
Bank and other borrowings:
• bank facilities
• senior public bonds
• private placement loan notes
• retail bonds
Total borrowings
Trade and other payables
Total
Financial assets
2018 – Group
Trade and other receivables
Total
Repayable
on demand
£m
—
2.8
—
—
—
2.8
—
—
<1 year
£m
423.0
166.8
17.5
26.6
33.1
667.0
89.3
8.3
1–2 years
£m
2–5 years
£m
Over 5
years
£m
Total
£m
387.1
592.9
— 1,403.0
—
17.5
25.3
72.0
501.9
—
7.0
—
285.0
—
66.2
944.1
—
30.7
—
—
—
—
169.6
320.0
51.9
171.3
— 2,115.8
—
32.3
89.3
78.3
2.8
764.6
508.9
974.8
32.3
2,283.4
Repayable
on demand
£m
<1 year
£m
1–2 years
£m
2–5 years
£m
—
—
33.3
33.3
—
—
—
—
Over 5
years
£m
—
—
Over 5
years
£m
Total
£m
33.3
33.3
Total
£m
Repayable
on demand
£m
—
7.0
—
—
—
7.0
—
7.0
<1 year
£m
347.0
125.5
47.2
17.9
8.9
546.5
91.8
1–2 years
£m
2–5 years
£m
390.6
766.9
— 1,504.5
—
17.5
26.4
33.1
—
35.0
25.4
75.1
—
267.5
—
63.1
132.5
367.2
69.7
180.2
467.6
902.4
330.6
2,254.1
—
—
—
91.8
638.3
467.6
902.4
330.6
2,345.9
Repayable
on demand
£m
<1 year
£m
1–2 years
£m
2–5 years
£m
—
—
29.8
29.8
—
—
—
—
Over 5
years
£m
—
—
Total
£m
29.8
29.8
(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.
(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 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
2019 and 2018 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 given that the Group’s
receivables can be repriced over a relatively short timeframe.
The Group’s exposure to movements in foreign exchange rates
during 2018 arose from the home credit operations in the
Republic of Ireland which are generally hedged by matching
euro-denominated net assets with euro-denominated borrowings
or forward contracts as closely as practicable.
As at 31 December 2019, a 2% movement in the sterling to euro
exchange rate would have led to a £0.7m (2018: £0.8m) movement
in customer receivables with an opposite movement of £0.7m
(2018: £0.8m) 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.
Provident Financial plc
Annual Report and Financial Statements 2019
185
Financial statements F I N A N C I A L A N D C A P I TA L R I S K M A N A G E M E N T C O N T I N U E D
Financial risk management continued
(d) Foreign exchange rate risk continued
As at 31 December 2019, a 2% movement in the sterling to US
dollar exchange rate would have led to a £0.5m (2018: £0.2m)
movement in the investment held at fair value through other
comprehensive income and a £0.5m impact on equity.
The Group maintains regulatory capital headroom in excess of
£50m, in line with the Board’s risk appetite. Despite the need to
absorb the continued transitional arrangements of IFRS 9, this
headroom, together with the regulatory prescribed buffers,
should be sufficient to withstand a potential downturn in
economic conditions caused by Brexit.
(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.
(f) Brexit
The economic outlook post Brexit remains uncertain and has
led to a significant amount of instability in the UK economy
and capital markets, albeit unemployment levels have remained
stable and there has not been any significant impact on the
Group’s businesses to date.
Despite any potential second order risks of Brexit, the Group has
proven resilient during previous economic downturns due to the
specialist business models deployed by its divisions which are
tailored to serving non-standard customers. In addition, all four
of the Group’s businesses – Vanquis Bank, Moneybarn, Provident
home credit and Satsuma – have tightened underwriting over
the last three years in advance of a potential weakening in
the UK economy.
The Group’s only direct exposure to the EU is the home credit
operation in the Republic of Ireland. This represents c.15% of the
home credit business and is, therefore, relatively immaterial to
the Group as a whole. The foreign exchange exposure to the
Republic of Ireland operation is hedged through a net
investment hedge.
The Group has current committed facilities to fund growth
and contractual maturities until mid-2022, when the current
syndicated bank facility is due to mature, assuming ongoing
access to retail deposits to fully fund Vanquis Bank. No effect is
anticipated on Vanquis Bank’s ability to access retail deposits,
although it maintains a minimum operational buffer over its liquid
requirements stipulated by the PRA to withstand any short-term
disruption. In line with the Group’s Treasury Policy, the Group is in
discussions with its lending banks with a view to refinancing the
current syndicated revolving bank facility 12 months in advance
of its maturity. The Group’s lending banks are predominantly UK
based, have supported the Group for many years and have
broader relationships through ancillary business such as
transactional banking. In the event of a prolonged period of
market disruption and the closure of debt capital markets, then
the Group has the ability to manage receivables growth and/or
dividend flows.
Capital risk management
To support the delivery of the Group’s purpose, the Group
operates a financial model that is founded on investing in
customer-centric businesses offering attractive returns which
aligns an appropriate capital structure with the Group’s dividend
policy and future growth plans.
The minimum amount of regulatory capital held by the Group
and Vanquis Bank represents the higher of the PRA imposed
requirement, being their respective total capital requirement
(TCR) together with the CRD IV stipulated buffers, and their
respective internal assessments of minimum capital requirements
based upon an assessment of risks facing the Group. The Internal
Capital Adequacy Assessment Process (ICAAP) considers all risks
facing the business, including credit, operational, counterparty,
conduct, pension and market risks, and assesses the capital
requirement for such risks in the event of downside stresses.
The Group and Vanquis Bank continually monitor and assess the
internal assessment of minimum regulatory capital requirements.
The minimum regulatory capital requirements of the Group and
Vanquis Bank are 25.5% (inclusive of a fixed add-on in respect of
pension risk) and 24.9% of total risk weighted assets respectively.
These assessments include: (i) CRD IV buffers of 3.5% of total risk
weighted assets comprising the capital conservation buffer
(2.5%) and counter cyclical buffer (1.0%); (ii) the minimum Pillar 1
prescribed requirement of 8.0% of risk weighted assets; and (iii)
Pillar 2a regulatory capital requirements of 14.0% and 13.4% of total
risk weighted assets for the Group and Vanquis Bank, respectively.
The Board expects to maintain a suitable level of headroom in
excess of £50m against this requirement to provide mitigation
against the ongoing recovery of the Group and the regulatory
backdrop and to support ongoing access to funding from the
bank and debt capital markets.
The impact from the adoption of IFRS 9 on 1 January 2018
on the Group’s net assets amounted to £184.0m and is being
phased into regulatory capital on a transitional basis over five
years as follows: 5% taken at the start of 2018 (£9m), 15% taken on
1 January 2019 (£18m), 30% taken on 1 January 2020 (£28m), 50%
to be taken in 2021 (£37m), 75% to be taken in 2022 (£46m) and
100% to be taken at the start of 2023 (£46m). The impact of the
IFRS 9 transitional arrangements on CET1 as at 31 December 2019
was £156m. For illustrative purposes, after adjusting for the impact
on risk weighted assets, the CET1 ratio at 31 December 2019 would
reduce from 30.7% to 24.1% if the IFRS 9 transitional arrangements
did not apply. The Group’s future capital generation, together
with the minimum dividend cover of at least 1.4 times as the
home credit business recovers and moves into profitability,
will be managed to absorb the transitional impact of IFRS 9.
186
Provident Financial plc
Annual Report and Financial Statements 2019
Capital risk management continued
A reconciliation of the Group’s equity to regulatory capital
and the CET1 ratio is set out below:
Regulatory capital (unaudited)
Net assets
IFRS 9 transition (85%/95% add-back)
Pension
Deferred tax on pension
Goodwill
Other intangible assets
Deferred tax on acquired intangible asset
Proposed dividend
Total regulatory capital (common equity
tier 1)
Risk weighted exposures
CET1 ratio
2019
£m
740.5
156.4
(78.0)
13.3
(71.2)
(44.1)
6.0
(40.5)
2018
£m
696.1
174.8
(83.9)
14.3
(71.2)
(55.0)
7.2
(25.1)
682.4
657.2
2,224.0
2,209.2
30.7%
29.7%
The CET1 ratio of 30.7% at the end of 2019 (2018: 29.7%) provides
headroom of approximately £117m (2018: approximately £96m)
against the Group’s TCR of 25.5%. A reconciliation of the movement
in regulatory capital during 2019 and 2018 is as follows:
Regulatory capital (unaudited)
At 31 December
IFRS 9 transition adjustment (15%/5%)
IFRS 16 transition adjustment
Prior year adjustment in respect
of deferred acquisition costs
At 1 January
Profit before tax, amortisation of acquisition
intangibles and exceptional items
Exceptional items
Add back amortisation of intangible assets
Deduct intangible asset additions
Add back pension (credit)/charge
Deduct pension contributions
Add back share-based payment charge
Tax and other
Regulatory capital generated
from operations
Shareholder capital movements:
Shares issued
Dividends accrued
Dividends paid exceed dividends accrued
At 31 December
2019
£m
657.2
(18.4)
(5.6)
2018
£m
308.1
(9.2)
—
16.0
—
649.2
298.9
162.6
(26.3)
10.8
(7.4)
(1.2)
(2.6)
1.9
(41.6)
153.5
(55.3)
24.5
(7.6)
6.5
(9.8)
1.1
(29.7)
96.2
83.2
—
(40.5)
(22.5)
300.2
(25.1)
—
682.4
657.2
The Treasury Committee is responsible for monitoring the level
of regulatory capital. The level of surplus regulatory capital
against the TCR is reported to the Board on a monthly basis
in the Group’s management accounts.
Provident Financial plc
Annual Report and Financial Statements 2019
187
Financial statements N O T E S T O T H E F I N A N C I A L S TAT E M E N T S
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 Group ExCo, whose primary responsibility is to support the
Chief Executive Officer in managing the Group’s day-to-day operations and analyse trading performance. The Group’s segments
comprise Vanquis Bank, Moneybarn, CCD and Central which are those segments reported in the Group’s management accounts
used by the Group ExCo as the primary means for analysing trading performance. The Group ExCo assesses profit performance
using profit before tax measured on a basis consistent with the disclosure in the Group financial statements.
Group
Vanquis Bank
Moneybarn
CCD
Central costs
Total Group before amortisation of acquisition intangibles and exceptional items
Amortisation of acquisition intangibles (note 11)
Exceptional items
Total Group
Revenue
Profit/(loss) before taxation
2019
£m
580.9
122.0
295.4
—
998.3
—
—
2018
(restated)
£m
644.9
104.3
342.2
—
1,091.4
—
—
998.3
1,091.4
2019
£m
2018
(restated)
£m
173.5
30.9
(20.8)
(21.0)
162.6
(7.5)
(26.3)
128.8
190.9
28.1
(38.7)
(20.2)
160.1
(7.5)
(55.3)
97.3
Acquisition intangibles represent the fair value of the broker relationships of £75.0m which arose on the 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 amortisation charge in 2019 amounted to £7.5m
(2018: £7.5m).
Exceptional items represent a net exceptional charge of £26.3m in 2019 (2018: £55.3m) and comprise:
Bid defence costs associated with NSF’s unsolicited offer for the Group
Restructuring costs, primarily in respect of the ongoing turnaround of CCD
Release of provisions in respect of ROP refund programme (see note 25)
Release of provisions in respect of Moneybarn FCA investigation (see note 25)
Premium and fees on redemption of senior bond (see note 3)
Pension charges in respect of GMP equalisation (see note 19)
Total exceptional items
2019
£m
23.8
19.3
(14.2)
(2.6)
—
—
26.3
2018
£m
—
29.9
—
—
18.5
6.9
55.3
Restructuring costs comprise: (i) CCD costs of £14.4m (2018: £29.9m) in relation to the ongoing turnaround of the home credit business following
the migration to the employed operating model in July 2017, comprising redundancy and other related costs of £13.0m (2018: £16.7m), an exceptional
impairment charge of £1.9m in respect of intangible assets (2018: £13.8m, comprising £12.8m in respect of intangible assets and £1.0m in respect
of property, plant and equipment) and an exceptional pension credit of £0.5m (2018: £0.6m) (see note 19); and (ii) redundancy and other one-off
costs in respect of central activities and Vanquis Bank of £3.1m (2018: £nil) and £1.8m (2018: £nil) respectively.
All of the above activities relate to continuing operations. Revenue between business segments is not material.
Group
Vanquis Bank
Moneybarn
CCD
Central
Segment assets
Segment liabilities
Net assets/(liabilities)
2019
£m
1,889.5
541.0
284.9
443.3
2018
(restated)
£m
1,974.7
438.9
342.6
368.7
2019
£m
2018
(restated)
£m
(1,492.2)
(501.4)
(344.8)
(79.8)
(1,577.4)
(421.9)
(352.1)
(61.4)
2019
£m
2018
(restated)
£m
397.3
39.6
(59.9)
363.5
397.3
17.0
(9.5)
307.3
Total before intra-group elimination
3,158.7
3,124.9
(2,418.2)
(2,412.8)
740.5
712.1
Intra-group elimination
Total Group
(237.9)
(187.7)
237.9
187.7
—
—
2,920.8
2,937.2
(2,180.3)
(2,225.1)
740.5
712.1
The presentation of segment net assets reflects the statutory assets, liabilities and net assets of each of the Group’s divisions. This results in an intra-group
elimination reflecting the difference between the central intercompany funding provided to the divisions and the external funding raised centrally.
188
Provident Financial plc
Annual Report and Financial Statements 2019
1 Segment reporting continued
The Group’s businesses operate principally in the UK and Republic of Ireland.
Group
Vanquis Bank
Moneybarn
CCD
Central
Total Group
Capital expenditure
Depreciation
Amortisation
2019
£m
7.1
4.4
2.4
0.1
2018
£m
3.7
1.4
6.1
1.7
14.0
12.9
2019
£m
2018
£m
1.5
0.7
3.4
1.4
7.0
1.2
0.7
5.6
1.6
9.1
2019
£m
3.3
0.8
4.8
7.5
2018
£m
2.7
0.7
8.3
7.5
16.4
19.2
Capital expenditure in 2019 comprises expenditure on intangible assets of £7.4m (2018: £7.6m) and property, plant and equipment of £6.6m (2018: £5.3m).
The acquired intangible asset in respect of Moneybarn’s broker relationships is held on consolidation and, therefore, the amortisation charge has
been allocated to central in the above analysis, consistent with the segment net asset analysis.
2 Revenue
Revenue is recognised by applying the effective interest rate (EIR) to the carrying value of a loan. The EIR is calculated at inception and represents
the rate which exactly discounts the future contractual cash receipts from a loan to the amount of cash advanced under that loan, plus directly
attributable issue costs (e.g. aggregator/broker fees). In addition, in Moneybarn, the EIR takes account of customers repaying early and in CCD
customers repaying early or beyond term, but who have not defaulted. Fee income is recognised at the time the charges are made to the customer
on the basis the performance is complete. As a result, the introduction of IFRS 15, effective from 1 January 2018, did not have a material impact on
the Group or Company.
Interest income
Fee income
Total revenue
Group
2019
£m
879.4
118.9
2018
(restated)
£m
943.9
147.5
998.3
1,091.4
All fee income earned relates to Vanquis Bank and Moneybarn.
Interest income relates to the interest charges on Vanquis Bank credit cards, net of deferred acquisition costs, and Moneybarn conditional sale
agreements together with the service charge on home credit and Satsuma loans. Fee income predominantly relates to Vanquis Bank and reflects
default and over-limit fees as well as other ancillary income streams such as ROP fees. Interchange income is also recognised within Vanquis Bank
as part of fee income on an accruals basis. Fee income in 2019 represented 20% (2018: 22%) of Vanquis Bank revenue.
3 Finance costs
Interest payable on:
Retail deposits
Senior public and retail bonds
Bank borrowings
Private placement loan notes
Lease liabilities
Exceptional premium and fees on redemption of senior bond (note 1)
Total finance costs
Group
2019
£m
30.2
29.0
5.9
4.6
2.3
—
72.0
2018
£m
29.4
29.1
11.0
3.7
—
18.5
91.7
Interest cover continues to be one of the Group’s banking covenants. It is calculated as profit before tax and exceptional items, interest and
amortisation divided by finance costs, and has a minimum requirement of 2.0 times. Interest cover, prior to exceptional items, in 2019 was 3.4 times
compared with 3.2 times in 2018. The increase in this measure reflects the higher profit in the year following the continued turnaround of the home
credit business in the year.
Provident Financial plc
Annual Report and Financial Statements 2019
189
Financial statements 4 Profit before taxation
Profit before taxation is stated after charging/(crediting):
Amortisation of other intangible assets:
• computer software (note 11)
• acquisition intangibles (note 11)
Depreciation of property, plant and equipment (note 12)
Loss on disposal of property, plant and equipment (note 12)
Depreciation of right of use assets (note 13)
Lease liability finance costs (note 3)
Short-term lease costs
Impairment of amounts receivable from customers (note 15)
Employment costs (prior to exceptional redundancy costs and curtailment credit) (note 9(b))
Exceptional items:
Exceptional bid defence costs associated with NSF’s unsolicited offer for the Group
Exceptional release of provisions (note 25)
Exceptional curtailment credit (note 19(a))
Exceptional redundancy cost, primarily in respect of CCD (note 9(b))
Exceptional intangible impairment charge (note 11)
Exceptional property, plant and equipment impairment charge (note 12)
Exceptional restructuring costs, primarily in respect of CCD
Premium and fees on redemption of senior bond (note 22(e))
Pension charges in respect of GMP equalisation (note 19(a))
Group
2019
£m
2018
(restated)
£m
8.9
7.5
7.0
2.2
17.6
2.3
0.9
336.9
215.9
23.8
(16.8)
(0.5)
14.8
1.9
—
3.1
—
—
11.7
7.5
9.1
—
—
—
—
396.8
234.4
—
—
(0.6)
4.8
12.8
1.0
11.9
18.5
6.9
Administrative and operating costs include costs incurred in running the business, the largest of which are employment costs (see note 9)
and marketing costs.
Auditor’s remuneration
Fees payable to the Company’s auditor for the audit of 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 non-audit services
Total auditor’s remuneration
Group
2019
£m
0.2
1.0
0.2
1.4
2018
£m
0.1
0.7
0.1
0.9
An additional £0.6m was paid to the Company’s auditor in 2018 relating to work undertaken in respect of the rights issue. As these
were directly attributable to the rights issue they were deducted from the proceeds within equity. They were therefore not recognised
in the income statement.
5 Tax charge
Tax charge in the income statement
Current tax:
• UK
• overseas
Total current tax
Deferred tax (note 20)
Impact of change in UK tax rate (note 20)
Total tax charge
Group
2019
£m
2018
(restated)
£m
(34.4)
—
(34.4)
(10.3)
0.3
(44.4)
(32.3)
0.3
(32.0)
0.5
(0.5)
(32.0)
The tax charge in respect of exceptional costs in 2019 amounts to £2.9m (2018: credit of £10.2m) and represents: (i) tax relief of £3.7m
in respect of the exceptional restructuring costs in CCD and the wider Group (2018: £5.5m); (ii) tax relief of £0.1m in respect of exceptional
costs associated with the defence of the unsolicited offer from NSF (2018: £nil); (iii) a tax charge of £6.0m which represents tax at the
combined mainstream corporation tax rate and bank corporation tax surcharge rate of 27% in respect of the £14.2m exceptional release
of provisions established in 2017 following completion of the refund programme in respect of ROP and a re-evaluation of the forward
flow of claims that may arise in respect of ROP complaints more generally, as well as tax at 27% on the 10% deemed taxable receipt
on customer balance reductions related to charged off accounts which are treated as bank compensation payments as well as tax on
the release of the related impairment provision (2018: £nil); and (iv) a tax charge of £0.7m in respect of the £2.6m release of provisions
established in 2017 following completion of the FCA investigation into affordability, forbearance and termination options at Moneybarn.
190
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 5 Tax charge continued
The tax credit in 2018 also comprised: (i) tax relief of £3.5m in respect of the premium and fees paid on redemption of senior bonds;
and (ii) tax relief of £1.2m in respect of the GMP equalisation charge in respect of the Group’s defined benefit scheme.
The tax credit in respect of the amortisation of acquisition intangibles amounts to £1.3m (2018: £1.3m).
The effective tax rate for 2019, prior to the amortisation of acquisition intangibles and exceptional items, is 26.3% (2018 (restated): 27.2%).
In addition to the introduction of bank corporation tax surcharge with effect from 1 January 2016, during 2015, changes were also
enacted reducing the mainstream 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 2016, a further change was enacted, which further reduced the mainstream corporation tax rate from 18% to 17%
with effect from 1 April 2020. Deferred tax balances at 31 December 2019 have been measured at 17% (2018: 17%) and, in the case of
Vanquis Bank, at the combined mainstream UK corporation tax and bank corporation tax surcharge rate of 25% (2018: 25%) to the extent
that the temporary differences on which deferred tax has been calculated are expected to reverse after 1 April 2020 (2018: 1 April 2020).
In 2019, movements in deferred tax balances have been measured at the mainstream corporation tax rate for the year of 19.0% (2018:
19.0%), and, in the case of Vanquis Bank, at the combined mainstream UK corporation tax and bank corporation tax surcharge rates
for the year of 27.0% (2018: 27.0%). A tax credit of £0.3m (2018 (restated): charge of £0.5m) represents the income statement adjustment
to deferred tax as a result of these changes and an additional deferred tax charge of £0.1m (2018: charge of £0.7m) has been taken
directly to other comprehensive income in respect of items reflected directly in other comprehensive income.
The tax credit on items taken directly to other comprehensive income is as follows:
Tax credit/(charge) on items taken directly to other comprehensive income
Deferred tax charge on fair value movement in investment
Deferred tax credit on actuarial movements on retirement benefit asset
Tax credit on items taken directly to other comprehensive income prior to impact of change in UK tax rate
Impact of change in UK tax rate
Total tax credit on items taken directly to other comprehensive income
Group
2019
£m
(1.2)
1.8
0.6
(0.1)
0.5
2018
£m
(0.5)
4.1
3.6
(0.7)
2.9
The deferred tax charge of £1.2m (2018: £0.5m) on the fair value movements in investments represents the deferred tax at the
combined mainstream corporation tax and bank corporation tax surcharge rate of 27.0% (2018: 27.0%) on the change in the valuation
of the Visa Inc. preferred stock during the year.
The rate of tax charge on the profit (2018: profit) before taxation for the year is higher than (2018: higher than) the average rate
of mainstream corporation tax in the UK of 19.00% (2018: 19.00%). This can be reconciled as follows:
Profit before taxation
Profit before taxation multiplied by the average rate of mainstream corporation tax in the UK of 19.00%
(2018: 19.00%)
Effects of:
•
impact of lower tax rates overseas
• adjustment in respect of prior years
• non-deductible general expenses
• non-deductible bid defence costs
• non-deductible bank compensation payments
• additional 10% of bank compensation payments
•
•
impact of change in UK tax rate
impact of bank corporation tax surcharge
Total tax charge
Group
2019
£m
128.8
2018
£m
97.3
(24.5)
(18.5)
(1.1)
0.7
0.2
(4.5)
(1.4)
(0.2)
0.3
(13.9)
(44.4)
(0.4)
1.2
(0.1)
—
—
—
(0.5)
(13.7)
(32.0)
The home credit business in the Republic of Ireland is subject to tax at the Republic of Ireland statutory tax rate of 12.5% (2018: 12.5%)
rather than the UK statutory mainstream corporation tax rate of 19.0% (2018: 19.0%). In 2019, the home credit business in the Republic
of Ireland made a loss (2018: loss) which can only be relieved against profits of the business in the Republic of Ireland at the 12.5%
statutory tax rate rather than the 19.0% UK statutory tax rate. This gives rise to an adverse impact on the Group tax charge of £1.1m in
2019 (2018: £0.4m). No deferred tax has been recognised in respect of this loss giving rise to a total adverse impact on the Group tax
charge of £1.1m in 2019 (2018: £0.4m).
The £0.7m credit (2018: £1.2m) in respect of prior years represents the benefit of resolving historical tax liabilities net of the release
of part of the provision for uncertain tax liabilities and, in the case of 2018, also securing tax deductions for employee share awards
which are higher than those originally anticipated.
Most of the costs associated with the defence of the unsolicited offer from NSF are, at this point, considered to be non-tax deductible
in computing the Group’s taxable profits. This gives rise to an adverse impact on the tax charge of £4.5m in 2019 (2018: £nil).
Provident Financial plc
Annual Report and Financial Statements 2019
191
Financial statements 5 Tax charge continued
The additional balance reductions related to charged off accounts, net of the release of provisions related to balance reductions and
settlements on other accounts which have arisen following completion of the refund programme in respect of ROP, are treated as
bank compensation payments and are therefore non-deductible in computing Vanquis Bank’s profits for tax purposes. This gives rise
to an adverse impact on the tax charge of £1.4m (2018: £nil). It also gives rise to an additional 10% deemed taxable receipt under the
bank compensation provisions on the additional balance reductions related to charged off accounts. This gives rise to an adverse
impact on the tax charge of £0.2m (2018: £nil).
The adverse impact of the bank corporation tax surcharge amounts to £13.9m (2018 (restated): £13.7m) and represents tax at the bank
corporation tax surcharge rate of 8% on Vanquis Bank’s taxable profits in excess of £25m where taxable profits are calculated after
adding back bank compensation payments, the 10% deemed taxable receipt, the FCA fine and other add-backs.
6 Earnings per share
Basic earnings per share 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. The weighted average number of shares in the period prior to the rights issue in April 2018 has been
adjusted to take account of the bonus element of the rights issue of 1.367 in accordance with IAS 33 ‘Earnings per Share’.
Diluted EPS calculates the effect on EPS assuming conversion of all dilutive potential ordinary shares. Dilutive potential ordinary shares are calculated
as follows:
(i)
(ii)
For share awards outstanding under performance-related share incentive schemes such as the Performance Share Plan (PSP) and the Long Term
Incentive Scheme (LTIS), the number of dilutive potential ordinary shares is calculated based on the number of shares which would be issuable if:
(i) the end of the reporting period is assumed to be the end of the schemes’ performance period; and (ii) the performance targets have been met
as at that date.
For share options outstanding under non-performance-related schemes such as the Save As You Earn scheme (SAYE), a calculation is
performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price
of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares
calculated is compared with the number of share options outstanding, with the difference being the dilutive potential ordinary shares.
The Group also presents an adjusted EPS, prior to the amortisation of acquisition intangibles and exceptional items.
Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share
or increase loss per share.
Reconciliations of basic and diluted earnings per share are set out below:
Group
Basic earnings per share
Dilutive effect of share options and awards
Diluted earnings per share
2019
Weighted
average
number of
shares
m
253.4
1.9
255.3
Earnings
£m
84.4
—
84.4
Per share
amount
pence
33.3
(0.2)
33.1
2018 (restated)
Weighted
average
number of
shares
m
239.5
0.7
240.2
Earnings
£m
65.3
—
65.3
Per share
amount
pence
27.3
(0.1)
27.2
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 11) and prior to exceptional items (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 items, net of tax
Adjusted basic earnings per share
Diluted earnings per share
Amortisation of acquisition intangibles, net of tax
Exceptional items, net of tax
Adjusted diluted earnings per share
2019
Weighted
average
number of
shares
m
253.4
—
—
253.4
255.3
—
—
255.3
Earnings
£m
84.4
6.2
29.1
119.7
84.4
6.2
29.1
119.7
Per share
amount
pence
33.3
2.5
11.5
47.3
33.1
2.4
11.4
46.9
2018 (restated)
Weighted
average
number of
shares
m
Per share
amount
pence
239.5
—
—
239.5
240.2
—
—
240.2
27.3
2.6
18.8
48.7
27.2
2.6
18.8
48.6
Earnings
£m
65.3
6.2
45.1
116.6
65.3
6.2
45.1
116.6
Adjusted basic earnings per share has reduced by 2.9%, reflecting the impact of the rights shares issued in April 2018. Basic earnings per share
increased by 22.0%, despite the impact of the rights shares issued in April 2018, reflecting the reduction in exceptional costs in the year.
192
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 7 Dividends
2018 final – 10.0p per share
2019 interim – 9.0p per share
Dividends paid
Group
2019
£m
25.1
22.5
47.6
2018
£m
—
—
—
The directors are recommending a final dividend in respect of the financial year ended 31 December 2019 of 16.0p per share
(2018: 10.0p) which will amount to an estimated dividend payment of £40.5m (2018: £25.1m). If approved by the shareholders at the
Annual General Meeting on 7 May 2020, this dividend will be paid on 22 May 2020 to shareholders who are on the register of members
at 3 April 2020. This dividend is not reflected in the balance sheet as at 31 December 2019 as it is subject to shareholder approval.
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
Share-based payment charge
Total directors’ remuneration
Group and Company
2019
£m
3.7
0.9
4.6
2018
£m
2.1
0.2
2.3
Short-term employee benefits comprise salary/fees, bonus, benefits earned in the year and pension salary supplements for Malcolm Le May
and Simon Thomas.
The share-based payment charge reflects the expected vesting of the Group’s share-based incentives.
9 Employee information
(a) Average monthly number of employees in the Group:
Vanquis Bank Moneybarn
CCD
Central
Group
Vanquis Bank Moneybarn
CCD
Central
2019
2018
Full time
Part time
Total
1,366
171
1,537
265
39
304
2,923
343
3,266
67
11
78
4,621
564
5,185
1,386
161
1,547
235
25
260
3,643
327
3,970
62
10
72
Group
5,326
523
5,849
Employees comprise all head office and branch employees within CCD and head office and contact centre employees within Vanquis Bank and
Moneybarn. Central employees represent corporate office employees and executive and non-executive directors employed by the Company.
Vanquis Bank average employee numbers have reduced by 10 in the year reflecting the focus on tight cost control. Moneybarn’s 17% increase
in average headcount continues to reflect the resource required to support the growth of the business and enhance the customer experience.
The 18% decrease in CCD average employee numbers reflects actions to reduce headcount in response to the reduction in customer numbers.
Provident Financial plc
Annual Report and Financial Statements 2019
193
Financial statements 9 Employee information continued
(b) Employment costs
Aggregate gross wages and salaries paid to the Group’s employees
Employer’s National Insurance contributions
Pension charge, prior to exceptional pension credit
Share-based payment charge/(credit) (note 27)
Total employment cost prior to exceptional costs
Exceptional redundancy cost
Exceptional pension curtailment credit (note 19)
Exceptional pension cost for GMP equalisation (note 19)
Total employment costs
Group
Company
2019
£m
184.5
20.5
9.6
1.3
215.9
14.8
(0.5)
—
2018
£m
205.6
22.1
9.5
(2.8)
234.4
4.8
(0.6)
6.9
230.2
245.5
2019
£m
11.6
1.5
(2.6)
1.3
11.8
1.6
(0.5)
—
12.9
2018
£m
10.4
1.7
(8.6)
0.4
3.9
—
(0.6)
6.9
10.2
The pension charge comprises the retirement benefit charge for defined benefit schemes, contributions to the stakeholder pension plan and
contributions to personal pension arrangements. The £2.6m (2018: £8.6m) credit in the Company for the pension charge represents contributions
received from the subsidiaries in relation to the defined benefit schemes, partly offset by the charge in relation to the defined contribution schemes.
The increase in the share-based payment charge from a £2.8m credit in 2018 to a £1.3m charge in 2019 primarily reflects the higher expected vesting
levels across the equity and cash-settled schemes in the Group. The share-based payment charge of £1.3m (2018: £2.8m credit) relates to equity-settled
schemes charges of £1.9m (2018: £1.1m charge) and a cash-settled schemes credit of £0.6m (2018: £3.9m credit).
10 Goodwill
Cost
At 1 January and 31 December
Accumulated impairment
At 1 January and 31 December
Net book value at 1 January and 31 December
Group
2019
£m
2018
£m
73.3
73.3
2.1
71.2
2.1
71.2
Goodwill is tested annually for impairment, or more frequently if there are indications that goodwill might be impaired. The net book
value of goodwill relates wholly to the acquisition of Moneybarn in 2014. The recoverable amount is determined from a value in use
calculation. The key assumptions used in the value in use calculation relate to the discount rates and growth rates adopted. Management
adopts pre-tax discount rates which reflect the time value of money and the risks specific to the Moneybarn business. The cash flow
forecasts are based on the most recent financial budgets approved by the Group Board for the next five years and extrapolates cash
flows for the following five years using a terminal growth rate of 2% (2018: 2%). The rate used to discount the forecast cash flows is 11%
(2018: 11%); this represents the Company’s risk adjusted cost of capital. No reasonably foreseeable reduction in the assumptions
would give rise to an impairment and therefore no further sensitivity analysis has been presented.
11 Other intangible assets
Cost
At 1 January
Additions
Disposals
At 31 December
Accumulated amortisation and impairment
At 1 January
Charged to the income statement
Exceptional impairment charge (note 1)
Disposals
At 31 December
Net book value at 31 December
Net book value at 1 January
194
Provident Financial plc
Annual Report and Financial Statements 2019
2019
Acquisition
intangibles
£m
Computer
software
£m
Total
£m
Acquisition
intangibles
£m
2018
Computer
software
£m
Total
£m
75.0
—
—
75.0
32.5
7.5
—
—
40.0
35.0
42.5
76.2
7.4
(18.2)
151.2
7.4
(18.2)
65.4
140.4
63.7
8.9
1.9
(18.2)
56.3
9.1
12.5
96.2
16.4
1.9
(18.2)
96.3
44.1
55.0
75.0
—
—
75.0
25.0
7.5
—
—
32.5
42.5
50.0
92.1
7.6
(23.5)
167.1
7.6
(23.5)
76.2
151.2
62.7
11.7
12.8
(23.5)
63.7
12.5
29.4
87.7
19.2
12.8
(23.5)
96.2
55.0
79.4
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 11 Other intangible assets continued
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. Additions to computer software in the year of £7.4m (2018: £7.6m) comprise
£1.3m (2018: £2.5m) of internally generated assets and £6.1m (2018: £5.1m) of externally purchased software.
The £7.4m (2018: £7.6m) of computer software expenditure principally relates to: (i) the development of systems in Vanquis Bank; and (ii) systems
to support the collections and operational projects at Moneybarn.
The disposals of £18.2m (2018: £23.5m) relate to assets in CCD which are no longer being used and have been fully amortised or impaired.
12 Property, plant and equipment
Group
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Accumulated depreciation and impairment
At 1 January 2019
Charged to the income statement
Disposals
At 31 December 2019
Net book value at 31 December 2019
Net book value at 1 January 2019
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
3.4
—
(3.4)
—
3.3
—
(3.3)
—
—
0.1
6.5
2.1
—
8.6
1.1
0.8
—
1.9
6.7
5.4
77.3
4.5
(21.2)
60.6
58.2
6.2
(16.4)
48.0
12.6
19.1
Total
£m
87.2
6.6
(24.6)
69.2
62.6
7.0
(19.7)
49.9
19.3
24.6
The loss on disposal of property, plant and equipment in 2019 amounted to £2.2m (2018: £nil) and represented proceeds received
of £2.7m (2018: £1.5m) less the net book value of disposals of £4.9m (2018: £1.5m).
Additions in 2019 principally comprise expenditure in respect of the routine replacement of IT equipment. Disposals in 2019 principally relate
to the sale of company vehicles in CCD which are no longer offered to non-essential users.
Group
Cost
At 1 January 2018
Additions
Disposals
At 31 December 2018
Accumulated depreciation and impairment
At 1 January 2018
Charged to the income statement
Exceptional impairment charge (see note 1)
Disposals
At 31 December 2018
Net book value at 31 December 2018
Net book value at 1 January 2018
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
3.4
—
—
3.4
3.3
—
—
—
3.3
0.1
0.1
6.5
—
—
6.5
1.1
—
—
—
1.1
5.4
5.4
78.7
5.3
(6.7)
77.3
53.3
9.1
1.0
(5.2)
58.2
19.1
25.4
Total
£m
88.6
5.3
(6.7)
87.2
57.7
9.1
1.0
(5.2)
62.6
24.6
30.9
Provident Financial plc
Annual Report and Financial Statements 2019
195
Financial statements 12 Property, plant and equipment continued
Company
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Accumulated depreciation
At 1 January 2019
Charged to the income statement
Disposals
At 31 December 2019
Net book value at 31 December 2019
Net book value at 1 January 2019
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
3.4
—
(3.4)
—
3.3
—
(3.3)
—
—
0.1
0.2
—
—
0.2
0.1
—
—
0.1
0.1
0.1
14.3
0.1
(2.0)
12.4
10.0
1.4
(1.6)
9.8
2.6
4.3
Total
£m
17.9
0.1
(5.4)
12.6
13.4
1.4
(4.9)
9.9
2.7
4.5
The profit on disposal of property, plant and equipment in 2019 amounted to £0.2m (2018: £nil) and represented proceeds received
of £0.7m (2018: £0.2m) less the net book value of disposals of £0.5m (2018: £0.2m).
Company
Cost
At 1 January 2018
Additions
Disposals
At 31 December 2018
Accumulated depreciation
At 1 January 2018
Charged to the income statement
Disposals
At 31 December 2018
Net book value at 31 December 2018
Net book value at 1 January 2018
13 Right of use assets
Cost
At 1 January 2019 – recognised on adoption of IFRS 16
Additions
Disposals
At 31 December 2019
Accumulated depreciation and impairment
At 1 January 2019
Charged to the income statement
Disposals
At 31 December 2019
Net book value at 31 December 2019
Net book value at 1 January 2019
Freehold
land and
buildings
£m
Leasehold
land and
buildings
£m
Equipment
and
vehicles
£m
3.4
—
—
3.4
3.3
—
—
3.3
0.1
0.1
0.2
—
—
0.2
0.1
—
—
0.1
0.1
0.1
13.0
1.7
(0.4)
14.3
8.6
1.6
(0.2)
10.0
4.3
4.4
Total
£m
16.6
1.7
(0.4)
17.9
12.0
1.6
(0.2)
13.4
4.5
4.6
Group
£m
Company
£m
81.9
3.0
(0.3)
84.6
—
17.6
(0.1)
17.5
67.1
81.9
23.6
—
—
23.6
—
2.8
—
2.8
20.8
23.6
All right of use assets relate to property leases. The addition in the year relates to the new head office property leased by Moneybarn.
196
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 14 Investment in subsidiaries
Cost
At 1 January
Additions
Disposals
At 31 December
Accumulated impairment losses
At 1 January
Exceptional charge to the income statement
Credit to the income statement
Disposal
At 31 December
Net book value at 31 December
Net book value at 1 January
Company
2019
£m
2018
£m
816.9
0.1
—
817.0
347.2
74.7
(0.1)
—
421.8
395.2
469.7
773.8
50.0
(6.9)
816.9
291.5
62.2
—
(6.5)
347.2
469.7
482.3
The directors consider the value of investments to be supported by their underlying assets and cash flow forecasts.
The £0.1m addition in 2019 relates to the IFRIC 11 adjustment relating to share options/awards provided to subsidiary employees. Under IFRIC 11, the
fair value of the share options/awards issued is required to be treated as a capital contribution and an investment in the relevant subsidiary, net of any
share options/awards that have vested. Additions in 2018 of £50.0m represented capital injected into Vanquis Bank following receipt of the rights
issue proceeds of £300.0m in April 2018.
A review of the investment carrying value in PFMSL and the exposure of intercompany loans has been performed on a consistent basis as 2018,
using forecast future cash flows of the CCD business. This has resulted in an exceptional impairment charge of £74.7m (2018: £62.2m) which has been
recognised in the income statement. In 2018, £37.9m of the impairment was reflected against the residual non-distributable reserve and the remaining
£24.3m against retained earnings. To the extent that the terminal growth rate of 2% differs by 1% the valuation would differ by £50m. To the extent that
the discount growth rate of 11% differs by 1% the valuation would differ by £50m. To the extent the cash flows used in the calculation differ by 5% the
valuation would differ by £22m.
The disposals in 2018 relate to: (i) the elimination of dormant companies of £6.5m and the associated provision of £6.5m; and, (ii) £0.4m relating
to the IFRIC 11 adjustment.
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 and certain other borrowings. 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 33).
All subsidiaries are consolidated and held directly by the Company except for those noted below, which are held by wholly owned
intermediate companies.
Company
Vanquis Bank Vanquis Bank Limited
Moneybarn
Duncton Group Limited
Moneybarn Group Limited
Moneybarn No. 1 Limited
Provident Financial Management Services Limited
Provident Personal Credit Limited
CCD
* Shares held by wholly owned intermediate companies.
The above companies operate principally in their country of incorporation.
Activity
Country of
incorporation
Class
of capital
%
holding
Financial services
Financial services
Financial services
Financial services
Management services
Financial services
England Ordinary
England Ordinary
England Ordinary
England Ordinary
England Ordinary
England Ordinary
100
100
100*
100*
100
100*
Provident Financial plc
Annual Report and Financial Statements 2019
197
Financial statements 15 Amounts receivable from customers
Under IFRS 9, all receivables are recognised within stage 1 on origination. A customer will then move to stage 2 when there has been a significant
increase in credit risk either through a missed payment or an adverse change in behavioural score. Stage 3 represents a customer in default. Revenue
recognition is recognised on the gross receivable in stage 1 and 2 and on the net receivable in stage 3. A customer can only move to stage 3 for
revenue recognition purposes at the Group’s interim or year end.
Impairment provisions are recognised on inception of a loan based on the probability of default (PD) and the typical loss arising on default (LGD):
• Stage 1 – accounts at initial recognition. The expected loss is based on a 12-month PD, based on historical experience, and revenue is recognised
on the gross receivable before impairment provision.
• Stage 2 – accounts which have suffered a significant deterioration in credit risk but have not defaulted. The expected loss is based on a lifetime PD,
based on historical experience, and revenue is recognised on the gross receivable before impairment provision.
• Stage 3 – accounts which have defaulted. The expected loss is based on a lifetime PD, based on historical experience. Revenue is recognised
on the net receivable after impairment provision.
Impairment provisions are calculated based on an unbiased probability-weighted outcome which takes into account historical performance
and considers the outlook for macroeconomic conditions. Further details can be found on page 179.
Group
Vanquis Bank
Moneybarn
CCD
2019
Due in
more than
one year
£m
10.0
384.8
23.5
Due within
one year
£m
1,451.5
117.3
225.5
Total
£m
1,461.5
502.1
249.0
2018 (restated)
Due in
more than
one year
£m
Total
£m
14.1
321.3
29.4
1,495.1
416.4
292.5
Due within
one year
£m
1,481.0
95.1
263.1
Total reported amounts receivable from customers
1,794.3
418.3
2,212.6
1,839.2
364.8
2,204.0
Vanquis Bank receivables comprise £1,432.6m (2018 (restated): £1,469.1m) in respect of credit cards and £28.9m (2018: £26.0m) in respect of loans.
The balance at 31 December 2019 is stated net of an estimated balance reduction provision of £nil (2018: £3.7m) in respect of the FCA investigation
into ROP.
Moneybarn receivables are stated net of an estimated balance reduction provision of £nil (2018: £1.8m) in respect of the FCA investigation into
affordability, forbearance and termination options.
CCD receivables comprise £205.8m in respect of the home credit business (2018: £253.0m) and £43.2m in respect of Satsuma (2018: £39.5m).
The gross amounts receivable from customers and allowance account which form the net amounts receivable from customers
are as follows:
Group
Gross amounts receivable
from customers
Allowance account
Reported amounts receivable
from customers
2019
2018 (restated)
Vanquis
Bank
£m
Moneybarn
£m
CCD
£m
Group
£m
Vanquis
Bank
£m
Moneybarn
£m
CCD
£m
Group
£m
1,903.1
(441.6)
586.8
(84.7)
593.9
(344.9)
3,083.8
(871.2)
1,997.8
(502.7)
540.8
(124.4)
725.6
(433.1)
3,264.2
(1,060.2)
1,461.5
502.1
249.0
2,212.6
1,495.1
416.4
292.5
2,204.0
198
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 15 Amounts receivable from customers continued
Amounts receivable from customers for Vanquis Bank can be reconciled as follows:
Vanquis Bank
Gross carrying amount
At 1 January
New financial assets originated and
new drawdowns
Net transfers and changes in credit risk
Write offs
Recoveries
Revenue
Other movements
At 31 December
Allowance account
At 1 January
Movements through income statement:
• drawdowns and net transfers and
changes in credit risk
• other movements
Total movements through
income statement
Other movements:
• write offs
• amounts recovered
2019
2018 (restated)
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
1,303.3
174.7
519.8
1,997.8
1,399.8
95.3
363.2
1,858.3
2,252.1
(269.9)
(12.1)
(2,417.9)
496.8
15.6
135.6
20.1
(18.0)
(229.7)
87.1
1.8
35.2
249.8
(348.0)
(111.9)
(3.0)
21.7
2,422.9
—
(378.1)
(2,759.5)
580.9
39.1
2,279.6
(395.1)
—
(2,533.3)
543.0
9.3
82.0
11.4
—
(62.2)
47.1
1.1
4.8
383.7
(193.3)
(95.0)
54.8
1.6
2,366.4
—
(193.3)
(2,690.5)
644.9
12.0
1,367.9
171.6
363.6
1,903.1
1,303.3
174.7
519.8
1,997.8
187.0
58.7
257.0
502.7
136.2
50.4
251.8
438.4
(61.8)
27.3
68.7
(24.8)
189.5
—
196.4
2.5
43.9
—
5.6
—
192.1
—
241.6
—
(34.5)
43.9
189.5
198.9
43.9
5.6
192.1
241.6
(12.1)
6.2
(18.0)
0.6
(348.0)
111.3
(378.1)
118.1
—
6.9
—
2.7
(193.3)
6.4
(193.3)
16.0
Allowance account at 31 December
146.6
85.2
209.8
441.6
187.0
58.7
257.0
502.7
Reported amounts receivable from
customers at 31 December
Reported amounts receivable from
customers at 1 January
1,221.3
86.4
153.8
1,461.5
1,116.3
116.0
262.8
1,495.1
1,116.3
116.0
262.8
1,495.1
1,263.6
44.9
111.4
1,419.9
Write offs have increased significantly in 2019 due to paying debt sales during the year. The Vanquis Bank allowance account includes the
macroeconomic provision which takes into account the potential for future changes in unemployment under a range of unemployment forecasts
provided by the Bank of England. A 20% weighting is placed on both the downside and upside scenarios with a 60% weighting on the base case
scenario. This is consistent with the prior year.
In 2019, Vanquis Bank improved its IFRS 9 models to better predict impairment. The enhancements included:
• alignment of the business and financial view of credit risk;
•
improvement of lifetime extrapolations by risk grade at origination;
• the recalibration of probability of default (PD) models; and
• the thresholds for significant increase in credit risk to latest data.
As at 31 December unutilised credit card commitments at Vanquis Bank were £1,101.1m (2018: £1,148.9m).
An increase of 1% of the gross exposure into stage 2 from stage 1 would result in an increase in the allowance account of £5.3m based
on applying the difference between the coverage ratios from stage 1 to stage 2 to the movement in gross exposure.
A breakdown of the gross receivable by internal credit risk rating is shown below:
Vanquis Bank
Good
Satisfactory
Lower quality
Total
Stage 1
£m
1,200.1
167.8
—
1,367.9
2019
Stage 2
£m
58.9
112.7
—
171.6
Stage 3
£m
Total
£m
— 1,259.0
280.5
—
363.6
363.6
363.6
1,903.1
Internal credit risk rating is based on the most recent credit score of a customer. All lower quality customers are in stage 3 as there has been evidence
of a significant increase in their credit score or they have defaulted or have entered a payment arrangement.
Provident Financial plc
Annual Report and Financial Statements 2019
199
Financial statements 15 Amounts receivable from customers continued
Amounts receivable from customers for Moneybarn can be reconciled as follows:
2019
2018 (restated)
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
292.8
282.8
(179.5)
—
(153.3)
78.8
13.8
130.7
—
59.8
—
(49.4)
38.4
8.9
117.3
—
119.7
(99.2)
(79.9)
26.1
(21.0)
540.8
282.8
—
(99.2)
(282.6)
143.3
1.7
253.9
234.6
(155.7)
(0.4)
(101.3)
53.5
8.2
98.7
—
40.8
(0.2)
(42.0)
29.4
4.0
74.6
—
114.9
(2.4)
(94.7)
35.0
(10.1)
427.2
234.6
—
(3.0)
(238.0)
117.9
2.1
335.4
188.4
63.0
586.8
292.8
130.7
117.3
540.8
9.2
28.4
86.8
124.4
8.6
29.7
54.7
93.0
9.6
(9.3)
—
7.4
—
9.6
8.3
—
—
8.3
55.4
53.5
(7.3)
(1.1)
48.1
39.7
0.3
7.4
55.4
63.1
1.0
(1.1)
34.5
48.0
Moneybarn
Gross carrying amount
At 1 January
New financial assets originated
Net transfers and changes in credit risk
Write offs
Recoveries
Revenue*
Other changes
At 31 December
Allowance account
At 1 January
Movements through income
statement:
• new financial assets originated
• net transfers and changes
in credit risk
Total movements through income
statement
Amounts netted off against revenue
for stage 3 assets
Other movements:
• write offs
—
—
—
—
(21.3)
(21.3)
—
—
(13.6)
(13.6)
(81.5)
(81.5)
(0.4)
9.2
(0.2)
28.4
(2.4)
(3.0)
86.8
124.4
Allowance account at 31 December
9.5
35.8
39.4
84.7
Reported amounts receivable
from customers at 31 December
Reported amounts receivable
from customers at 1 January
325.9
152.6
23.6
502.1
283.6
102.3
30.5
416.4
283.6
102.3
30.5
416.4
245.3
69.0
19.9
334.2
*
In the income statement Moneybarn revenue is £122.0m (2018: £104.3m) and for stage 3 assets is reported net of the impairment charge, the
difference of which is included in the ‘amounts netted against revenue for stage 3 assets’ in the loss allowance account reconciliation of £21.3m
(2018: £13.6m).
Write offs have increased significantly in 2019 due to the sale of terminated debt towards the end of the year. The Moneybarn allowance account
includes the macroeconomic provision which reflects that a reduction in car sales and an increase in unemployment could lead to an increase
in impairment. This is consistent with the prior year.
Vehicles are held as collateral against a Moneybarn conditional sale agreement until it is repaid in full. The impact of holding the
collateral of £339.8m (2018: £286.3m) on the allowance account as at 31 December 2019 was £52.9m (2018: £65.1m), representing
71% (2018: 72%) of the balance.
Moneybarn gross receivables are stated net of unearned finance income of £308.7m (2018: £254.1m).
An increase of 1% of the gross exposure into stage 2 from stage 1 would result in an increase in the allowance account of £0.5m based
on applying the difference between the coverage ratios from stage 1 to stage 2 to the movement in gross exposure.
A breakdown of the gross receivable by internal credit risk rating is shown below:
Moneybarn
Good
Satisfactory
Lower quality
Below standard
Total
Stage 1
£m
72.0
221.5
41.2
0.7
335.4
2019
Stage 2
£m
16.6
124.2
46.1
1.5
188.4
Stage 3
£m
2.5
39.3
19.5
1.7
63.0
Total
£m
91.1
385.0
106.8
3.9
586.8
Internal credit risk rating is based on the internal credit score of a customer at inception of the loan. The majority of good and satisfactory gross
receivables is held in stage 1 reflecting the tightening of underwriting in the fourth quarter of 2019.
200
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 15 Amounts receivable from customers continued
Amounts receivable from customers for CCD can be reconciled as follows:
CCD
Gross carrying amount
At 1 January
New financial assets originated
Net transfers and changes in credit risk
Write offs
Recoveries
Revenue
Other movements
At 31 December
Allowance account
At 1 January
Movements through income
statement:
• new financial assets originated
• net transfers and changes in credit risk
Total movements through income
statement
Other movements:
• write offs
• other movements
Allowance account at 31 December
Reported amounts receivable from
customers at 31 December
Reported amounts receivable from
customers at 1 January
2019
2018
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
183.6
353.4
(118.7)
(1.1)
(454.1)
192.8
—
48.4
5.5
3.7
(1.4)
(61.2)
40.9
0.1
493.6
—
115.0
(181.4)
(87.8)
59.7
2.9
725.6
358.9
—
(183.9)
(603.1)
293.4
3.0
221.2
404.4
(145.1)
(2.2)
(506.5)
211.6
0.2
60.9
6.7
10.6
(3.0)
(78.4)
51.6
—
443.1
—
134.5
(60.0)
(99.7)
76.8
(1.1)
725.2
411.1
—
(65.2)
(684.6)
340.0
(0.9)
155.9
36.0
402.0
593.9
183.6
48.4
493.6
725.6
12.0
12.9
408.2
433.1
20.4
15.1
342.3
377.8
31.5
(32.0)
0.7
(2.1)
—
98.1
32.2
64.0
38.6
(44.8)
1.1
(0.3)
—
126.2
39.7
81.1
(0.5)
(1.4)
98.1
96.2
(6.2)
0.8
126.2
120.8
(1.1)
—
10.4
(1.4)
—
(181.4)
(0.5)
(183.9)
(0.5)
10.1
324.4
344.9
(2.2)
—
12.0
(3.0)
—
(60.0)
(0.3)
(65.2)
(0.3)
12.9
408.2
433.1
145.5
25.9
77.6
249.0
171.6
35.5
85.4
292.5
171.6
35.5
85.4
292.5
200.8
45.8
100.8
347.4
Write offs have increased significantly in 2019 due to the removal of the ring-fenced book which is now included as part of the post-charge off asset.
There is no additional macroeconomic provision included in the allowance account for CCD, consistent with the prior year, as the payment performance
of home credit customers is not typically correlated to the wider economy as may be the case for prime customers.
An increase of 1% of the gross exposure into stage 2 from stage 1 would result in an increase in the allowance account of £0.3m based
on applying the difference between the coverage ratios from stage 1 to stage 2 to the movement in gross exposure.
A breakdown of the gross receivable by internal credit risk rating is shown below:
CCD
Very good
Good
Satisfactory
Lower quality
Below standard
Total
2019
Stage 1
£m
Stage 2
£m
62.2
23.2
28.8
10.4
31.3
8.9
6.7
8.4
3.0
9.0
155.9
36.0
Stage 3
£m
6.3
10.4
35.2
72.7
277.4
402.0
Total
£m
77.4
40.3
72.4
86.1
317.7
593.9
Internal credit risk rating reflects the internal credit risk grade of customers at the year end. The significant amount of below standard gross
receivables held in stage 3 reflects the post-charge off asset and ring-fenced book held in CCD following the change to the employed operating
model in 2017.
Annual Report and Financial Statements 2019 201
Provident Financial plc
Financial statements 15 Amounts receivable from customers continued
The movement in directly attributable acquisition costs included within amounts receivable from customers can be analysed as follows:
Group
Brought forward
Capitalised
Amortised
Carried forward
2019
2018
Vanquis
Bank
£m
Moneybarn
£m
21.3
18.3
(7.8)
31.8
19.8
23.0
(18.2)
24.6
CCD
£m
1.3
8.8
(8.2)
1.9
Group
£m
42.4
50.1
(34.2)
58.3
Vanquis
Bank
£m
Moneybarn
£m
14.7
12.0
(5.4)
21.3
15.5
18.3
(14.0)
19.8
CCD
£m
1.0
4.4
(4.1)
1.3
Group
£m
31.2
34.7
(23.5)
42.4
The impairment charge in respect of amounts receivable from customers can be analysed as follows:
Impairment charge on amounts receivable from customers
Vanquis Bank
Moneybarn
CCD
Total impairment charge
Group
2019
£m
198.9
41.8
96.2
336.9
2018
(restated)
£m
241.6
34.4
120.8
396.8
The average effective interest rate for the year ended 31 December 2019 was 25% for Vanquis Bank (2018: 28%), 125% for CCD (2018: 119%)
and 34% for Moneybarn (2018: 34%).
The average effective EIR for Vanquis Bank has reduced from 28% in 2018 to 25% in 2019 due to a modest increase in the mix of nearer-prime
customers and the downwards repricing of higher APR accounts where the customer has improved their credit standing. The CCD average effective
interest rate has increased from 109% in 2018 to 125% in 2019 due to the modest shift in mix to shorter-term, higher-yielding products.
The average period to maturity of the amounts receivable from customers within CCD is 6 months (2018: 6 months) and within
Moneybarn is 39 months (2018: 39 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 3% of the amount owed plus any fees and interest charges in the month and £10.
The currency profile of amounts receivable from customers is as follows:
Group
Sterling
Euro
Reported amounts receivable from customers
Group
2019
£m
2,179.1
33.5
2018
(restated)
£m
2,165.1
38.9
2,212.6
2,204.0
Euro receivables represent loans issued by the home credit business in the Republic of Ireland, and amount to 13% of CCD’s
receivables (2018: 13%).
16 Investments
Group
Government gilts
Visa shares
Total investments
Group
2019
£m
—
16.6
16.6
2018
£m
35.7
12.1
47.8
(a) Government gilts
Government gilts in 2018 comprised UK Government gilts which formed part of the liquid assets buffer and other liquid resources
held by Vanquis Bank in accordance with the PRA’s liquidity regime.
(b) Visa shares
The Visa Inc. shares represent preferred stock in Visa Inc. held by Vanquis Bank following completion of Visa Inc.’s acquisition of
Visa Europe Limited on 21 June 2016. In consideration for Vanquis Bank’s interest in Visa Europe Limited, Vanquis Bank received cash
consideration of €15.9m (£12.2m) on completion, preferred stock with an approximate value of €10.7m and deferred cash consideration
of €1.4m due on the third anniversary of the completion date. The deferred consideration was received in June 2019. The preferred
stock is convertible into Class A common stock of Visa Inc. at a future date, subject to certain conditions.
202
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 16 Investments continued
(b) Visa shares continued
The fair value of the preferred stock in Visa Inc. held by Vanquis Bank as at 31 December 2019 of £16.6m (2018: £12.1m) is held at fair value
through the OCI. The increase in the fair value of the investment during the year of £4.5m (2018: £2.2m) in respect of the movement in
the Visa Inc. share price and the movement in foreign exchange rates has been recognised in the statement of comprehensive income.
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 have been made for: (i) illiquidity, as the preferred stock is not tradable on an open market and
can only be transferred to other Visa members; and (ii) future litigation costs which could affect the valuation of the stock prior to conversion.
17 Financial instruments
(a) Classification and measurement
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 IFRS 9. Assets and liabilities outside the scope of IFRS 9 are shown within non-financial assets/liabilities:
Group
Assets
Investments
Cash and cash equivalents
Amounts receivable from customers
Trade and other receivables
Deferred tax asset
Retirement benefit asset
Property, plant and equipment
Right of use assets
Goodwill
Other intangible assets
Total assets
Liabilities
Retail deposits
Bank and other borrowings
Trade and other payables
Lease liabilities
Current tax liabilities
Provisions
Total liabilities
2019
Investment
held at fair
value through
OCI
£m
Amortised
cost
£m
Non-financial
assets/
liabilities
£m
Total
£m
—
16.6
—
353.6
— 2,212.6
6.6
—
—
—
—
—
—
—
—
—
—
—
—
—
16.6
—
—
353.6
— 2,212.6
33.3
25.0
78.0
19.3
67.1
71.2
44.1
26.7
25.0
78.0
19.3
67.1
71.2
44.1
16.6
2,572.8
331.4
2,920.8
— (1,345.2)
(618.3)
—
(89.3)
—
(78.3)
—
—
—
—
—
— (1,345.2)
(618.3)
—
(89.3)
—
(78.3)
—
(34.7)
(34.7)
(14.5)
(14.5)
— (2,131.1)
(49.2)
(2,180.3)
The carrying value for all financial assets represents the maximum exposure to credit risk.
Group
Assets
Investments
Cash and cash equivalents
Amounts receivable from customers
Trade and other receivables
Deferred tax asset
Retirement benefit asset
Property, plant and equipment
Goodwill
Other intangible assets
Total assets
Liabilities
Retail deposits
Bank and other borrowings
Trade and other payables
Current tax liabilities
Provisions
Total liabilities
2018 (restated)
Investment
held at fair
value through
OCI
£m
Amortised
cost
£m
Non-financial
assets/
liabilities
£m
Total
£m
—
47.8
—
387.9
— 2,204.0
10.0
1.3
—
—
—
—
—
—
—
—
—
—
47.8
—
—
387.9
— 2,204.0
29.8
33.0
83.9
24.6
71.2
55.0
18.5
33.0
83.9
24.6
71.2
55.0
49.1
2,601.9
286.2
2,937.2
— (1,431.7)
(623.8)
—
(91.8)
—
—
—
—
—
— (1,431.7)
(623.8)
—
(91.8)
—
(24.6)
(24.6)
(53.2)
(53.2)
— (2,147.3)
(77.8)
(2,225.1)
Annual Report and Financial Statements 2019 203
Provident Financial plc
Financial statements
17 Financial instruments continued
(a) Classification and measurement continued
Assets and liabilities outside the scope of IFRS 9 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
Right of use assets
Total assets
Liabilities
Bank and other borrowings
Trade and other payables
Lease liabilities
Current tax liabilities
Deferred tax liabilities
Total liabilities
Company
Assets
Cash and cash equivalents
Investment in subsidiaries
Trade and other receivables
Retirement benefit asset
Current tax asset
Property, plant and equipment
Total assets
Liabilities
Bank and other borrowings
Trade and other payables
Deferred tax liabilities
Total liabilities
2019
Non-financial
assets/
liabilities
£m
Amortised
cost
£m
Total
£m
17.4
395.2
892.6
78.0
2.7
20.8
—
395.2
1.8
78.0
2.7
20.8
498.5
1,406.7
—
—
—
(0.1)
(11.6)
(616.3)
(100.4)
(24.9)
(0.1)
(11.6)
17.4
—
890.8
—
—
—
908.2
(616.3)
(100.4)
(24.9)
—
—
(741.6)
(11.7)
(753.3)
2018
Non-financial
assets/
liabilities
£m
Amortised
cost
£m
—
469.7
2.6
83.9
1.8
4.5
1.0
—
821.0
—
—
—
822.0
Total
£m
1.0
469.7
823.6
83.9
1.8
4.5
562.5
1,384.5
(621.1)
(86.6)
—
—
—
(13.3)
(621.1)
(86.6)
(13.3)
(707.7)
(13.3)
(721.0)
(b) Fair values of financial assets and liabilities held at fair value
The Group holds certain financial assets and liabilities at fair value, grouped into Levels 1 to 3 of the fair value hierarchy on the degree
to which the fair value is observable.
The following financial assets and liabilities are held at fair value:
Group
Assets
Investments held at fair value through other
comprehensive income:
• government gilts
• Visa Inc. shares
Total assets
Level 1
£m
2019
Level 2
£m
Level 3
£m
Level 1
£m
2018
Level 2
£m
Level 3
£m
—
—
—
—
—
—
—
16.6
16.6
35.7
—
35.7
—
—
—
—
12.1
12.1
Level 1 fair value measurements are those derived from quoted market prices in active markets for identical assets and liabilities.
The Group previously held government gilts within Level 1 as they were valued using available market prices.
Level 2 fair value measurements are those derived from inputs other than quoted market prices included in Level 1 that are observable
for the asset or liability either directly or indirectly.
204
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 17 Financial instruments continued
(b) Fair values of financial assets and liabilities held at fair value continued
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not
based on observable market data (unobservable inputs). The Group holds Visa shares in Level 3. The valuation has been determined
using a combination of observable and non-observable inputs. As the common stock share price of Visa Inc. is readily available, this
input is deemed to be observable. However, certain assumptions have been made in respect of the illiquidity adjustment to the share
price and the likelihood of future litigation costs. These inputs are therefore deemed to be a significant unobservable input.
The following table sets out their movement during the year:
At 1 January
Gains or losses recognised in other comprehensive income
At 31 December
Group
2019
£m
12.1
4.5
16.6
2018
£m
9.9
2.2
12.1
The illiquidity adjustment has been estimated at around 6% and the expected future litigation costs have been estimated around 15%
of the Visa Inc. share price. These assumptions are consistent with 2018.
The higher the illiquidity and future litigation costs the lower the fair value. The sensitivity to the unobservable inputs, in isolation,
is set out in the table below:
Illiquidity +/-1%
Future litigation costs +/-1%
Group
2019
£m
0.2
0.2
2018
£m
0.2
0.2
Transfers between the different levels of the fair value hierarchy would be made when the inputs used to measure the fair value no
longer satisfy the conditions required to be classified in a certain level within the hierarchy. There have been no transfers between
levels in the current or prior year.
(c) Fair values of financial assets and liabilities not held at fair value
The table below shows the fair value of financial assets and liabilities not presented at fair value in the balance sheet:
Group
Assets
Cash and cash equivalents
Amounts receivable from customers
Trade and other receivables
Total assets
Liabilities
Retail deposits
Bank and other borrowings
Trade and other payables
Lease liabilities
Total liabilities
Company
Assets
Cash and cash equivalents
Trade and other receivables
Total assets
Liabilities
Bank and other borrowings
Trade and other payables
Lease liabilities
Total liabilities
2019
2018 (restated)
Fair value
£m
Book value
£m
Fair value
£m
Book value
£m
353.6
3,008.3
33.3
353.6
2,212.6
33.3
387.9
3,329.2
29.8
387.9
2,204.0
29.8
3,395.2
2,599.5
3,746.9
2,621.7
(1,351.6)
(631.3)
(89.3)
(78.3)
(1,345.2)
(618.3)
(89.3)
(78.3)
(1,441.0)
(658.8)
(91.8)
—
(1,431.7)
(623.8)
(91.8)
—
(2,150.5)
(2,131.1)
(2,191.6)
(2,147.3)
2019
2018
Fair value
£m
Book value
£m
Fair value
£m
Book value
£m
17.4
892.6
910.0
17.4
892.6
910.0
1.0
823.6
824.6
1.0
823.6
824.6
(629.2)
(100.4)
(24.9)
(616.1)
(100.4)
(24.9)
(656.1)
(86.6)
—
(621.1)
(86.6)
—
(754.5)
(741.4)
(742.7)
(707.7)
Annual Report and Financial Statements 2019 205
Provident Financial plc
Financial statements
17 Financial instruments continued
(c) Fair values of financial assets and liabilities not held at fair value continued
Key considerations in the calculation of fair values of those financial assets and liabilities not presented at fair value in the balance
sheet are set out below. Where there is no significant difference between carrying value and fair value no additional information has
been presented.
Fair value of amounts receivable from customers has been derived by discounting expected future cash flows (net of collection costs)
at the credit risk-adjusted discount rate at the balance sheet date. They are categorised within Level 3 as the expected future cash
flows and discount rate are deemed to be significant unobservable inputs.
The fair value of retail deposits have been calculated by discounting the expected future cash flows at the relevant market interest
rate yield curves prevailing at the balance sheet date and are categorised within Level 3 of the fair value hierarchy as the expected
future cash flows are deemed to be significant unobservable inputs.
Within bank and other borrowings, the senior public bonds and retail bonds are classed as Level 1 as they are valued within quoted
market prices. The private placement loan notes are classed as Level 2 as their fair value has been calculated by discounting the
expected future cash flows at the relevant market interest rate yield curves prevailing at the balance sheet date.
18 Trade and other receivables
Current assets
Trade receivables
Other receivables
Amounts owed by Group undertakings
Prepayments and accrued income
Total current assets
Group
Company
2019
£m
0.1
6.5
—
26.7
33.3
2018
£m
0.1
11.2
—
18.5
29.8
2019
£m
—
—
890.8
1.8
892.6
2018
£m
—
—
821.0
2.6
823.6
There are £nil amounts past due in respect of trade and other receivables (2018: £nil). Within the Company, an impairment provision of £121.4m
(2018: £122.9m) is held against amounts owed by Group undertakings due in less than one year. The Company has assessed the estimated credit
losses representing the probability of default and loss given default for these intercompany loans. As a result of which, there has been a £1.5m credit
to the Company income statement in 2019 (2018: £nil) in respect of the provision.
Amounts owed by Group undertakings are unsecured, repayable on demand or within one year, and generally accrue interest at rates
linked to LIBOR.
19 Retirement benefit asset
(a) Pension schemes – defined benefit
The retirement benefit asset reflects the difference between the present value of the Group’s obligation to current and past employees to provide
a defined benefit pension and the fair value of assets held to meet that obligation. As at 31 December 2019, the fair value of the assets exceeded
the obligation and hence a net pension asset has been recorded.
The Group operates a defined benefit scheme: the Provident Financial Staff Pension Scheme. The scheme is of the funded,
defined benefit type and has been substantially closed to new members since 1 January 2003.
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 which 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. 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 2018 by a qualified
independent actuary. The valuation used for the purposes of IAS 19 ‘Employee Benefits’ has been based on the results of the 2018
valuation to take account of the requirements of IAS 19 in order to assess the liabilities of the scheme at the balance sheet date.
Scheme assets are stated at fair value as at the balance sheet.
The Group is entitled to a refund of any surplus, subject to tax, if the scheme winds up after all benefits have been paid.
206
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 19 Retirement benefit asset continued
(a) Pension schemes – defined benefit 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 is 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 the 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
2019
%
9
—
26
30
34
1
100
£m
76.4
—
219.3
252.9
284.8
9.2
842.6
(764.6)
78.0
2018
%
8
9
17
22
43
1
100
£m
62.6
71.5
136.0
177.3
334.4
6.5
788.3
(704.4)
83.9
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. This position is reviewed periodically by the trustee who consult the Company as part of this process.
The valuation of the pension scheme has decreased from £83.9m at 31 December 2018 to £78.0m at 31 December 2019. A high-level reconciliation
of the movement is as follows:
Group and Company
Pension asset as at 1 January
Cash contributions made by the Group
Actuarially based cost of new benefits
Exceptional past service cost – plan amendment
Exceptional past service cost – curtailment credit
Return on assets being held to meet pension obligations in excess of discount rate
Change in mortality assumptions
(Decrease)/increase in discount rate used to discount future liabilities
Decrease/(increase) in inflation rate used to forecast pensions
Actuarial/membership experience
Pension asset as at 31 December
2019
£m
84
3
(1)
—
1
67
20
(110)
13
1
78
2018
£m
102
10
—
(7)
1
(31)
(31)
51
(2)
(9)
84
Annual Report and Financial Statements 2019 207
Provident Financial plc
Financial statements 19 Retirement benefit asset continued
(a) Pension schemes – defined benefit continued
The amounts recognised in the income statement were as follows:
Current service cost
Interest on scheme liabilities
Interest on scheme assets
Contributions from subsidiaries
Net credit/(charge) recognised in the income statement before exceptional past
service (costs)/credit
Exceptional past service charge – plan amendment (note 1)
Exceptional past service credit – curtailment credit (note 1)
Exceptional past service credit/(cost)
Net credit/(charge) recognised in the income statement
Group
Company
2019
£m
(1.7)
(19.5)
21.9
—
0.7
—
0.5
0.5
1.2
2018
£m
(2.7)
(17.4)
19.9
—
(0.2)
(6.9)
0.6
(6.3)
(6.5)
2019
£m
(1.7)
(19.5)
21.9
2.4
3.1
—
0.5
0.5
3.6
2018
£m
(2.7)
(17.4)
19.9
9.2
9.0
(6.9)
0.6
(6.3)
2.7
The exceptional curtailment credit of £0.5m in 2019 (2018: £0.6m) represents the reduction in headcount following business
restructuring within CCD (see note 1).
The exceptional cost for plan amendment in 2018 related to charges in respect of the estimated liabilities arising due to amending
members benefits for equalisation of Guaranteed Minimum Pensions, following the High Court judgement against Lloyds Bank PLC
and others in October 2018.
The net credit/(charge) recognised in the income statement of the Group and the Company has been included within administrative
and operating 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
Group
Company
2019
£m
788.3
21.9
—
67.4
2.6
(37.6)
2018
£m
835.5
19.9
—
(31.3)
9.8
(45.6)
2019
£m
788.3
21.9
0.2
67.4
2.4
(37.6)
2018
£m
835.5
19.9
9.2
(31.3)
0.6
(45.6)
Fair value of scheme assets at 31 December
842.6
788.3
842.6
788.3
The Group contributions to the defined benefit pension scheme in the year ending 31 December 2020 are expected to be
approximately £4m.
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 past service charge – plan amendment (note 1)
Exceptional past service credit – curtailment credit (note 1)
Actuarial movement – experience
Actuarial movement – demographic assumptions
Actuarial movement – financial assumptions
Net benefits paid out
Group and Company
2019
£m
(704.4)
(1.7)
(19.5)
—
0.5
0.1
19.9
(97.1)
37.6
2018
£m
(733.2)
(2.7)
(17.4)
(6.9)
0.6
(9.1)
(31.4)
50.1
45.6
Present value of the defined benefit obligation at 31 December
(764.6)
(704.4)
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 liabilities is approximately 18 years (2018: 17 years).
208
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 19 Retirement benefit asset continued
(a) Pension schemes – defined benefit continued
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
2019
%
2.95
2.05
2.70
2.10
2.00
2018
%
3.30
2.20
3.00
2.20
2.80
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 2 tables (2018: SAPS series 1 tables), with
multipliers of 96% (2018: 96%) and 101% (2018: 101%) respectively for males and females. The 4% downwards (2018: 4% downwards)
adjustment to mortality rates for males and a 1% upwards (2018: 1% upwards) adjustment for females reflect higher life expectancies
for males and lower life expectancies for females 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) 2018 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
Male
Female
2019
years
21.8
23.1
2018
years
22.2
23.6
2019
years
23.3
24.8
2018
years
23.8
25.3
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
Group and Company
2019
£m
14
6
38
2018
£m
12
5
30
Group and Company
2019
£m
21.9
67.4
89.3
2018
£m
19.9
(31.3)
(11.4)
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 other 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
2019
£m
67.4
(77.1)
(9.7)
(95.9)
2018
£m
(31.3)
9.6
(21.7)
(86.2)
Annual Report and Financial Statements 2019 209
Provident Financial plc
Financial statements 19 Retirement benefit asset continued
(a) Pension schemes – defined benefit continued
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
Group and Company
2019
£m
842.6
(764.6)
2018
£m
2017
£m
2016
£m
2015
£m
788.3
(704.4)
835.5
(733.2)
830.1
(757.7)
666.4
(604.1)
Retirement benefit asset recognised in the balance sheet
78.0
83.9
102.3
72.4
62.3
Experience gains/(losses) on scheme assets:
• amount (£m)
• percentage of scheme assets (%)
Experience (losses)/gains on scheme liabilities:
• amount (£m)
• percentage of scheme liabilities (%)
67.4
8.0
(0.1)
—
(31.3)
(4.0)
(9.1)
(1.3)
18.2
2.2
(3.7)
(0.5)
153.7
18.5
4.5
0.6
(52.4)
(7.9)
25.9
4.3
(b) Pension schemes – defined contribution
The Group operates a Group Personal 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% and 8%). The assets of the scheme are held separately
from those of the Group and Company.
The Group also operates a separate pension scheme for auto-enrolment into which the Company and subsidiaries contribute a
proportion of qualifying earnings of the member of 1%. The assets of the scheme are held separately from those of the Group or the
Company. The pension charge in the consolidated income statement represents contributions paid by the Group in respect of these
plans and amounted to £10.3m for the year ended 31 December 2019 (2018: £9.3m). Contributions made by the Company amounted
to £0.5m (2018: £0.4m). £nil contributions were payable to the fund at the year end (2018: £0.6m).
The Group contributed £nil in 2019 into individual personal pension plans in the year (2018: £nil).
The Unfunded, Unapproved Retirement Benefit Scheme (UURBS) decreased by £0.5m in the year as amounts were withdrawn from
the scheme; the balance outstanding for the Group at 31 December 2019 was £nil (2018: £0.5m).
20 Deferred tax
Deferred tax is a future tax liability or asset resulting from temporary differences or timing difference between the accounting value of assets and
liabilities and their value for tax purposes. Deferred tax arises primarily in respect of 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, investments which are taxed only on disposal, the opening balance
sheet adjustments to restate the IAS 39 balance sheet onto an IFRS 9 basis for which tax deductions are available over 10 years, the opening balance
sheet adjustment in respect of the change of accounting treatment of deferred acquisition costs which is taxable over 10 years and the opening
balance sheet adjustment in respect of the adoption of IFRS 16 which is deductible over the average period of the relevant leases. 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.
Deferred tax is calculated in full on temporary differences under the balance sheet liability method. During 2015, reductions in
corporation tax rates were enacted, reducing the mainstream UK 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 Vanquis
Bank over £25m. During 2016, a further change was enacted which further reduced the mainstream UK corporation tax rate from 18%
to 17% with effect from 1 April 2020.
Deferred tax at 31 December 2019 has been measured at 17% (2018: 17%) and, in the case of Vanquis Bank, at the combined mainstream
UK corporation tax and bank corporation tax surcharge rates of 25% (2018: 25%) on the basis that the temporary differences on which
deferred tax has been calculated are expected to reverse after 1 April 2020 (2018: 1 April 2020). The exception to this is the opening
balance sheet adjustment to restate the IAS 39 balance sheet to an IFRS 9 basis where deferred tax has been measured at the mainstream
UK corporation tax rate and, in the case of Vanquis Bank, at the combined mainstream UK corporation tax and bank corporation tax
surcharge rate, at which the amount will be tax deductible over the next 10 years. In 2019, movements in deferred tax balances have
been measured at the mainstream corporation tax rate for the year of 19.0% (2018: 19%), and, in the case of Vanquis Bank, at the
combined mainstream UK corporation tax and bank corporation tax surcharge rate for the year of 27.0% (2018: 27%). A tax credit
of £0.3m (2018 (restated): tax charge of £0.5m) represents the income statement adjustment to deferred tax as a result of these
changes and an additional deferred tax charge of £0.1m (2018 (restated): credit of £0.7m) has been taken directly to other
comprehensive income in respect of items reflected directly in other comprehensive income.
210
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 20 Deferred tax continued
The movement in the deferred tax balance during the year can be analysed as follows:
Asset/(liability)
At 1 January as previously reported
Charge on prior year adjustment in respect of directly attributable acquisition costs
Credit on adjustment arising on transition to IFRS 16
At 1 January restated
(Charge)/credit to the income statement
Credit on other comprehensive income prior to impact of change in UK tax rate
Impact of change in UK tax rate:
• credit/(charge) to the income statement
• charge to other comprehensive income
At 31 December
Group
2019
£m
33.0
—
1.5
34.5
(10.3)
0.6
0.3
(0.1)
25.0
2018
(restated)
£m
33.8
(3.7)
—
30.1
0.5
3.6
(0.5)
(0.7)
33.0
Company
2019
2018
£m
(13.3)
—
0.6
(12.7)
(0.6)
1.8
0.1
(0.2)
£m
(15.9)
—
—
(15.9)
(1.1)
4.1
0.1
(0.5)
(11.6)
(13.3)
The deferred tax charge of £3.7m at 1 January 2018 represents deferred tax at the combined mainstream corporation tax and the bank
corporation tax surcharge rate on the opening balance sheet adjustment in respect of the change of accounting treatment of directly
attributable acquisition costs in Vanquis Bank which is taxable over 10 years.
The deferred tax credit of £1.5m at 1 January 2019 represents deferred tax at the mainstream rate of corporation tax and, in the case
of Vanquis Bank, at the combined mainstream corporation tax and the bank corporation tax surcharge rate on the opening balance sheet
adjustment in respect of the adoption of IFRS 16 ‘Leases’ which is deductible over the average remaining term of the relevant leases.
An analysis of the deferred tax asset/(liability) for the Group is set out below:
2019
2018 (restated)
Group – asset/(liability)
At 1 January previously reported
Charge on prior year adjustment
in respect of directly attributable
acquisition costs
Credit on adjustment arising
on transition to IFRS 16
At 1 January restated
Credit/(charge) to the income statement
(Charge)/credit on other
comprehensive income prior
to change in UK tax rate
Impact of change in UK tax rate:
• credit/(charge) to the
income statement
• credit/(charge) to other
comprehensive income
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
2.6
44.8
(14.4)
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
2.7
48.3
(17.2)
Total
£m
33.0
—
1.5
—
—
2.6
0.4
—
—
—
—
1.5
—
—
46.3
(10.0)
(14.4)
(0.7)
34.5
(10.3)
(1.2)
1.8
0.6
0.2
0.1
0.1
0.3
(0.2)
(0.1)
25.0
Total
£m
33.8
(3.7)
—
30.1
0.5
(3.7)
—
44.6
1.5
—
—
(17.2)
(0.9)
(0.5)
4.1
3.6
(0.6)
0.1
(0.5)
(0.2)
44.8
(0.5)
(14.4)
(0.7)
33.0
—
—
2.7
(0.1)
—
—
—
2.6
At 31 December
3.0
35.4
(13.4)
Provident Financial plc
Annual Report and Financial Statements 2019
211
Financial statements 20 Deferred tax continued
An analysis of the deferred tax liability for the Company is set out below:
Company – asset/(liability)
At 1 January previously reported
Credit on adjustment arising on
transition to IFRS 16
At 1 January restated
Credit/(charge) to the income
statement
Credit on other comprehensive
income prior to impact of change
in UK tax rate
Impact of change in UK tax rate:
• credit to the income statement
• charge to other comprehensive
income
At 31 December
—
—
—
0.1
—
—
—
1.1
0.6
1.7
—
—
—
—
2019
2018
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
Accelerated
capital
allowances
£m
Other
temporary
differences
£m
Retirement
benefit
obligations
£m
Total
£m
Total
£m
(14.4)
(13.3)
—
0.6
(14.4)
(12.7)
(0.1)
—
(0.1)
1.4
—
1.4
(17.2)
(15.9)
—
—
(17.2)
(15.9)
(0.7)
(0.6)
0.1
(0.3)
(0.9)
(1.1)
1.8
0.1
1.8
0.1
(0.2)
(0.2)
—
—
—
—
—
—
—
4.1
0.1
4.1
0.1
(0.5)
(0.5)
1.1
(14.4)
(13.3)
0.1
1.7
(13.4)
(11.6)
Deferred tax assets have been recognised in respect of all temporary differences because it is probable that these assets will
be recovered.
21 Cash and cash equivalents
Cash and cash equivalents includes cash at bank and held in short-term deposits, floats held by CEMs within CCD and Vanquis Bank’s liquid assets
buffer, including other liquid resources, held in accordance with the PRA’s liquidity regime and an operational buffer. The PRA requires regulated
entities to maintain a liquid assets buffer to ensure they have available funds to help protect against unforeseen circumstances.
Cash at bank and in hand
Group
Company
2019
£m
2018
£m
353.6
387.9
2019
£m
17.4
2018
£m
1.0
In addition to cash and cash equivalents, the Group had £2.8m of bank overdrafts at 31 December 2019 (2018: £7.0m) and the
Company had £0.8m of bank overdrafts (2018: £4.2m), both of which are disclosed within bank and other borrowings (see note 22).
Vanquis Bank’s total liquid assets buffer, held in accordance with the PRA’s liquidity regime together with an additional operational
buffer, amounted to £321.9m (2018: £420.6m). This includes £321.9m (2018: £384.9m) held in cash and cash equivalents and £nil
(2018: £35.7m) held in a combination of UK Government gilts. As at 31 December 2019, £138.2m (2018: £106.5m) of the buffer was
available to finance Vanquis Bank’s day-to-day operations.
The currency profile of cash and cash equivalents is as follows:
Sterling
Euro
Total cash and cash equivalents
Group
Company
2019
£m
353.6
—
353.6
2018
£m
387.7
0.2
387.9
2019
£m
17.4
—
17.4
2018
£m
1.0
—
1.0
Cash and cash equivalents are non-interest bearing other than in respect of the cash held on deposit and the amounts held by
Vanquis Bank as a liquid assets buffer and other liquid resources which bear interest at rates linked to the Bank of England base rate.
212
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 22 Borrowings
Current liabilities
Retail deposits
Bank and other borrowings
Total
Non-current liabilities
Retail deposits
Bank and other borrowings
Total
Total borrowings
(a) Facilities and borrowings
Group
Company
2019
£m
2018
£m
2019
£m
2018
£m
410.0
53.5
463.5
339.3
49.8
389.1
935.2
564.8
1,092.4
574.0
1,500.0
1,666.4
1,963.5
2,055.5
—
51.5
51.5
—
564.8
564.8
616.3
—
47.1
47.1
—
574.0
574.0
621.1
Borrowings principally comprise retail deposits issued by Vanquis Bank (see note 22(b)), syndicated bank facility, together with overdrafts and uncommitted
loans which are repayable on demand, senior public bonds (see note 22(e)), loan notes privately placed with UK institutions (see note 22(f)) and retail
bonds (see note 22(g)). As at 31 December 2019, borrowings under these facilities amounted to £1,963.5m (2018: £2,055.5m).
(b) Retail deposits
Vanquis Bank is a PRA-regulated bank and is now fully funded through retail deposits. As at 31 December 2019, £1,345.2m (2018: £1,431.7m)
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 2019
have been issued at rates of between 1.0% and 2.7%.
A reconciliation of the movement in retail deposits is set out below:
Group
At 1 January
New funds received
Maturities
Retentions
Cancellations
Interest
At 31 December
(c) Maturity profile borrowings
The maturity of borrowings, together with the maturity of facilities, is as follows:
Group
Repayable:
On demand (uncommitted)
In less than one year
Accrued interest
Included in current liabilities
Between one and two years
Between two and five years
Accrued interest
Arrangement fees
Included in non-current liabilities
Total Group
2019
£m
2018
£m
1,431.7
125.1
(327.2)
119.9
(15.2)
10.9
1,301.0
352.2
(347.9)
134.9
(24.4)
15.9
1,345.2
1,431.7
2019
2018
Borrowing
facilities
available
£m
Borrowings
£m
Borrowing
facilities
available
£m
Borrowings
£m
5.2
457.2
—
462.4
2.8
457.2
3.5
463.5
459.1
1,102.7
—
—
459.1
1,033.6
12.8
(5.5)
14.5
370.7
—
385.2
7.0
370.7
11.4
389.1
870.4
1,121.9
—
—
543.0
1,121.9
5.7
(4.2)
1,561.8
1,500.0
1,992.3
1,666.4
2,024.2
1,963.5
2,377.5
2,055.5
Borrowings are stated after deducting £5.5m of unamortised arrangement fees (2018: £4.2m) and the addition of accrued interest
of £16.3m (2018: £17.1m).
Annual Report and Financial Statements 2019 213
Provident Financial plc
Financial statements 22 Borrowings continued
(c) Maturity profile borrowings continued
Company
Repayable:
On demand (uncommitted)
In less than one year
Accrued interest
Included in current liabilities
Between one and two years
Between two and five years
Accrued interest
Arrangement fees
Included in non-current liabilities
Total Company
2019
2018
Borrowing
facilities
available
£m
Borrowings
£m
Borrowing
facilities
available
£m
Borrowings
£m
5.2
50.2
—
55.4
90.0
545.0
—
—
635.0
690.4
0.8
50.2
0.5
51.5
90.0
475.9
4.4
(5.5)
564.8
616.3
14.5
42.5
—
57.0
500.2
400.0
—
—
900.2
957.2
4.2
42.5
0.4
47.1
173.0
400.0
5.2
(4.2)
574.0
621.1
As at 31 December 2019, the weighted average period to maturity of the Group’s committed facilities, including retail deposits, was
2.2 years (2018: 2.3 years) and for the Company’s committed facilities was 2.7 years (2018: 2.5 years). Excluding retail deposits, the
weighted average period to maturity of the Group’s committed facilities was 2.7 years (2018: 2.3 years).
(d) Interest rate and currency profile of borrowings
The interest rate and foreign exchange rate exposure on borrowings is as follows:
Group
Sterling
Euro
Total Group
Company
Sterling
Euro
Total Company
2019
Floating
£m
Fixed
£m
Total
£m
1,743.6
—
185.2
34.7
1,928.8
34.7
Fixed
£m
1,859.4
—
2018
Floating
£m
168.0
28.1
Total
£m
2,027.4
28.1
1,743.6
219.9
1,963.5
1,859.4
196.1
2,055.5
Fixed
£m
398.4
—
398.4
2019
Floating
£m
183.2
34.7
217.9
Total
£m
581.6
34.7
616.3
Fixed
£m
427.7
—
427.7
2018
Floating
£m
165.3
28.1
193.4
Total
£m
593.0
28.1
621.1
(e) Senior public bonds
On 23 October 2009, the Company issued £250.0m of senior public bonds. The bonds had an annual coupon of 8.0% and were
repayable on 23 October 2019.
On 4 June 2018, the Group issued £250m of five-year fixed-rate bonds carrying a semi-annual coupon of 7%. The proceeds of the
bond issue were used to finance the tender offer for the £250.0m existing senior bonds, maturing on 23 October 2019. 89% of the
existing bonds were tendered and redeemed at an 8.0% premium on 30 May 2018. The remaining existing senior bonds of £27.5m
matured and were repaid on their original maturity date on 23 October 2019.
214
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
22 Borrowings continued
(f) Private placement loan notes
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 ten-year term loan which amortises between years five and ten. The first two repayments of
£10.0m were repaid in 2016 and 2017 and the third instalment of £15.0m was paid in 2018. A fourth instalment of £15.0m was paid on
31 January 2019 and the fifth instalment of £25.0m was paid in line with its contractual maturity on 31 January 2020. The remaining
instalment of £25.0m was repaid early on 14 February 2020.
The Company also entered into a £20m private placement loan note with a third party in March 2011 at a rate linked to LIBOR.
The loan note was repaid on its contractual maturity date in March 2018.
(g) Retail bonds
The Company has three outstanding retail bonds issued on the Order Book for Retail Bonds (ORB) platform established by
the London Stock Exchange as follows:
Issue date
14 April 2010
27 March 2013
9 April 2015
Total Group and Company
Rate
%
Maturity date
7.5% *
14 April 2020
6.0% 27 September 2021
9 October 2023
5.125%
Amount
£m
25.2
65.0
60.0
150.2
* 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.
(h) 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, together with cash held on deposit, to fund growth and contractual maturities
for at least the following 12 months.
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 undrawn committed borrowing facilities
Group and Company
2019
£m
—
—
69.1
69.1
2018
£m
—
327.4
—
327.4
The Group has committed borrowing facilities of £2,019.0m (2018: £2,363.0m) at the end of 2019.
Headroom on the Group’s committed debt facilities was £69.1m at 31 December 2019. Together with the ongoing retail deposits
programme, and the bilateral securitisation facility signed on 14 January 2020 (see note 32), this is sufficient to fund contractual debt
maturities and projected growth in the Group until mid 2022, when the Group’s syndicated revolving bank facility matures.
In order to reconcile the borrowings and the headroom on committed facilities shown, the facilities and borrowings in respect of amounts repayable
on demand and interest accrued should be deducted and unamortised arrangement fees should be added back to borrowings as follows:
Group
Total facilities and borrowings
Repayable on demand
Unamortised arrangement fees
Accrued interest
Total committed facilities and borrowings
Headroom on committed facilities
2019
2018
Facilities
£m
Borrowings
£m
Facilities
£m
Borrowings
£m
2,024.2
(5.2)
—
—
1,963.5
(2.8)
5.5
(16.3)
2,377.5
(14.5)
—
—
2,055.5
(7.0)
4.2
(17.1)
2,019.0
1,949.9
2,363.0
2,035.6
69.1
327.4
Annual Report and Financial Statements 2019 215
Provident Financial plc
Financial statements 22 Borrowings continued
(i) Weighted average interest rates and periods to maturity
The weighted average interest rate and the weighted average period to maturity of the Group and the Company’s fixed-rate
borrowings is as follows:
Group
Sterling
Company
Sterling
2019
2018
Weighted
average
interest
rate
%
Weighted
average
period to
maturity
years
Weighted
average
interest
rate
%
Weighted
average
period to
maturity
years
3.29
2.2
3.20
2.4
2019
2018
Weighted
average
interest
rate
%
Weighted
average
period to
maturity
years
Weighted
average
interest
rate
%
Weighted
average
period to
maturity
years
6.56
3.0
6.65
2.5
(j) Fair values
The fair values of the Group and Company’s borrowings are compared to their book values as follows:
Group
Retail deposits
Bank loans and overdrafts
Senior public bonds
Sterling private placement loan notes
Retail bonds
Total Group
Company
Bank loans and overdrafts
Senior public bonds
Sterling private placement loan notes
Retail bonds
Total Company
23 Trade and other payables
Current liabilities
Trade payables
Amounts owed to Group undertakings
Other payables including taxation and social security
Accruals
Total trade and other payables
2019
2018
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
1,345.1
164.0
251.3
50.5
152.6
1,351.6
164.0
262.7
51.9
152.7
1,431.7
126.6
279.2
65.6
152.4
1,441.0
126.6
310.8
69.7
151.7
1,963.5
1,982.9
2,055.5
2,099.8
2019
2018
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
161.9
251.3
50.5
152.6
616.3
161.9
262.7
51.9
152.7
629.2
123.9
279.2
65.6
152.4
621.1
123.9
310.8
69.7
151.7
656.1
Group
Company
2019
£m
3.5
—
8.3
77.5
89.3
2018
£m
7.3
—
9.6
74.9
91.8
2019
£m
—
94.6
1.7
4.1
100.4
2018
£m
—
72.7
1.7
12.2
86.6
The amounts owed to Group undertakings are unsecured, due for repayment in less than one year and accrue interest at rates linked
to LIBOR.
216
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 24 Lease liabilities
Current
Non-current
Total
A maturity analysis of the lease liabilities is shown below:
Due within one year
Due between one and five years
Due in more than five years
Total
Unearned finance cost
Total lease liabilities
Group
2019
£m
Company
2019
£m
10.2
68.1
78.3
2.5
22.4
24.9
Group
2019
£m
Company
2019
£m
10.3
43.5
34.7
88.5
(10.2)
78.3
3.2
14.8
11.0
29.0
(4.1)
24.9
The total cash outflow for leases in the year amounted to £16.7m for the Group, including short-term lease cash outflows of £0.9m.
At 31 December 2019, the Group is also committed to £0.3m for short-term leases. Total cash outflows for the company amounted
to £3.0m.
25 Provisions
Provisions
At 1 January
Utilised in the year
Released in the year
Reclassification from balance reduction provisions
At 31 December
Group
2019
£m
53.2
(21.9)
(16.8)
—
14.5
2018
£m
104.6
(62.2)
—
10.8
53.2
Vanquis Bank
On 27 February 2018, Vanquis Bank agreed a settlement with the FCA into their investigation into ROP. The investigation concluded
that Vanquis Bank did not adequately disclose in its sales calls that the charges for ROP would be treated as a purchase transaction
and therefore potentially incur interest. The total estimated cost of settlement amounted to £172.1m and was reflected in the 2017
financial statements, of which £75.4m was reflected as a balance adjustment to receivables with the remaining £96.7m reflected as a
provision. The provision comprised: (i) cash settlements to customers of £51.7m; (ii) higher expected forward flow of ROP complaints
more generally in respect of which compensation may need to be paid of £30.7m; (iii) administration costs of £12.3m; and (iv) the fine
levied by the FCA of just under £2.0m.
The ROP refund programme was completed in 2019 with over 1.3 million current and former ROP customers refunded. As a result, the
provision has reduced from £45.7m at 31 December 2018 to £11.7m at 31 December 2019 reflecting: (i) cash settlements and administration
costs of £19.8m (2018: £61.8m); and (ii) the release of £14.2m of the provisions originally established in 2017 as an exceptional credit
(see note 1) following completion of the refund programme and a re-evaluation of the forward flow of claims that may arise in respect
of ROP complaints more generally. The balance reduction provision has also reduced from £3.7m at the end of 2018 to £nil at
31 December 2019 (see note 15).
The remaining ROP provision principally reflects the estimated cost of the forward flow of ROP complaints more generally in respect
of which compensation may need to be paid. The provision is calculated using a number of key assumptions:
• customer complaints volumes – an estimate of future claims which may be initiated by customers where the volume is anticipated
to cease after 31 December 2021;
• average claim redress – the expected average payment to customers for upheld claims; and
• customer and FOS complaints upheld rates – the number of claims redressed as a percentage of total claims received.
These assumptions involve management judgement and are subjective, particularly in respect of the uncertainty associated with
future claims levels. It is therefore possible that the eventual outcome may differ from the current estimate. A +/-10% variation in
customer complaints volumes would result in a £1.0m increase/decrease in provisions, a +/-10% variation in average claim redress
would result in a £1.0m increase/decrease in provisions, and a +/-10% variation in upheld rate would result in a £1.8m increase/
decrease in provisions.
Provident Financial plc
Annual Report and Financial Statements 2019
217
Financial statements 25 Provisions continued
Moneybarn
In the 2017 financial statements, a provision of £20.0m was reflected in respect of the FCA’s investigation into affordability,
forbearance and termination options at Moneybarn. The provision comprised a £12.1m balance adjustment to receivables with
the remaining £7.9m reflected as a provision in respect of potential cash restitution, administration costs and an FCA fine.
The redress required to resolve the issues arising in respect of the FCA investigation into affordability, forbearance and termination
options was completed in the third quarter of 2019 and Moneybarn has now received the final notice from the FCA. As a result, the
provision has reduced from £7.5m at 31 December 2018 to £2.8m at 31 December 2019 in respect of: (i) refund activity and the costs
of the investigation of £2.1m; and (ii) the release of £2.6m of the provision as an exceptional credit following receipt of the final notice
(see note 1). The balance reduction provision has also reduced from £1.8m at the end of 2018 to £nil at 31 December 2019 (see note 15).
26 Share capital
Group and Company
Ordinary shares of 20 8⁄11p 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 due to rights issue
Shares issued pursuant to the exercise/vesting of options and awards
At 31 December
2019
Issued and
fully paid
2018
Issued and
fully paid
52.5
52.5
253.4
253.3
2019
m
253.3
—
0.1
253.4
2018
m
148.2
105.0
0.1
253.3
Share capital increased by £21.8m as a result of the rights issue in April 2018. The rights issue was undertaken through a cash box structure which
allowed merger relief to be applied to the issue of shares rather than recording share premium. The resulting merger reserve of £278.2m is included
within other reserves.
The shares issued pursuant to the exercise/vesting of options and awards comprised 94,296 ordinary shares (2018: 52,192)
with a nominal value of £19,545 (2018: £10,818) and an aggregate consideration of £0.1m (2018: £0.1m).
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 SG Kleinwort Hambros Trust Company (CI) 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 2019, the EBT
held 2,853,722 (2018: 2,853,722) shares in the Company with a cost of £4.5m (2018: £4.5m) and a market value of £13.0m (2018: £16.4m).
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.
27 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). The Group also operates a cash-settled share incentive scheme, the Provident Financial
Equity Plan (PFEP), for eligible employees based on a percentage of salary.
When an equity-settled share option or award is granted, a fair value is calculated based on the share price at grant date, the 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 2019, awards/options have been granted under the LTIS, PSP and SAYE (UK and ROI) schemes (2018: awards/options have been granted under
the LTIS, SAYE (UK and ROI) and PFEP schemes).
218
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
27 Share-based payments continued
(a) Equity-settled schemes
The charge to the income statement in 2019 for equity-settled schemes was £1.9m for the Group (2018: £1.1m) and £1.3m
for the Company (2018: £0.4m).
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 the 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 (£)
2019
PSP
LTIS
SAYE
2018
LTIS
SAYE
1 Apr 2019
5.17
—
85,798
3
—
3
3
—
n/a
5.12
1 Apr 2019
5.17
—
1,693,073
3
8 Oct 2019
3.87
3.23
1,883,398
3 and 5
74.1% 68.0%–84.9%
Up to 5
Up to 5
0.66% 0.23%–0.27%
3.0%
0.38–0.76
n/a
4.53
3
3
16 Apr 2018
6.85
—
1,417,274
3
4 Oct 2018
5.90
5.38
963,978
3 and 5
82.6% 65.8%–83.3%
Up to 5
Up to 5
0.82% 0.99%–1.22%
3.0%
2.61–3.36
n/a
5.89
3
3
2019
PSP
LTIS
SAYE
2018
LTIS
SAYE
1 Apr 2019
5.17
—
69,307
3
—
3
3
—
n/a
5.12
1 Apr 2019
5.17
—
752,522
3
8 Oct 2019
3.87
3.23
146,987
3 and 5
74.1% 68.0%–84.9%
Up to 5
Up to 5
0.66% 0.23%–0.27%
3.0%
0.38–0.76
n/a
4.33
3
3
16 Apr 2018
6.85
—
460,947
3
4 Oct 2018
5.90
5.38
28,651
3 and 5
82.6% 65.8%–83.3%
Up to 5
Up to 5
0.82% 0.99%–1.22%
3.0%
2.61–3.36
n/a
5.89
3
3
The expected volatility is based on historical volatility over the last three or five years depending on the length of the option/award.
The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero coupon UK Government
bonds of a similar duration to the life of the share option.
A reconciliation of award/share option movements during the year is shown below:
Group
Outstanding at 1 January 2019
Awarded/granted
Lapsed
Exercised
Outstanding at 31 December 2019
Exercisable at 31 December 2019
PSP
LTIS
SAYE
Weighted
average
exercise
price
£
—
—
—
—
—
—
Number
207,155
85,798
(51,231)
(45,230)
196,492
—
Weighted
average
exercise
price
£
—
—
—
—
—
—
Weighted
average
exercise
price
£
5.31
3.23
5.28
5.09
3.87
Number
2,744,321
1,883,398
(1,944,819)
(8,498)
2,674,402
5,958
16.05
Number
1,767,331
1,693,073
(338,986)
—
3,121,418
—
Annual Report and Financial Statements 2019 219
Provident Financial plc
Financial statements 27 Share-based payments continued
(a) Equity-settled schemes continued
Group
Outstanding at 1 January 2018
Awarded/granted
Granted through rights issue
Lapsed
Exercised
Outstanding at 31 December 2018
Exercisable at 31 December 2018
PSP
LTIS
SAYE
Weighted
average
exercise
price
£
—
—
—
—
—
—
—
Number
296,741
—
50,085
(548)
(139,123)
207,155
—
Weighted
average
exercise
price
£
—
—
—
—
—
—
—
Weighted
average
exercise
price
£
7.28
5.39
—
8.03
5.13
5.31
Number
1,932,732
963,978
581,918
(717,115)
(17,192)
2,744,321
20,677
12.08
Number
595,503
1,417,274
—
(53,211)
(192,235)
1,767,331
—
Share awards outstanding under the LTIS scheme at 31 December 2019 had an exercise price of £nil (2018: £nil) and a weighted
average remaining contractual life of 1.7 years (2018: 1.9 years). Share options outstanding under the SAYE schemes at 31 December 2019
had exercise prices ranging from 323p to 1,760p (2018: 483p to 1,760p) and a weighted average remaining contractual life of 2.8 years
(2018: 2.6 years). Share awards outstanding under the PSP schemes at 31 December 2019 had an exercise price of £nil (2018: £nil) and
a weighted average remaining contractual life of 1.1 years (2018: 0.7 years).
Company
Outstanding at 1 January 2019
Awarded/granted
Lapsed
Exercised
Outstanding at 31 December 2019
Exercisable at 31 December 2019
Company
Outstanding at 1 January 2018
Awarded/granted
Granted through rights issue
Lapsed
Exercised
Outstanding at 31 December 2018
Exercisable at 31 December 2018
PSP
LTIS
SAYE
Weighted
average
exercise
price
£
—
—
—
—
—
—
Weighted
average
exercise
price
£
—
—
—
—
—
—
—
Number
143,142
69,307
(33,939)
(31,734)
146,776
—
PSP
Number
189,005
—
30,409
—
(76,272)
143,142
—
Weighted
average
exercise
price
£
—
—
—
—
—
—
Weighted
average
exercise
price
£
—
—
—
—
—
—
—
Number
613,630
752,522
(106,720)
—
1,259,432
—
LTIS
Number
227,380
460,947
—
—
(74,697)
613,630
—
Weighted
average
exercise
price
£
5.34
3.23
5.29
—
3.45
Number
123,998
146,987
(108,368)
—
162,617
774
17.60
SAYE
Weighted
average
exercise
price
£
7.51
5.38
—
8.30
5.01
5.34
Number
94,718
28,651
34,860
(33,534)
(697)
123,998
386
11.75
Share awards outstanding under the LTIS at 31 December 2019 had an exercise price of £nil (2018: £nil) and a weighted average
remaining contractual life of 1.8 years (2018: 1.9 years). Share options outstanding under the SAYE schemes at 31 December 2019
had exercise prices ranging from 323p to 1,760p (2018: 501p to 1,760p) and a weighted average remaining contractual life of 3.0 years
(2018: 2.8 years). Share awards outstanding under the PSP schemes at 31 December 2019 had an exercise price of £nil (2018: £nil)
and a weighted average remaining contractual life of 1.2 years (2018: 0.7 years).
(b) Cash-settled schemes
During 2018, 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 credit to the
income statement in 2019 was £0.6m for the Group (2018: £3.9m) and £nil for the Company (2018: £nil). The Group has a liability
of £1.1m as at 31 December 2019 (2018: £1.7m) and £nil for the Company (2018: £nil).
220
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 28 Other reserves
Group
At 1 January 2018
Other comprehensive income/(expense):
• fair value movements in investments (note 16)
• tax on items taken directly to other comprehensive income
(note 5)
impact of change in UK tax rate
•
Other comprehensive income for the year
Transactions with owners:
• proceeds from rights issue (note 26)
• share-based payment charge (note 27)
• transfer of share-based payment reserve on vesting
of share awards
At 31 December 2018
At 1 January 2019
Other comprehensive income/(expense):
• fair value movements in investments (note 16)
• tax on items taken directly to other comprehensive income
(note 5)
impact of change in UK tax rate
•
Other comprehensive income for the year
Transactions with owners:
• share-based payment charge (note 27)
• transfer of share-based payment reserve on vesting
of share awards
At 31 December 2019
—
—
—
—
—
278.2
—
—
278.2
278.2
—
—
—
—
—
—
Merger
reserve
£m
Profit
retained by
subsidiary
£m
Capital
redemption
reserve
£m
Share-based
payment
reserve
£m
Fair value
reserve
£m
Total
other
reserves
£m
0.8
3.6
7.3
1.7
13.4
—
—
—
—
—
—
—
0.8
0.8
—
—
—
—
—
—
—
—
—
—
—
—
—
3.6
3.6
—
—
—
—
—
—
—
—
—
—
—
1.1
(2.1)
6.3
6.3
—
—
—
—
1.9
(1.5)
6.7
2.2
2.2
(0.5)
(0.2)
1.5
—
—
—
3.2
3.2
4.5
(1.2)
0.1
3.4
—
—
(0.5)
(0.2)
1.5
278.2
1.1
(2.1)
292.1
292.1
4.5
(1.2)
0.1
3.4
1.9
(1.5)
6.6
295.9
278.2
0.8
3.6
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 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 fair value reserve reflects the fair value movements in the investments held at fair value through other comprehensive income, net of deferred tax
(see note 16).
Annual Report and Financial Statements 2019 221
Provident Financial plc
Financial statements 28 Other reserves continued
Company
At 1 January 2018
Non-
distributable
reserve
£m
37.9
Transactions with owners:
• proceeds from rights issue (note 26)
• share-based payment charge (note 27)
• transfer of share-based payment reserve on vesting of share awards
• share-based payment movement in investment in subsidiaries
• transfer of non-distributable reserve following write down of investment in
—
—
—
—
Merger
reserve
£m
2.3
278.2
—
—
—
subsidiaries (note 14)
At 31 December 2018
At 1 January 2019
Transactions with owners:
• share-based payment charge (note 27)
• transfer of share-based payment reserve on vesting of share awards
• share-based payment movement in investment in subsidiaries
At 31 December 2019
(37.9)
—
—
—
—
—
—
—
280.5
280.5
—
—
—
280.5
Capital
redemption
reserve
£m
Share-based
payment
reserve
£m
Total
other
reserves
£m
3.6
7.3
51.1
—
—
—
—
—
3.6
3.6
—
—
—
3.6
—
0.4
(1.0)
(0.4)
—
6.3
6.3
1.3
(1.0)
0.1
6.7
278.2
0.4
(1.0)
(0.4)
(37.9)
290.4
290.4
1.3
(1.0)
0.1
290.8
The non-distributable reserve arose on the sale of Provident Personal Credit Limited (PPC) by the Company to Provident Financial Management Services
Limited (PFMSL) in 2000. The transaction enabled PFMSL to be established as a central service function for its subsidiaries PPC and Greenwood Personal
Credit Limited and ensured that the entities forming CCD were consolidated into one sub-group which more accurately reflected the Group’s structure.
The original gain on sale of £809.2m was recognised as a non-distributable reserve as the consideration provided by PFMSL comprised cash funded
by the issue of debt and shares by PFMSL to the Company. The debt was refinanced in 2004 with a new £638m term loan from the Company. £200m
of the original gain was made distributable in 2005 following the settlement in cash of £200m of the £638m loan by PFMSL.
Following the significant losses incurred in CCD during 2017, a full review was undertaken of the Company’s investment in PFMSL and the intercompany
loans of £438m and £200m provided to PFMSL and PPC respectively. As a result of this review, the Company released PFMSL and PPC from their
obligations under the intercompany loans and impairment charges of £644.8m were taken to the Company’s income statement in 2017. £571.3m
of the non-distributable reserve was transferred to retained earnings to offset these impairment charges (see note 14). The remaining £73.5m of
impairment charges was not matched with a transfer from the non-distributable reserve as this amount represented the Company’s original cost of
investment in PPC. During 2018 a further £62.2m was recognised as impairment in PPC, of which £37.9m was reflected against the non-distributable
reserve and £24.3m against retained earnings.
The rights issue was undertaken through a cash box structure which allowed merger relief to be applied to the issue of shares rather than recording
share premium and thereby creating distributable reserves for the Company where capital is not injected in Vanquis Bank. The net proceeds of the
rights issue of £300m was recorded as an increase in share capital and the creation of a merger reserve. £50m of the capital raised was injected into
Vanquis Bank with the remaining £250m retained in the Company.
For the purposes of declaring dividends distributable reserves include: (i) retained earnings, adjusted to reflect the unrealised gain on the retirement
benefit asset; (ii) share-based payment reserve, net of deferred tax and the IFRIC 11 adjustment; (iii) merger reserve; and (iv) treasury share reserve.
The distributable reserves do not include distributable reserves held within subsidiary companies.
29 Related party transactions
The Company recharges the pension scheme referred to in note 19 with a proportion of the costs of administration and professional
fees incurred by the Company. The total amount recharged during the year was £0.5m (2018: £0.5m) and the amount payable to the
pension scheme at 31 December 2019 was £nil (2018: £nil).
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
Moneybarn
CCD
Other central companies
2019
2018
Management
recharge
£m
Interest
credit
£m
Outstanding
balance
£m
Management
recharge
£m
Interest
credit
£m
Outstanding
balance
£m
5.2
2.4
8.8
—
—
(28.3)
(9.2)
—
8.3
488.0
324.1
97.4
4.3
2.0
8.5
—
(6.6)
(21.9)
(15.4)
—
2.1
405.8
364.4
98.8
Total related party transactions
16.4
(37.5)
917.8
14.8
(43.9)
871.1
The outstanding balance represents the gross intercompany balance receivable by the Company, against which a provision
of £121.4m (2018: £122.9m) is held.
222
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 29 Related party transactions continued
In 2016, Vanquis Bank and the PRA agreed a voluntary requirement for Vanquis Bank not to pay dividends to, or enter into certain
transactions outside the normal course of business with, the Provident Financial Group without the PRA’s consent. The voluntary requirement
remains in place. With the consent of the PRA, Vanquis Bank approved and paid a £59.8m dividend in March 2019 and approved and
paid a dividend of £80.0m in September 2019. Subsequent to the year end, a further dividend of £80.0m was approved and paid in
February 2020.
There are no transactions with directors other than those disclosed in the Directors’ Remuneration Report.
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.
(a) Challenge to self-employed status of UK home credit agents
It is understood from discussions with HMRC that they have commenced an industry-wide review of the self-employed status of agents.
In July 2017, the Group changed its home credit operating model in the UK from a self-employed agent model to an employed workforce
to take direct control of all aspects of the customer relationship. Policies and procedures were in place up to the transition to the new
operating model to ensure that the relationship between the business and the agents it engaged were such that self-employed status
was maintained. Compliance with policies was routinely evidenced and tested. To date, the Group has successfully defended claims
and challenges against the historic employment status of the Group’s UK home credit agents although there can be no guarantee
that this will also be the case with future claims and challenges.
The Group’s discussions with HMRC, which are focusing on the period from when the FCA took over responsibility for the regulation
of consumer credit in April 2014 to the change of operating model in July 2017, remain in the initial fact-finding stages. The Group is
working positively and collaboratively with HMRC who have indicated that the review could continue for another year.
Were the Group to be unsuccessful in defending the historic self-employed position of agents, it may be required to pay additional
taxes, in particular employer’s national insurance contributions, on the approximate £80m per annum commission it paid to agents in
the UK for the years concerned. As discussions with HMRC remain in the preliminary stages and the Group does not know the amounts
of tax and national insurance contributions paid by agents through self-assessment which are available for offset, it is difficult to
calculate an accurate liability should the Group be unsuccessful in defending the position.
The Group has worked with HMRC over many years to manage employment status risk and it remains confident that agents were
self-employed as a matter of law throughout their engagement by the home credit business.
(b) Irresponsible lending complaints and the Financial Ombudsman Service (FOS)
There continues to be heightened claims management company activity around non-standard lending sectors, particularly in respect
of irresponsible lending in high-cost credit and more recently in home credit. As a result, CCD has seen an increase in the number
and cost of such complaints and an increase in referrals to the FOS, particularly in the first half of 2019. CCD continues to robustly
defend inappropriate or unsubstantiated claims and is working closely with the FOS in this regard. Complaints of irresponsible lending
and referrals to the FOS stabilised during the second half of 2019.
CCD incurs the cost of settling complaints as part of its normal business as usual activity. However, were the Group to be unsuccessful
in defending certain irresponsible lending complaints referred to above, it may lead to a material increase in the cost of settling such
complaints. It is not possible to calculate the aggregated increased cost of such a scenario.
(c) Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is subject to other complaints and threatened or actual legal
proceedings (including class or group action claims) brought by or on behalf of current or former employees, agents, customers,
investors or other third parties, as well as legal and regulatory reviews, challenges, investigations and enforcement actions, both in the
UK and overseas. All such material matters are periodically reassessed, with the assistance of external professional advisors where
appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely
than not that a payment will be made, a provision is established to management’s best estimate of the amount required at the relevant
balance sheet date. In some cases it will not be possible to form a view, for example because the facts are unclear or because further
time is needed properly to assess the merits of the case, and no provisions are held in relation to such matters. However, the Group
does not currently expect the final outcome of any such case to have a material adverse effect on its financial position, operations
or cash flows.
Annual Report and Financial Statements 2019 223
Provident Financial plc
Financial statements 31 Reconciliation of profit/(loss) after taxation to cash generated from/(used in) operations
Group
Company
Profit/(loss) after taxation
Adjusted for:
• tax charge/(credit)
• finance costs
• exceptional premium and fees paid on refinancing of senior bonds
• finance income
• dividends received
• share-based payment charge
• retirement benefit (credit)/charge prior to exceptional pension
(credit)/charge
• exceptional pension (credit)/charge
• amortisation of intangible assets
• exceptional impairment of intangible assets
• depreciation of property, plant and equipment and right of use assets
• exceptional impairment on property, plant and equipment
•
loss/(profit) on disposal of property, plant and equipment
• exceptional release of provisions
•
Changes in operating assets and liabilities:
• amounts receivable from customers
• trade and other receivables
• trade and other payables
• provisions
• contributions into the retirement benefit scheme
increase of impairment provision against investment in subsidiaries
Cash generated from/(used in) operations
Note
5
3
3
29
27
19
19
11
1
12
12
12
25
14
25
19
2019
£m
84.4
44.4
72.0
—
—
—
1.9
(0.7)
(0.5)
16.4
1.9
24.6
—
2.2
(16.8)
—
(8.6)
(3.5)
(2.5)
(21.9)
(2.6)
190.7
2018
(restated)
£m
65.3
32.0
73.2
18.5
—
—
1.1
0.2
6.3
19.2
12.8
9.1
1.0
—
—
—
(91.7)
(1.9)
(5.9)
(62.2)
(9.8)
67.2
2019
£m
47.1
0.6
40.9
—
(51.7)
(139.8)
1.3
(3.1)
(0.5)
—
—
4.1
—
(0.2)
—
74.6
—
(67.1)
13.8
—
(0.2)
(80.2)
2018
£m
(62.2)
(1.2)
43.8
18.5
(51.4)
—
0.4
(9.0)
6.3
—
—
1.6
—
—
—
62.2
—
(79.5)
(10.4)
—
(0.6)
(81.5)
The movements in amounts receivable from customers of £8.6m (2018: £91.7m) includes the non-cash movement in the impairment
provision of £189.0m (2018: £151.0m).
Group
Cash movement in amounts receivable from customers
Non-cash provision movement – allowance account
Net movement in amounts receivable from customers
2019
£m
180.4
(189.1)
2018
£m
(253.5)
161.8
(8.6)
(91.7)
The table below details changes in the Group and Company’s liabilities arising from financing activities, including both cash and
non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be,
classified in the cash flow statement as cash flows from financing activities.
Cash changes
Non-cash changes
2019
1 January
2019
£m
Financing
cash flows
£m
Lease
payments
£m
Amortised
fees
£m
Interest
paid
£m
(2,055.5)
(89.0)
(2,144.5)
91.4
—
91.4
—
15.8
15.8
(2.1)
—
(2.1)
(1.5)
(2.3)
(3.8)
2018
Included
within
overdrafts
£m
Lease
additions
and
disposals
£m
31 December
2019
£m
4.2
—
4.2
— (1,963.5)
(78.3)
(2.8)
(2.8)
(2,041.8)
Cash changes
Non-cash changes
1 January
2018
£m
Financing
cash flows
£m
(2,193.0)
148.2
(2,193.0)
148.2
Amortised
fees
£m
(3.0)
(3.0)
Interest
paid
£m
(3.8)
(3.8)
Included
within
overdrafts
£m
31 December
2018
£m
(3.9)
(2,055.5)
(3.9)
(2,055.5)
Group
Total borrowings (note 22)
Lease liabilities (note 24)
Total
Group
Total borrowings (note 22)
Total
224
Provident Financial plc
Annual Report and Financial Statements 2019
NOTES TO THE FINANCIAL STATEMENTS CONTINUED 31 Reconciliation of profit/(loss) after taxation to cash generated from/(used in) operations continued
Company
Total borrowings (note 22)
Lease liabilities (note 24)
Total
Company
Total borrowings (note 22)
Total
Cash changes
Non-cash changes
2019
1 January
2019
£m
Financing
cash flows
£m
Lease
payments
£m
Amortised
fees
£m
Interest
paid
£m
Included
within
overdrafts
£m
31 December
2019
£m
(621.1)
(27.1)
(648.2)
3.5
—
3.5
—
2.7
2.7
0.8
(0.5)
0.3
3.4
—
3.4
(616.3)
(24.9)
(641.2)
(2.9)
—
(2.9)
2018
Cash changes
Non-cash changes
1 January
2018
£m
Financing
cash flows
£m
(889.2)
271.0
(889.2)
271.0
Amortised
fees
£m
(3.0)
(3.0)
Interest
paid
£m
4.0
4.0
Included
within
overdrafts
£m
31 December
2018
£m
(3.9)
(3.9)
(621.1)
(621.1)
32 Post balance sheet events
The Group successfully signed a bilateral securitisation facility with NatWest Markets to fund Moneybarn business flows on
14 January 2020. The new facility provides up to £100m of initial funding and is anticipated to grow to £275m over the next 18 months.
As a part of obtaining consent for the securitisation from the Group’s existing lenders, the Group’s revolving syndicated credit facility
has reduced from £235m to £211m and the Group early repaid the remaining M&G loan facility of £25m on 14 February 2020.
33 Details of subsidiary undertakings
The subsidiary undertakings of the Group at 31 December 2019 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 name
Registered at 1 Godwin Street, Bradford BD1 2SU:
Vanquis Bank Limited
Provident Financial Management Services Limited
Provident Personal Credit Limited*
Greenwood Personal Credit Limited*
N&N Simple Financial Solution Limited
Cheque Exchange Limited*
Provident Investments Limited
Direct Auto Finance Insurance Services Limited
Direct Auto Finance Limited
Direct Auto Financial Services Limited
Provfin Limited*
Provident Limited
Provident Print Limited
Provident Yes Car Credit Limited
Yes Car Credit (Holdings) Limited
Yes Car Credit Limited
Aquis Cards Limited
Ellaf Limited
Envoyhead Limited
HT Greenwood Limited*
Peoples Motor Finance Limited
Policyline Limited
Provfin Investments Limited
Provident Family Finance Limited
Provident Financial Group Limited
Provident Financial Trustees (Performance Share Plan)
Limited
Provident Home Shopping Limited
The Provident Clothing and Supply Company Limited
Company
number
2558509
328933
146091
125150
3803565
2927947
4541509
3834656
3412137
3444409
1879771
575965
2211204
4253314
194214
3459042
7036307
1858423
1910002
954387
1078365
1294141
953919
912244
642504
4625062
543498
509371
* Companies whose immediate parent is not Provident Financial plc.
Company name
Company
number
Registered at Athena House, Bedford Road, Petersfield,
Hampshire GU32 3LJ:
Moneybarn No.1 Limited*
Duncton Group Limited
Moneybarn Group Limited*
Moneybarn Limited*
Moneybarn No. 4 Limited*
4496573
6308608
4525773
2766324
8582214
Registered at Suite 2/04 King James VI Business Centre,
Friarton Road, Perth, Scotland PH2 8DY:
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
Lawson Fisher Limited
SC122077
SC125164
SC129388
SC118423
SC127062
SC127489
SC127807
SC118257
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SC122181
SC129378
SC004758
Registered at 13 Castle Street, St. Helier, Jersey,
Channel Islands JE4 5UT:
Erringham Holdings Limited
39894
Moneybarn Financing Limited (company number: 12323134) was
incorporated in the UK on 19 November 2019 to act as a vehicle to allow
the securitisation of the Moneybarn customer receivables. Its registered
address is Fifth Floor, 100 Wood Street, London EC2V 7EX. The company
is not a subsidiary of Provident Financial plc but will form part of the
consolidated Group due to meeting the requirements of IFRS 10
‘Consolidated Financial Statements’.
Annual Report and Financial Statements 2019 225
Provident Financial plc
Financial statements I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F P R O V I D E N T F I N A N C I A L P L C
Report on the audit of the financial statements
Opinion
In our opinion:
• the statement of accounting policies; and
• the related notes 1 to 33.
• the financial statements of Provident Financial plc (the Company)
and its subsidiaries (the Group) give a true and fair view of
the state of the Group’s and of the Company’s affairs as at
31 December 2019 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 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.
We have audited the financial statements of Provident Financial plc
(the Company) and its subsidiaries (the Group) which comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated and Company balance sheets;
• the consolidated and Company statements of changes in equity;
• the consolidated and Company cash flow statements;
Summary of our audit approach
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.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in
the auditor’s responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group and the Company in accordance
with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting
Council’s (FRC’s) Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We confirm that the
non-audit services prohibited by the FRC’s Ethical Standard were
not provided to the Group or the parent company.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Key audit matters
The key audit matters that we identified in the current year were:
• Provision for impairment losses against loans and receivables in the Vanquis Bank, Home Credit Division
and Moneybarn.
• Provision for Repayment Option Plan forward flow (ROP) in Vanquis Bank.
• Revenue recognition in Vanquis Bank and Home Credit Division.
• Valuation of the defined benefit scheme.
• Carrying value of the parent company’s investment in the Consumer Credit Division (CCD).
Within this report, any new key audit matters are identified with
are the same as the prior year identified with
.
and any key audit matters which
The materiality that we used for the Group financial statements was £8.1m which was determined on the
basis of 5% of the profit before tax and exceptional items.
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.
There were changes in the key audit matters identified, as discussed further in the key audit matters section below.
In 2017 and 2018 we determined materiality based on a three-year average profit before tax and exceptional items
benchmark due to the fact that the Group had made losses in 2017. We have revised our benchmark from the prior
year to reflect the fact that the Group’s profitability is now more stable and the Group’s recovery is largely complete.
We therefore consider it appropriate to return to a measure based on current year profit before tax and exceptional items.
Additionally, we have increased our benchmark for materiality from 4.5% on three-year average profit before tax
and exceptional items, to 5%, of profit before tax and exceptional items, for the current year.
Materiality
Scoping
Significant
changes in our
approach
226
Provident Financial plc
Annual Report and Financial Statements 2019
We confirm that we have
nothing material to report, add
or draw attention to in respect
of these matters.
We confirm that we have
nothing material to report, add
or draw attention to in respect
of these matters.
Conclusions relating to going concern, principal risks and viability statement
Going concern
Principal risks
and viability
statement
We have reviewed the directors’ statement in the statement of accounting
policies in 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.
We considered as part of our risk assessment the nature of the Company,
its business model and related risks including where relevant the impact of
Brexit, the requirements of the applicable financial reporting framework
and the system of internal control. We evaluated the directors’ assessment
of the Company’s ability to continue as a going concern, including
challenging the underlying data and key assumptions used to make
the assessment, and evaluated the directors’ plans for future actions
in relation to their going concern assessment.
We are required to state whether we have anything material to add or
draw attention to in relation to that statement required by Listing Rule
9.8.6R(3) and report if the statement is materially inconsistent with our
knowledge obtained in the audit.
Based solely on reading the directors’ statements and considering
whether they were consistent with the knowledge we obtained in the
course of the audit, including the knowledge obtained in the evaluation of
the directors’ assessment of the Company’s ability to continue as a going
concern, we are required to state whether we have anything material to
add or draw attention to in relation to:
• the disclosures on pages 42 to 53 that describe the principal risks,
procedures to identify emerging risks, and an explanation of how these
are being managed or mitigated;
• the directors’ confirmation on page 144 that they have carried out
a robust assessment of the principal and emerging risks facing the
Company, including those that would threaten its business model,
future performance, solvency or liquidity; or
• the directors’ explanation on page 64 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 are also required to report whether the directors’ statement relating
to the prospects of the Company required by Listing Rule 9.8.6R (3)
is materially inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
Changes to key audit matters identified, compared with the previous audit
Following receipt of the FCA’s final notice in February 2020, we no longer consider the investigation into Moneybarn’s affordability,
forbearance and termination options a key audit matter as the fine is consistent with the amount provided for in the balance sheet.
The ROP refund programme was completed in early 2019 and therefore our key audit matter is now focused on the key assumptions
driving the valuation of the ROP forward flow provision.
Annual Report and Financial Statements 2019 227
Provident Financial plc
Financial statements I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F P R O V I D E N T F I N A N C I A L P L C
C O N T I N U E D
Key audit matters continued
Changes to key audit matters identified, compared with the previous audit continued
Impairment indicators have been identified in relation to the valuation of CCD as a result of the poor trading since the implementation
of the employed operating model in 2017. The estimated recoverable amount of these balances is subjective due to the need for
management judgement being applied in forecasting and discounting future cash flows which form the basis of the value in use
calculation. We have therefore identified a key audit matter in relation to the carrying value of CCD in the Company’s balance sheet.
Provision for impairment losses against loans and receivables (Vanquis Bank, Home Credit Division and Moneybarn)
Key audit matter
description
The IFRS 9 provision for impairment losses is calculated by modelling portfolios of receivables within the
Group. The assessment of the Group’s calculation of provisions is complex and requires management to
make significant judgements regarding the level and timing of expected future cash flows to calculate
expected credit losses. There is further judgement involved in assessing whether the model applied and
any adjustments capture all relevant factors that have a significant influence on expected credit losses.
Due to the potential for management to introduce inappropriate bias to judgements made in the estimation
process, we have determined that there was a potential for fraud through possible manipulation of
provisions for loan impairment.
The Group’s provision for impairment against loans and receivables is £871.2m (restated 2018: £1,060.2m).
Further detail in respect of these is set out on pages 179 and 183 and in note 15 of the financial statements
and also within the strategic reporting section. The restatement in the previous year pertains to the change
in accounting policy for the treatment of deferred acquisition costs in Vanquis Bank (see the revenue
recognition key audit matter for further details).
Within Vanquis Bank modelling techniques are applied by management to estimate the provision for
expected credit losses on credit card receivables. The total provision amounted to £432.0m (2018: £498.0m).
The underlying models and calculation techniques are complex and make use of significant amounts of data
from a variety of sources.
The expected credit loss estimate is driven by account-specific estimation of probability of default (PD)
and loss given default (LGD) which represent the key areas of judgement.
Historical payment patterns are generated using data extracted from the Company’s Data Warehouse. The
extracted data are then used to calibrate the developed models, i.e. to update the coefficients in the PD model
formulae and update the collection curves used to derive LGDs in line with the most recent historical data on
portfolio performance. The updated models are then used to estimate account-specific PDs and LGDs. Inappropriate
calibration of the models could materially affect the provision for expected credit losses.
Multiple possible macroeconomic scenarios have been considered and their estimated outcomes have
been probability weighted to calculate the provision for expected credit losses.
Within the Home Credit Division receivables are valued using collections curves to estimate the expected
future losses on cohorts of loans exhibiting similar risk characteristics including the customer’s internal
credit score, the number of missed payments in the previous 12 weeks, and whether the customer has
previously had a Provident home credit loan. Management therefore performs a curve test in order to
quantify and recognise the associated provision shortfall.
The collections curves used for the purposes of management’s curve test are constructed based on recent
collections data (four weeks post year end) and the net credit receivable generated by the curve test is materially
sensitive to changes in collections data. We have therefore identified a significant risk that the recent collections
data used in the curve test calculations may not be complete and/or accurate.
Within Moneybarn management uses SQL scripts to extract historical default and collections data,
which are then used to manually create PD and LGD models using fitting curves, within Excel spreadsheets.
Multiple possible macroeconomic scenarios have also been considered by the Company and their
estimated outcomes have been probability weighted to calculate the provision for expected credit losses.
The LGD is the most sensitive assumption within the ECL model and, based on our wider knowledge
of market reports discussing the reduction in used car values, we identified a significant risk in relation
to the valuation of the underlying collateral impacting the LGD assumptions.
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Provident Financial plc
Annual Report and Financial Statements 2019
Key audit matters continued
Provision for impairment losses against loans and receivables (Vanquis Bank, Home Credit Division and Moneybarn)
continued
How the scope
of our audit
responded to the
key audit matter
Controls procedures
Within Vanquis Bank we obtained an understanding of relevant controls relating to calibration of the
expected credit loss models and the identification, valuation and recording of impairment provisions.
Within the Home Credit Division we obtained an understanding and tested the operating effectiveness of
relevant controls relating to calibration of the expected credit loss models and the identification, valuation
and recording of impairment provisions. This included using our IT specialists to test the data flow of loans
made and collections received from source systems to the automated IFRS 9 model scripts to test their
completeness and accuracy.
Within Moneybarn we obtained an understanding of the relevant controls relating to calibration of the
expected credit loss models and the identification, valuation and recording of impairment provisions.
Substantive procedures
Across each of the three divisions we obtained an understanding of the IFRS 9 methodology and models.
We evaluated whether the methodology applied by management is compliant with requirements of IFRS 9.
This included considerations related to the appropriateness of portfolio segmentation into homogeneous
cohorts. In performing these procedures we further considered whether there were any indications of bias
in the methodology applied by management or in the estimation of the amount and timing of expected
future cash flows. We also challenged whether the potential impact of economic uncertainty surrounding
the UK has been appropriately incorporated into expected credit loss calculations.
We tested completeness of post-model adjustments by understanding the deficiencies in model
methodologies and in the data used in the models and evaluating whether a material post-model
adjustment is required to address them.
Within Vanquis Bank we obtained an understanding of the IFRS 9 methodology and models with a focus on
including PD and LGD. We evaluated whether the methodology applied by management is compliant with
the requirements of IFRS 9. In performing these procedures we further considered whether there were any
indications of bias in the methodology applied by the management.
For each material change to the models introduced by management in 2019 we understood and challenged
the rationale and substantively tested how management has implemented them. We evaluated whether the
changes are compliant with the financial reporting requirements and lead to a more accurate ECL estimate.
We evaluated the methodology and the mechanics of the models with assistance of Deloitte credit modelling
specialists. As part of this, we evaluated the methodology for identification of significant increase in credit
risk and how it was implemented in the mechanics of the models.
We obtained, evaluated and tested the model performance monitoring reports produced by management
which compare observed default data to parameters predicted by the models.
We tested the data used in the models including historical data used to generate expected future cash
flows, the current portfolio data and the macroeconomic forecast data which is sourced by the Company
from a third-party provider. This included considerations related to whether the macroeconomic forecasts
are reflective of risks associated with Brexit.
Within the Home Credit Division we utilised our data specialists to independently reperform the expected
credit loss calculation for the entire population of loans using the fixed 2016 collections curves. We tested
management’s calculation of the provision shortfall on loans which are performing below 2016 levels.
We engaged our data specialists to test the completeness and accuracy of the data used in the provision
shortfall calculations, and we reviewed and challenged the underlying methodology.
Within Moneybarn we obtained an understanding of the IFRS 9 methodology and models (including PD and
LGD). We evaluated whether the methodology applied by management is compliant with the requirements
of IFRS 9. In performing these procedures we further considered whether there were any indications of bias
in the methodology applied by the Company and used market reports to challenge management on the
modelling approach adopted for the LGD assumptions specifically.
We tested the data used in the models including historical data used to generate expected future cash
flows, the current portfolio data and the macroeconomic forecast data. In addition we engaged internal data
specialists to evaluate the SQL scripts used for PD and LGD data extraction via a script translation, as well as
a re-performance, using the previously verified data used in the models.
We challenged whether there was any evidence to suggest that historical collections data would not appropriately
estimate future performance by considering changes in the composition and credit risk profile of the loan
book, using internal management information. In addition we performed back testing on a sample of used
car sales to validate model expectations versus recent actual experience.
Annual Report and Financial Statements 2019 229
Provident Financial plc
Financial statements I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F P R O V I D E N T F I N A N C I A L P L C
C O N T I N U E D
Key audit matters continued
Provision for impairment losses against loans and receivables (Vanquis Bank, Home Credit Division and Moneybarn)
continued
Key observations
Based on our substantive testing in Vanquis Bank we found that:
• the methodology used is compliant with the requirements of IFRS 9;
• the provision model calculations were found to be executed as intended and in compliance
with the methodology; and
• the data used in the models were found to be appropriate.
As a result, we concluded that the provision for expected credit losses is appropriate.
We found the Home Credit Division and Moneybarn provision calculated by management to be appropriate.
The provision models across the Group were found to be working as intended and the methodologies used
are compliant with the requirements of IFRS 9.
Provision for Repayment Option Plan forward flow (Vanquis Bank)
Key audit matter
description
On 27 February 2018, the Company reached a settlement with the Financial Conduct Authority (FCA) in
respect of the FCA’s investigation into the ROP product sold by the bank. The customer redress programme
started in 2018 and was completed in early 2019.
Whilst the proactive redress programme has been completed, Vanquis Bank continues to receive customer
complaints in relation to ROP, which are considered on a case by case basis. Correspondingly, significant
management judgement is required to assess the level of provision in relation to the redress expected
to be paid on such complaints.
The ROP provision is an area of management judgement where there is a risk of fraud due to the ability
of management to introduce inappropriate bias to judgements made in the estimation process.
The accounting policies in relation to the valuation of the provision and key sources of estimation
uncertainty associated with the provision are discussed on page 182. As disclosed in note 25 on page 217
and the Strategic Report, the total provision remaining at 31 December 2019 amounts to £11.7m (2018: £45.7m).
How the scope
of our audit
responded to the
key audit matter
In order to understand whether key assumptions in estimation of the provision remain appropriate we
obtained and reviewed the correspondence between the Company and the regulator in relation to ROP.
We have reviewed and tested the accuracy of the calculations supporting the valuation of the provision
recognised by management. We have evaluated whether the underlying assumptions are reasonable
and supportable. We have tested the data used in the calculations by agreeing to supporting evidence.
Additionally we substantively tested the amount of refunds that have been paid out during 2019.
We further independently developed a reasonable range for the provision based on alternative forecasts
of future complaints to evaluate Vanquis Bank’s estimate.
We evaluated whether the provision disclosures contained within note 25 were appropriate and in accordance
with the requirements of IAS 37.
Key observations
The valuation of the ROP forward flow provision was found to be appropriate.
The disclosures are in line with the requirements of IAS 37.
230
Provident Financial plc
Annual Report and Financial Statements 2019
Key audit matters continued
Revenue recognition (Vanquis Bank and Home Credit Division)
Key audit matter
description
The Group’s revenue is £998.3m (restated 2018: £1,091.4m) and further detail in respect of the accounting
policies and revenue recognised is set out in the accounting policies on pages 176 and 177 and note 2
of the financial statements.
How the scope
of our audit
responded to the
key audit matter
Within Vanquis Bank we concluded that manual adjustments posted to revenue pose a significant risk of
material misstatement.
These manual adjustments are necessary to ensure revenue is recognised in compliance with IFRS 9, which
requires that interest should be accrued using the original effective interest rate applied to the net carrying
value of the asset for credit impaired assets and to the gross carrying value of assets that are not in default.
The loan administration system accrues revenue on a gross contractually billed basis, and therefore a
manual adjustment is necessary for such assets.
During 2019 management introduced an additional manual adjustment to revenue related to deferred certain
customer acquisition costs. Respective costs incurred are capitalised and amortised over the life of the
credit card. Vanquis Bank has voluntarily changed the respective accounting policy and the 2018 comparative
information in the financial statements was restated in line with the requirements of IAS 8, which resulted
in a £6.6m increase in 2018 profit before tax.
Further information on the change in the accounting policy and the corresponding impact is disclosed on
pages 176 and 177 and note 2 of the financial statements.
The recognition of revenue in Home Credit Division is calculated using models based on SQL scripts. The
calculation of interest revenue is heavily dependent on the completeness and accuracy of the flow of data
from the Customer Experience Managers’ (CEMs’) applications in the field, through to the core IFRS 9 models.
Controls procedures
We obtained an understanding of the controls over the manual adjustments to revenue recognised by
management within Vanquis Bank.
We engaged our IT specialists to test the completeness and accuracy of data flows across relevant system
interfaces from the CEMs’ field applications into the core business databases within the Home Credit Division.
We obtained an understanding and tested the operating effectiveness of management’s reconciliation
controls over the completeness and accuracy of the flow of data through to the core IFRS 9 models.
Substantive procedures
Within Vanquis Bank, we assessed the methodology used to calculate the manual adjustments to interest income
against the IFRS 9 requirements. With the involvement of our data specialists we reviewed the programming
code used to perform the EIR calculation and evaluate whether it is performed in line with the methodology.
We assessed the revised accounting policy on the accounting treatment of customer acquisition costs for
compliance with IFRS 9. We substantively tested the calculations of the impact on the 2019 and 2018
financial statements.
We assessed the results of our procedures for any indications of fraud or management bias.
Within the Home Credit Division, we have assessed the revenue recognition policy against IFRS 9
requirements. We have challenged the appropriateness of the effective interest rates used to calculate
revenue and reperformed the EIR calculations for a sample of products.
We utilised internal data specialists to create an independent IFRS 9 revenue model and recalculated
the weekly revenue for a sample of customers.
Key observations Within Vanquis Bank we concluded that the revenue recognised is appropriate based on the substantive
testing performed.
Within the Home Credit Division we found the models to be working as intended and the underlying
assumptions to be reasonable. From the evidence we obtained, the underlying data used was found to be
complete and accurate.
The revised accounting policy on customer acquisition costs was found to be appropriate. The disclosures
of the change in accounting policy and the restatement are in line with the requirements of IAS 8.
Provident Financial plc
Annual Report and Financial Statements 2019
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Financial statements I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F P R O V I D E N T F I N A N C I A L P L C
C O N T I N U E D
Key audit matters continued
Valuation of the defined benefit scheme
Key audit matter
description
Under IAS 19, the value of the defined benefit pension scheme is recognised on the Group’s balance sheet,
reflecting an actuarial valuation of the assets and liabilities of the scheme at the balance sheet date. We identified
the key risk of material misstatement as the valuation of the pension obligation of £764.6m (2018: £704.4m).
This valuation involves judgements in relation to inflation, discount and mortality rates. The most critical
element identified was the discount rate assumption as set out in the sensitivity analysis in note 19.
Further detail in respect of these assumptions is set out in the accounting policies on page 180, page 182
and note 19 of the financial statements.
How the scope
of our audit
responded to the
key audit matter
We obtained an understanding of the review of management’s assumptions used in the valuation
of the defined benefit scheme.
We used internal actuarial specialists to assist us in evaluating the appropriateness of the principal actuarial
assumptions used in the calculation of the retirement benefit obligation. This involved benchmarking
management’s assumptions against those used by a range of organisations as at 31 December 2019
and considering the consistency of those judgements compared to the prior year.
Key observations
All assumptions, including the discount rate adopted by management, are within what we considered
to be an acceptable range.
Carrying value of the parent company’s investment in CCD
Key audit matter
description
The Company’s total exposure to CCD is £443.1m and comprises investment in equity shares and intercompany
balances. There are indicators of impairment identified as a result of the trading performance following the
implementation of the employed operating model in 2017.
How the scope
of our audit
responded to the
key audit matter
The estimated recoverable amount of these balances is subjective due to inherent uncertainty in forecasting
future cash flows and judgements required in determining an appropriate discount rate and terminal growth
rate for the purposes of the value in use calculation. We have therefore identified a key audit matter in
relation to the valuation of the investment in the subsidiary.
The impairment charge recognised in the income statement for the period ending 31 December 2019 is £74.7m
(2018: £62.2m), as disclosed in note 14 on page 197 and the Strategic Report.
Controls procedures
We obtained an understanding of the key control relating to the review of the key assumptions used in the
value in use calculation.
Substantive procedures
We critically assessed the assumptions underpinning the valuation of the CCD business including the discount rate,
terminal growth rate and the forecast future cash flows. We evaluated management’s valuation methodology
against the requirements of IAS 36 and engaged internal valuation specialists to challenge the discount
rate assumption.
We evaluated the methodology used to determine value in use and tested the accuracy of the
underlying calculation.
Key observations We did not identify any issues in relation to key assumptions including the discount rate, the terminal growth
rate and the forecast future cash flows and concur with management’s valuation of the CCD business.
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Annual Report and Financial Statements 2019
Our application of materiality
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.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company financial statements
Materiality
£8.1m (2018: £8.6m)
£6.5m (2018: £5.4m)
Basis for
determining
materiality
Rationale for
the benchmark
applied
5% of profit before tax and exceptional items
(2018: 4.5% profit before tax and exceptional items
averaged over the previous three years).
5% of profit before tax and exceptional items
(2018: 0.75% of net assets).
Profit-based measures are the financial measures
most relevant to users of the financial statements.
We considered the most relevant basis for materiality
to be the profits earned from continuing business
operations and have therefore excluded the
exceptional items as identified by management
in note 1 to the financial statements.
Profit-based measures are the financial measures
most relevant to users of the financial statements.
We considered the most relevant basis for materiality
to be the profits earned from continuing business
operations and have therefore excluded the exceptional
items as identified by management in note 1 to the
financial statements.
In 2017 and 2018 we calculated materiality based on
a three-year average profit before tax and exceptional
items benchmark due to the fact the Group made
losses in 2017. We have revised our benchmark from
the prior year to reflect the fact that the Group’s
profitability is now more stable and the Group’s
recovery is largely complete. We therefore consider
it appropriate to return to a measure based on
current year profit before tax and exceptional items.
In the prior year materiality was calculated as 0.75%
of net assets due to the entity making a loss. In the
current year we have returned to a profit-based
measure as this remains the financial measure most
relevant to the users of the financial statements.
Additionally, we have increased our benchmark for
materiality from 4.5% on three-year average profit
before tax and exceptional items to 5% of profit
before tax and exceptional items. This is due to the
reduced risk in the current year in comparison to
the prior year owing to the recapitalisation through
syndicated financing and reduced uncertainty
surrounding the conduct provisions and
HCD performance.
PBT £162.6m
£0.20m95+5+I
Group materiality
£8.1m
Component
materiality range
£7.30m to £0.03m
Audit Committee
reporting threshold
PBT
Group materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 70% of Group
materiality for the 2019 audit (2018: 70%). In determining performance materiality, we considered the quality of the control environment
and whether we were able to rely on controls, nature of the balance and the level of audit adjustments identified in the prior period.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.2m (2018: £0.2m),
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.
Annual Report and Financial Statements 2019 233
Provident Financial plc
Financial statements I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F P R O V I D E N T F I N A N C I A L P L C
C O N T I N U E D
An overview of the scope of our audit
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. Moneybarn
and the Consumer Credit Division are audited by separate
engagement teams led by the Group audit partner; Vanquis Bank
is audited by a separate component team, under the supervision
of the Group team which has maintained regular communication
throughout the audit.
Other information
The directors are responsible for the other information. The other
information comprises the information included in the annual
report including the Strategic Report, the Governance section
and the Directors’ Remuneration Report, other than the financial
statements and our Auditor’s Report thereon.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report
to you as uncorrected material misstatements of the other
information include where we conclude that:
• Fair, balanced and understandable – the statement given by
the directors that they consider the Annual Report and financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to
assess the Company’s position and performance, business
model and strategy, is materially inconsistent with our
knowledge obtained in the audit; or
• Audit Committee reporting – the section describing the work
of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate
Governance Code – the parts of the directors’ statement
required under the Listing Rules relating to the Company’s
compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor
in accordance with Listing Rule 9.8.10R(2) do not properly
disclose a departure from a relevant provision of the UK
Corporate Governance Code.
We have nothing to report in respect of these matters.
Responsibilities of directors
As explained more fully in the Directors’ Responsibilities
Statement, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a
true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Company’s ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless
the directors either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit
of the financial statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis
of these financial statements.
Details of the extent to which the audit was considered capable
of detecting irregularities, including fraud and non-compliance
with regulations are set out below.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council’s website at: www.frc.org.uk/auditorsresponsibilities.
This description forms part of our Auditor’s Report.
Extent to which the audit was considered capable
of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, and then
design and perform audit procedures responsive to those risks,
including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.
Identifying and assessing potential risks related
to irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance
with laws and regulations, our procedures included the following:
• enquiring of management, internal audit and the Audit
Committee, including obtaining and reviewing supporting
documentation, concerning the Group’s policies and
procedures relating to:
•
identifying, evaluating and complying with laws and
regulations and whether they were aware of any instances
of non-compliance;
• detecting and responding to the risks of fraud and whether
they have knowledge of any actual, suspected or alleged
fraud; and
• the internal controls established to mitigate risks related to
fraud or non-compliance with laws and regulations;
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Provident Financial plc
Annual Report and Financial Statements 2019
Extent to which the audit was considered capable
of detecting irregularities, including fraud continued
Identifying and assessing potential risks related
to irregularities continued
• discussing among the engagement team including significant
component audit teams and involving relevant internal specialists,
including tax and IT specialists, regarding how and where fraud
might occur in the financial statements and any potential
indicators of fraud. As part of this discussion, we identified
potential for fraud in the following areas: provisions for impairment
losses against loans and receivables, forward flow ROP provision,
defined benefit obligation provision and revenue recognition; and
• obtaining an understanding of the legal and regulatory
frameworks that the Group operates in, focusing on those
laws and regulations that had a direct effect on the financial
statements or that had a fundamental effect on the operations
of the Group. The key laws and regulations we considered in
this context included the UK Companies Act, Listing Rules,
pension legislation and tax legislation. In addition, compliance
with the requirements of the Financial Conduct Authority and
Prudential Regulation Authority were fundamental to the
Group’s ability to continue as a going concern.
Audit response to risks identified
As a result of performing the above, we identified provisions for
impairment losses against loans and receivables, Vanquis Bank’s
forward flow ROP provision, pension scheme valuation and
revenue recognition as key audit matters. The key audit matters
section of our report explains the matters in more detail and also
describes the specific procedures we performed in response to
those key audit matters. As a result of performing the above, we
did not identify any key audit matters related to the potential risk
of fraud or non-compliance with laws and regulations.
In addition to the above, our procedures to respond to risks
identified included the following:
• reviewing the financial statement disclosures and testing
supporting documentation to assess compliance with relevant
laws and regulations discussed above;
• enquiring of management, the Audit Committee and in-house
legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
• reading minutes of meetings of those charged with
governance, reviewing internal audit reports and reviewing
correspondence with regulatory bodies such the Prudential
Regulation Authority and the Financial Conduct Authority; and
•
in addressing the risk of fraud through management override
of controls, testing the appropriateness of journal entries and
other adjustments; assessing whether the judgements made
in making accounting estimates are indicative of a potential
bias; and evaluating the business rationale of any significant
transactions that are unusual or outside the normal course
of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members
including internal specialists and significant component audit teams,
and remained alert to any indications of fraud or non-compliance
with laws and regulations throughout the audit.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies
Act 2006
In our opinion the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance
with the Companies Act 2006.
In our opinion, based on the work undertaken in the course
of the audit:
• the information given in the Strategic Report and the Directors’
Report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
• the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the Group
and the parent company and their environment obtained in
the course of the audit, we have not identified any material
misstatements in the Strategic Report or the Directors’ Report.
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
• 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 financial statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration
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 in respect of these matters.
Annual Report and Financial Statements 2019 235
Provident Financial plc
Financial statements I N D E P E N D E N T A U D I T O R ’ S R E P O R T T O T H E M E M B E R S O F P R O V I D E N T F I N A N C I A L P L C
C O N T I N U E D
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were
appointed by the directors on 29 June 2012 to audit the financial
statements for the year ending 31 December 2012 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is
eight years, covering the years ending 31 December 2012 to
31 December 2019.
Consistency of the Audit Report with the additional report
to the Audit Committee
Our audit opinion is consistent with the additional report to the
Audit Committee we are required to provide in accordance with
ISAs (UK).
Use of our report
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to
the Company’s members those matters we are required to state
to them in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Matthew Perkins (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Birmingham, United Kingdom
27 February 2020
236
Provident Financial plc
Annual Report and Financial Statements 2019
A LT E R N AT I V E P E R F O R M A N C E M E A S U R E S
In addition to statutory results and key performance indicators (KPIs) reported under International Financial Reporting Standards
(IFRS), the Group provides certain alternative performance measures (APMs). These APMs are used internally by management
and are also deemed helpful in understanding of the Group’s underlying performance. These non-statutory measures should not
be considered as replacements for IFRS measures. The definition of these non-statutory measures may not be comparable
to similarly titled measures reported by other companies.
Relevance
Adjusted profit before tax
excludes the impact of
amortisation of acquisition
intangibles and exceptional
items and is used to provide
further clarity on the
ongoing, underlying
financial performance of
the divisions and Group.
APM
Method of calculation
Adjusted profit
before tax
A reconciliation of adjusted profit before tax to statutory profit before tax
is shown below:
Adjusted profit/(loss) before tax:
– Vanquis Bank
– Moneybarn
– CCD
– Central costs
Adjusted profit before tax
Amortisation of acquisition intangibles
Exceptional items
Statutory profit before tax
Year ended 31 December
2019
£m
2018
(restated) 1
£m
Change
%
173.5
30.9
(20.8)
(21.0)
162.6
(7.5)
(26.3)
128.8
190.9
28.1
(38.7)
(20.2)
160.1
(7.5)
(55.3)
97.3
(9.1)
10.0
46.3
(4.0)
1.6
—
52.4
32.4
Adjusted profit before tax is stated before: £7.5m (2018: £7.5m) of amortisation in
respect of acquisition intangibles established as part of the acquisition of Moneybarn
in August 2014 and exceptional items. Exceptional items in 2019 represent net
exceptional charges of £26.3m (2018: exceptional charges of £55.3m) comprising:
(i) £23.8m (2018: £nil) of defence costs associated with Non-Standard Finance plc’s
(NSF’s) unsolicited offer for the Group; (ii) £19.3m (2018: £29.9m) of restructuring
costs, primarily in respect of the ongoing turnaround of the home credit business
in CCD following the migration to the employed operating model in July 2017;
(iii) a credit of £14.2m (2018: £nil) in Vanquis Bank in respect of the release of provisions
established in 2017 following completion of the refund programme in respect of
ROP and a re-evaluation of the forward flow of claims that may arise in respect of
ROP complaints more generally; and (iv) a credit of £2.6m (2018: £nil) in Moneybarn
in respect of the release of provisions established in 2017 following completion
of the FCA investigation into affordability, forbearance and termination options.
Exceptional costs in 2018 also included £18.5m in respect of the refinancing of the
senior bonds maturing in October 2019 and £6.9m of non-cash pension charges
in respect of the equalisation of Guaranteed Minimum Pensions following the
High Court judgement against Lloyds Bank PLC and others in October 2018.
1
2018 comparatives have been restated for: (i) the change in treatment of directly
attributable acquisition costs in Vanquis Bank following a refresh of contractual
terms with affiliates in 2019 – this has resulted in a £6.6m increase in 2018 profits
and a benefit of £10.5m to 2019 profits and is expected to result in a reduction of
approximately £6m in 2020 profits compared with previous plans; and (ii) the
change in recognition of revenue on credit impaired receivables in Moneybarn
which has resulted in a reduction in revenue and impairment but has had no
impact on Moneybarn’s profits.
Annual Report and Financial Statements 2019 237
Provident Financial plc
Financial statements
A LT E R N AT I V E P E R F O R M A N C E M E A S U R E S C O N T I N U E D
APM
Method of calculation
Relevance
Adjusted basic
earnings per share
(EPS)
Profit after tax, excluding the amortisation of acquisition intangibles and
exceptional items, divided by the weighted average number of shares in issue.
Average
receivables
Average of month-end receivables for the 12 months ended 31 December.
Dividend cover
Adjusted basic earnings per share divided by dividend per share.
Cost income ratio
Costs, compromising administrative and other operating costs, as a percentage
of revenue for the 12 months ended 31 December.
Return on assets
(ROA)
Adjusted profit before interest after tax as a percentage of average receivables.
This is used to assess the Group’s
operational performance from
continuing operations per
ordinary share. It removes
the effect of amortisation
of acquisition intangibles
and exceptional items.
This is used to smooth the
seasonality of receivables across
the divisions in calculating
performance KPIs.
This shows the rate that the
Company is paying its dividends
out of earnings. The dividend
policy will reflect the Board’s risk
appetite of maintaining a regulatory
capital headroom in excess of
£50m and the remaining
transitional impact of IFRS 9.
This ratio is a measure of
the efficiency of the Group’s
cost base.
This measures the return
a company generates from
its assets prior to the impact
of funding strategy for
each division.
Return on equity
(ROE)
Adjusted profit after tax as a percentage of average equity. Equity is stated after
deducting the Group’s pension asset, net of deferred tax, and the fair value of
derivative financial instruments.
ROE shows the return being
generated from the shareholders’
equity retained in the business.
Customer
satisfaction
The percentage of customers surveyed who are satisfied (or more than satisfied)
with the service they have been provided.
Common equity
tier 1 (CETI) ratio
The ratio of the Group’s regulatory capital to the Group’s risk-weighted assets
measured in accordance with CRD IV.
Funding headroom
Committed bank and debt facilities less borrowings on those facilities.
This represents the difference
between the total amount of
committed contractual debt
facilities provided by banks,
bond holders and other lenders
and the amount of funds drawn
on those facilities.
238
Provident Financial plc
Annual Report and Financial Statements 2019
S H A R E H O L D E R I N F O R M AT I O N
Information
for Shareholders
Provident Financial plc
Annual Report and Financial Statements 2019
239
Shareholder information I N F O R M AT I O N F O R S H A R E H O L D E R S
Financial calendar
Dividend announced
Ex-dividend date for ordinary shares
Record date for the dividend
Annual General Meeting
Payment date for the dividend
27 February 2020
2 April 2020
3 April 2020
7 May 2020
22 May 2020
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 the Group’s
website at www.providentfinancial.com.
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.
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; and
• 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; and
• 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; and
• 38.1% for additional rate taxpayers.
The dividend allowance means that you can receive certain
amounts of dividends tax free no matter what other non-dividend
income you have in the tax year. The dividend allowance for the
tax years from 2015/16 to 2016/17 was £5,000. This allowance
has reduced to £2,000 in the 2018/19 tax year.
240
Provident Financial plc
Annual Report and Financial Statements 2019
Company details
Registered office
and contact details:
Provident Financial plc
No. 1 Godwin Street
Bradford
West Yorkshire
England
BD1 2SU
Telephone:
+44 (0)1274 351 351
Fax:
+44 (0)1274 730 606
Website:
www.providentfinancial.com
Company number
668987
Registrar
The Company’s registrar is:
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Telephone: 0871 664 0300 (from within the UK)
Calls are charged at the standard geographic rate and will vary
by provider. Calls outside the UK will be charged at the applicable
international rate. Lines are open between 9.00am and 5.30pm,
Monday to Friday excluding public holidays in England and Wales.
Telephone: +44 (0)20 371 664 0300 (from outside the UK)
Link Signal Hub
Link Asset Services offers a share portal service which enables
registered shareholders to manage their Provident Financial plc
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.linksignalhub.com.
Link Dividend Reinvestment Plan
Link 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 Link Asset Services:
Telephone: 0371 664 0381 (from within the UK)
Calls are charged at the standard geographic rate and will vary
by provider. Calls outside the UK will be charged at the applicable
international rate. Lines are open between 9.00am and 5.30pm,
Monday to Friday excluding public holidays in England and Wales.
Telephone: +371 664 0381 (from outside the UK)
Special requirements
A PDF version of the full Annual Report and financial statements
is available on our website.
Advisors
Independent auditor
Deloitte LLP
4 Brindley Place
Birmingham
B1 2HZ
Company advisors
and stockbrokers
J.P. Morgan Cazenove
25 Bank Street
London
E14 5JP
Barclays
1 Churchill Place
Canary Wharf
London
E14 5HP
Solicitors
Clifford Chance LLP
10 Upper Bank Street
London
E14 5JJ
Herbert Smith Freehills LLP
Exchange House
Primrose Street
London
EC2A 2EG
Addleshaw Goddard LLP
Milton Gate
60 Chiswell Street
London
EC1Y 4AG
TLT LLP
1 Redcliff Street
Bristol
BS1 6TP
CBP002868
Provident Financial Group plc’s commitment to environmental issues is reflected in this Annual Report, which
has been printed on Symbol Matt Plus, an FSC® certified material. This document was printed by CPI Group
using its environmental print technology, which minimises the impact of printing on the environment.
Vegetable-based inks have been used and 99% of dry waste is diverted from landfill. The printer is a
CarbonNeutral® company. Both the printer and the paper mill are registered to ISO 14001.
Provident Financial plc
Annual Report and Financial Statements 2019
241
Provident Financial plc
No. 1 Godwin Street
Bradford
BD1 2SU
United Kingdom
+44 (0)1274 351351
www.providentfinancial.com
Company number 668987
View and download
the online version here:
providentfinancial.com/ar2019