Record
Annual Report 2018

Plain-text annual report

R e c o r d p l c A n n u a l R e p o r t 2 0 1 8 Record plc Annual Report 2018 ABOUT US Record is an independent currency manager with 35 years’ experience in delivering currency solutions. Everything we do is for our clients – we have no proprietary business. Our clients are largely institutions, including pension funds, charities, foundations, endowments, and family offices, as well as other fund managers and corporate clients. We are based in Windsor, in the UK, and have been since our formation in 1983. Record has always been an independent currency specialist, and has always focused on developing a deep understanding of the risk and reward opportunities in currency markets, so as to offer our clients the most appropriate solution to their needs. Our clients benefit from our experience, and from the continuity and consistency with which we apply that experience. We also attach importance to continuity of leadership and management. Record plc is listed on the Main Market of the London Stock Exchange, and is majority‑owned by its Directors and employees. Experience Specialists in currency with 35 years’ experience operating in currency markets Integrity A culture of integrity and accountability is embedded throughout our governance structure Client relationships We aim to build long‑term “trusted adviser” relationships with clients to understand fully their currency issues and to provide robust and high‑quality solutions Visit us online www.recordcm.com linkedin.com/company/record‑currency‑management twitter.com/RecordCurrency CONTENTS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Highlights Where we operate Chairman’s statement Chief Executive Officer’s statement Strategy and objectives Key Performance Indicators Business model Business review Market review Operating review Financial review Risk management Corporate social responsibility Chairman’s introduction Board of Directors Corporate governance report Nomination Committee report Audit and Risk Committee report Remuneration report Directors’ report Directors’ responsibilities statement Independent auditor’s report Financial statements Notes to the financial statements 2 3 4 6 10 12 14 22 24 28 32 39 43 44 46 50 52 56 71 73 74 78 85 ADDITIONAL INFORMATION Five year summary Information for shareholders Definitions 116 116 IBC 1 S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s A d d i t i o n a l i n f o r m a t i o n Record plc Annual Report 2018 Record plc Annual Report 2018 Strategic report HIGHLIGHTS Assets Under Management Equivalents1 Clients $62.2bn 2017: $58.2bn +7% Revenue £23.8m 2017: £23.0m (restated) +4% 60 2017: 59 +2% Profit before tax2 £7.3m 2017: £7.9m (restated) -7% Earnings per share Ordinary dividend per share 3.03p 2017: 2.91p +4% 2.30p 2017: 2.00p +15% Special dividend per share 0.50p 2017: 0.91p -45% 1. As a currency manager Record manages only the impact of foreign exchange and not the underlying assets, therefore its “assets under management” are notional rather than real. To distinguish this from the AUM of conventional asset managers, Record uses the concept of Assets Under Management Equivalents (“AUME”) and by convention this is quoted in US dollars. Further detail of how Record calculates AUME are included on the inside back cover. 2. Revenue, gross profit, operating profit and profit before tax for the comparative periods have been restated to reflect a re-presentation of items previously included under other income as first disclosed in the results for the six months ended 30 September 2017. As a result, operating profit and profit before tax are now the same as the operating profit and profit before tax previously disclosed as “underlying”. A reconciliation of all items under the historical and revised presentation is included under note 13 to the financial statements. 2 WHERE WE OPERATE The Group’s main geographical markets are the UK, North America and Continental Europe, in particular Switzerland. The Group’s main geographical markets are the UK, North America and Continental Europe, in particular Switzerland, as determined by the location of clients to whom services are provided. The Group also has clients elsewhere including Australasia. The Group’s Head Office is in Windsor, UK from where all of its operations are performed and controlled. The Group also has offices in New York, and in Zürich, Switzerland. In addition to these main markets, we continue to explore new geographical markets which we believe may offer attractive opportunities. Sales office New York Sales office Switzerland AUME $46.3bn Continental Europe AUME $8.9bn United Kingdom AUME $6.9bn North America AUME $0.1bn Rest of World Regions Our clients are located in: • United Kingdom • United States • Switzerland • Australia • Canada • Germany • Singapore • Cayman Islands • Netherlands • Sweden • Finland • Luxembourg • Channel Islands • Portugal • Ireland 3 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationHead office WindsorCHAIRMAN’S STATEMENT This year, Record celebrates thirty-five years of being in business in the currency markets, underlining our strength and resilience in a continually challenging and evolving environment. Neil Record Chairman Overview Such resilience is only possible through our commitment to our clients, which in turn, is due to the flexibility of the business and its staff to take advantage of new opportunities as they arise and to adapt to meet new challenges. exchange market participants. We were therefore delighted to sign up to both the FX Global Code and the LGPS Investment Code of Transparency during the year and have become a signatory to the UN-supported Principles for Responsible Investment since the end of the year. With this in mind, Record has seen a year of investment in resources and systems. These investments support our ability to offer innovative and differentiated products to our clients and to maintain our premium levels of service, as well as to address new regulatory requirements, such as under MiFID II. Regulation in the foreign exchange market continues to play a pivotal role in the move towards cost transparency. In our role of acting as agent for our clients, we put the utmost importance on integrity and acting solely in our clients’ best interests, and in promoting the highest standards of transparency and market conduct. In this respect, we fully support and endorse all efforts made to increase transparency, to encourage best practice and to maintain the highest levels of integrity by all foreign Group strategy Our core strategy remains to achieve and maintain trusted adviser status so as to grow our relationships with current and potential clients, and to provide market-leading products and service levels. In order to achieve this, the Group continues to invest in its talented people, in innovation and in systems. In my statement last year, I highlighted the opportunities for saving costs and adding value for clients on certain types of Passive Hedging mandates using opportunities created by the emergence of a gap between interest rates implied by forward FX rates and actual market interest rates – this gap being known in the FX markets as “basis”. These opportunities are now being recognised in commercial terms, through innovative changes made to some enhanced Passive Hedging mandates. There has been a change in mix of fees on these mandates from management fee only to reduced management fee plus a performance fee element. The first performance fees under these changes could be recognised in the current year. This innovative product development gives the business a level of exposure to market performance even in passive mandates. This adds further diversification to Record’s income streams, potentially leading to fees exceeding those earned on a management fee only basis. 4 Record plc Annual Report 2018Strategic reportThe Group also recognises the importance of progress in its distribution strategy. During the year an office was opened in Zürich to enhance our current relationships in Switzerland, and to support further growth in that market. A Currency Multi-Strategy fund was launched towards the end of the year, recognising the need to offer an alternative vehicle to investors for whom a pooled fund is more suitable than a segregated mandate. It was also pleasing to note the start of a new segregated Multi-Strategy mandate in a rekindled market (Australia) for Record, in the quarter following the year end. Capital and dividend In the previous financial year, the Board confirmed a change in capital policy which aims to ensure retained capital broadly equivalent to one year’s worth of future estimated overheads (excluding variable remuneration), in addition to capital assessed as required for regulatory purposes, for working capital purposes and for investing in new opportunities for the business. In my statement last year I confirmed that the Board was considering a return of excess capital to shareholders. A Tender Offer was subsequently approved at General Meeting on 14 July 2017, and the Company purchased approximately 22.3 million ordinary shares (approximately 10% of the then-outstanding share capital) for cancellation, returning just over £10 million to shareholders. In line with the Group’s dividend policy, the Board is recommending a final ordinary dividend of 1.15 pence per share, which would represent a 15% increase in the ordinary full year dividend to 2.30 pence per share. This includes a specific increase of 10% offsetting the decrease in issued shares cancelled following the Tender Offer in July. The interim dividend of 1.15 pence per share was paid on 22 December 2017, and the final ordinary dividend of 1.15 pence per share, subject to shareholders’ approval, will be paid on 1 August 2018 to shareholders on the register at 29 June 2018. The Board has maintained its policy of declaring a special dividend equal to the excess of earnings per share over ordinary dividends and any increase in the Group’s capital requirements. A marginal increase in the Group’s assessment of its Pillar II regulatory capital requirement in conjunction with the anticipated increase in costs for the current financial year increases capital required under the Group’s policy. The net increase in capital requirements is equal to approximately 0.23 pence per share, and as a result the Board is announcing a special dividend of 0.50 pence per share to be paid simultaneously with the final dividend, thereby taking total dividends for the year to 2.80 pence per share, compared to earnings per share of 3.03 pence. In the future, it remains the Board’s intention to pursue a progressive ordinary dividend policy, with dividends expected to be paid equally in respect of an interim and a final dividend. In setting the interim and final dividends, the Board will be mindful of setting a level of ordinary dividend payments which it expects to be at least covered by earnings and which allows for future sustainable dividend growth by the business in line with the trend in profitability. The Board intends to continue its approach of considering returning to shareholders any excess of earnings over the sum of ordinary dividends for the financial year and increased capital requirements, normally in the form of special dividends. The Board will continue to consider ordinary dividends and other distributions to shareholders on a “total distribution” basis. The total distribution for any year will be at least covered by earnings, and will always be subject to the financial performance of the business, the market conditions at the time and to any further capital assessed as required under the policy described above. The Board The Senior Independent Director, David Morrison, will no longer be deemed independent from 1 October 2018. A formal search process overseen by the Nomination Committee commenced early in 2017 with a view to appointing a new independent director to the Board prior to the end of David’s tenure. In this respect we were pleased to announce the appointment of Tim Edwards to the Board as non-executive director, effective 21 March 2018. Tim brings a wealth of experience to the Board from his background in advising, leading and investing, in particular in high-growth businesses in biotechnology and related fields. His skills and expertise especially in the areas of corporate development and people management will be highly relevant to Record’s continued development, and my Board colleagues and I are delighted to welcome him to the Board. Further information is given in this respect in the Nomination Committee report on page 50. Outlook Although this financial year saw fewer political shocks than that preceding it, the world still seems to be in a period of rapid change – globalisation is being challenged and the threat of protectionism and trade wars is growing. In such times, financial markets, including foreign exchange markets, will continue to be impacted by ongoing geopolitical developments and instability. Such developments provide opportunities for the Group to engage with both current and prospective clients, and to use our innovative and flexible approach in tailoring our products to meet specific client objectives. All of this is directed towards delivering sustainable, long-term growth for the business and sustainable long-term returns for our shareholders. The continued success of the Group is due to the support of our clients and to the talented people within, providing innovation and thought-leadership as well as the highest levels of client service. On behalf of the Board, I would like to take this opportunity to thank everyone and to look forward to further opportunities and growth in the year ahead. Neil Record Chairman 14 June 2018 5 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationCHIEF EXECUTIVE OFFICER’S STATEMENT Record’s management is confident that investments in product enhancement will create further opportunities to grow the business in the current financial year. James Wood-Collins Chief Executive Officer In a year when sterling’s strength presented revenue headwinds, in contrast to the previous financial year, Record achieved revenue growth of 4%. Continued investments to enhance our products and services, as well as increased occupancy costs, led to a reduction in operating margin to 31%, and a 7% reduction in profit before tax. Record’s management is confident that these investments will create further opportunities to grow the business in the current financial year, with a diverse portfolio of well-positioned services in both currency risk management and return-seeking strategies. Market overview The year to 31 March 2018 saw a period of relative calm in financial markets, due to improvements in developed market growth prospects and the apparent lack of inflationary pressures. In contrast to the previous year, political outcomes were much as anticipated and were not a major source of market uncertainty. Historically low asset price volatility was therefore a major theme for the year, though this ended somewhat abruptly early in 2018. With a lack of political stimulus, trends in the FX market were driven primarily by economic surprises, in particular Eurozone growth. Investment performance Dynamic Hedging for US clients generated modestly negative returns, although the low hedge ratios maintained by Record’s process meant that clients kept most of the gains from a broadly weak US dollar. Performance for UK clients was mixed by currency. In return-seeking programmes, Multi-Strategy mandates generated negative returns, although Record’s track record since inception continues to be supportive of further sales of this product. 6 Record plc Annual Report 2018Strategic reportAUME Revenue Profit before tax $62.2bn £23.8m 7% 4% £7.3m 7% AUME increased by 7% in US dollar terms over the financial year to $62.2 billion. Revenues increased by 4% to £23.8 million, notwithstanding the impact of sterling strength on the conversion of the 87% of management fees that are denominated in currencies other than sterling. Record’s costs before variable remuneration grew by 13%, largely attributable to the 11% growth in personnel costs due to continued investment in additional headcount in order to maintain innovation and enhancement of our services. As a result the Group’s operating margin reduced from 34% to 31%, and profit before tax fell by 7% to £7.3 million. Basic earnings per share of 3.03 pence represented a 4% increase on the prior financial year, taking into account the Tender Offer undertaken in July 2017. Asset flows and financial performance AUME increased by 7% in US dollar terms over the financial year to $62.2 billion, and decreased by 5% in sterling terms to £44.3 billion. Net outflows of $1.2 billion in the year represented aggregate net outflows from hedging of $2.2 billion (predominantly represented by net outflows from Dynamic Hedging of $1.7 billion), offset by net inflows to Currency for Return, Multi-product and cash of $0.6 billion, $0.3 billion and $0.1 billion respectively. The aggregate impact of external factors (i.e. equity and other market movements and the impact of exchange rates over the period) was to increase AUME by $5.1 billion and the effect of changes to portfolio sizes for some Currency for Return mandates with defined volatility targets increased AUME by $0.1 billion. Client numbers increased to 60. The anticipated mandate changes set out in April’s Fourth Quarter Trading Update, resulting in net inflows of $0.5 billion to Passive Hedging and $0.3 billion to Multi-Strategy, and one net additional client, have now all taken place. 7 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationCHIEF EXECUTIVE OFFICER’S STATEMENT CONTINUED Strategic progress Record’s strategic progress over the year can be measured against each of the strategic objectives set out in the Annual Report 2017. Client relationships Innovation People As outlined previously, the enhancement of existing products and development of new ones is a constant feature at Record, driven by clients’ needs and market opportunities. Much of our focus in the financial year has been on developing Passive Hedging to take advantage of market opportunities without changing the client’s hedge ratio, thereby reducing costs and adding value. As well as identifying and monitoring market opportunities, we have invested in the resources required to make investment decisions on a dynamic basis. Continued enhancement is also a feature of Dynamic Hedging and Currency for Return strategies, with research in particular on adding further strategies to Multi-Strategy. We equally invest in operational and implementation capabilities. Although the reversal of the introduction of mandatory variation margin on FX forwards for many of our clients has meant that fewer clients than anticipated have had to introduce this, we see growing opportunities to use this capability for clients choosing to exchange margin. We continue to attract, retain and develop high-quality staff, principally through intern programmes and graduate and early-stage career hires. We then focus on internal development and retention of these individuals. When recruiting staff early in their careers some attrition is inevitable, but this also creates a growing pool of alumni with whom we maintain strong relationships. We have largely succeeded in retaining key staff in a highly-competitive employment market. During the year we have brought much of our recruiting activity in-house, with the intention of maintaining consistently high standards at lower cost than using external recruitment agents. We participate in industry remuneration benchmarking exercises, and regularly review remuneration across the firm to ensure that we remain competitive, whilst recognising increased individual contributions through promotions. The increase in personnel costs (excluding variable remuneration) of 11% has reflected the increase in staff numbers to support product innovation and enhancement, and ultimately future growth. Our strategy of building trusted individual relationships with clients and their advisers remains unchanged. The Group benefits from the diversification amongst its clients, by location, client type and objective, in that any given period typically sees a variety of different themes predominate. During the financial year, our business in Switzerland, long a core market, continued to be focused largely on Passive Hedging. The challenges in hedging to Swiss francs, particularly in a rising US dollar interest rate environment, mean that Switzerland has led much of our innovation in Passive Hedging. This innovation has created opportunities to add value for clients, which in some cases has led to those clients altering their fee structure to include a performance-related element, as discussed in the Fourth Quarter Trading Update. In the US, the dollar has broadly been weak. As a result, interest in currency hedging has diminished; we believe this to be temporary and cyclical rather than structural. The UK market continues to be more challenging, despite some recovery in sterling, and we see Record’s best prospects here in identifying opportunities for specialist and differentiated hedging services. Currency for Return in general, and Multi-Strategy in particular, is much less dependent in perception on the client’s base currency, and we have continued to see growing interest. This has been demonstrated by the new mandate that has started in this financial year, and has encouraged us to launch the Record Currency Multi-Strategy Fund. 8 Record plc Annual Report 2018Strategic reportRisk management Growth Profitability The Group takes a proactive approach to developing its systems, people and processes, in order to improve management of operational risk and to meet the demands of emerging regulatory requirements. Much of the systems development focus during the financial year was on meeting the requirements of MiFID II, which we were pleased to complete in time for the 3 January 2018 deadline. We have continued to extend the scope of enhanced systems for exposure capture and rebalancing processes for Hedging mandates, and to invest in our cyber-security defences. As discussed on page 23, the Group has developed a contingency plan should the UK’s exit from the European Union result in the loss of “passporting” permissions, although implementation of this plan was paused given the commitment by both UK and EU authorities to a transition period extending to December 2020. We have achieved growth in client numbers (59 to 60), AUME ($58.2 billion to $62.2 billion), management fees (£22.7 million to £23.5 million) and revenues (£23.0 million to £23.8 million) over the period. We have invested in people across the business, with headcount growing from 75 at 31 March 2017 to 83 at 31 March 2018. We continue to focus on growth opportunities in our core markets of the UK, continental Europe in particular Switzerland, and North America, as well as selectively pursuing opportunities in other markets. The Group’s profitability has been restrained by the decision to invest in additional headcount to maintain innovation and service enhancement, as well as by increased office occupancy costs. Record’s management continues to be confident that these investments will lead to further growth opportunities across Record’s product range. Record’s profit before tax decreased from £7.9 million to £7.3 million over the period, and the operating margin has decreased from 34% to 31%. Find out more about our strategy and objectives on pages 10 and 11 Outlook With respect to new business, we are seeing a gratifyingly diverse range of opportunities across client locations, investor types and objectives. The investments we are continuing to make in service enhancement, in particular but not limited to Passive Hedging, are expected to result in new opportunities with both current and prospective clients, including in Europe and in Switzerland in particular. In the US, recent US dollar weakness has temporarily diminished interest in hedging, but Multi-Strategy continues to be well-positioned, and the recently-launched fund is expected to make it accessible to a wider range of investors than previously. We continue to explore further opportunities in other markets, such as Australia. From a financial perspective, the move in the case of some enhanced Passive Hedging mandates to performance fee structures, means that management fee revenues will be reduced, although we continue to expect performance fees to match or exceed the foregone management fees over time. All of Record’s management and staff remain focused on maintaining and enhancing our relationships with existing clients, as well as developing new client relationships, so as to continue to grow the business. James Wood-Collins Chief Executive Officer 14 June 2018 9 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information STRATEGY AND OBJECTIVES We are a specialist currency manager. Client relationships Innovation People Building strong, long‑term “trusted adviser” relationships with our clients Devising and implementing new products and strategies Attracting, developing and retaining a diverse pool of high‑quality people Enhancing existing products and strategies • A deep understanding of our clients’ needs and concerns helps us to develop effective solutions and to identify new business opportunities • Bespoke solutions meet unique client requirements, reinforce our thought leadership and differentiate Record from our competitors • Strong relationships lead to client longevity • Innovative solutions enhance premium • Ensures high quality and continuity of products and service to clients • Development, diversity and retention of talent key to delivery of best in class business model and to long-term stability of business and support for new ideas brand and reputation and give opportunities for growth • Enhances product diversification of our business • Underperforming products or products failing to meet client objectives lead to risk of client and reputational loss • Bespoke solutions may be less scalable and represent more operational risk than standard products • Buoyant market leads to attractive alternative opportunities and risk of upward pressure on fixed remuneration • Change of clients’ or Record’s personnel • Products are susceptible to changes in • Entrepreneurial individuals may wish can put relationships at risk • Link to Principal risks: People and employment, Investment, Operational external factors e.g. economic and regulatory factors, market sentiment and volatility • Link to Principal risks: People and employment, Market, Operational to broaden their experience elsewhere • Link to Principal risks: People and employment, Investment, Operational • Number of clients • Management fees KPI: Client numbers 60 +2% Management fees £23.5m +3% • New business or clients won for bespoke • Retention and longevity of talent mandates or new strategies • Newly seeded funds and growth in seeded funds through external investment • A number of existing Passive Hedging Staff retention clients upgraded to an enhanced Passive Hedging service, in some cases providing the opportunity for earning performance fees • Seeding of the new Multi-Strategy fund in the final quarter of the year 93% (2017: 83%) Employees for more than five years 46% • A changing geopolitical landscape will • Further enhancement to strategies across • Continued focus on selective recruitment continue to drive uncertainty, maintaining FX market issues high on client agendas and providing increasing opportunities to engage with clients • Continued focus on liquidity and cash flow in low yield and highly regulated environment will lead to opportunities for more bespoke mandates and complementary services alongside current product range the whole suite of products and retention of key talent • Development of our cash and liquidity • Identify and develop talented individuals management capabilities to complement our product offerings at early stages of their career to maximise potential • Provide collaborative and collegiate working environment to support innovative thinking and productivity 10 : y b d e v e i h c a e r a s l a o g r u O : s t fi e n e B : y r e v i l e d o t s k s i R : y b d e r u s a e M : r a e y n i e d a m s s e r g o r P : 9 1 - Y F r o f s n o i t a t c e p x E Record plc Annual Report 2018Strategic report Our goals are to meet client demand for robust and innovative currency solutions and, in doing so, to create shareholder value for investors over the long term. Risk management Growth Profitability Maintaining a robust operational model underpinned by a strong risk management framework Growing AUME Operating a scalable and profitable business model • Reinforces client confidence and trust • Fundamental to creating long-term • Fundamental to creating long-term • Minimises risk of errors and complaints shareholder value shareholder value • Enhances reputation and stability • Enhances liquidity in shares of organisation • Leads to increase in revenue streams • Supports development of business and talent • Assists attraction and retention of talent • Increasing costs of resources in connection with managing risks associated with more bespoke mandates • Link to Principal risks: People and employment, Operational • Investment in systems • Formal complaints • Changes in product mix towards lower • Profitability sensitive to size and margin mandates, or mandates with lower management fees but with performance fees may affect short-term profitability concentration of client base • Market competition may lead to reduced margins • Business scalability can be affected by AUME type (i.e. less scalable bespoke mandates) • Size of mandates can be affected by external factors (e.g. market movements) • Link to Principal risks: Concentration, People and employment, Investment, Market • Business scalability can be affected by product mix • Link to Principal risks: All • AUME movement in year • Operating profit margin • Projects to enhance efficiency of data KPI: AUME management for both Passive and Dynamic Hedging clients completed in year • Significant system enhancements to address MiFID II and other regulatory changes completed within formal deadlines during the year • Complaints: none (2017: none) $62.2bn +7% • Development to Multi-Strategy process to improve efficiency and strengthen controls within a flexible framework able to support future enhancements • Heightened geopolitical tensions and economic uncertainty in global markets should help to maintain focus on the effects of FX markets on clients’ portfolios • Continued investment in developing and upgrading core systems and infrastructure • Complementary services may assist in developing growth in overall AUME • Launch of new Multi-Strategy Fund may lead to more scalable interest in Currency for Return • Basic EPS • Dividends paid KPI: Operating profit margin 31% (2017: 34%) KPI: Basic EPS 3.03p +4% Ordinary dividends (per share) 2.30p +15% Special dividends (per share) 0.50p -45% • More bespoke products may be less scalable and affect profitability • Flows into Currency for Return products offer higher margins and scalability through fund vehicles • A change in mix from management fee only Passive Hedging mandates to management plus performance fees, alongside continued investment in people and resources may reduce operating margins over the short to medium term 11 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationKEY PERFORMANCE INDICATORS Measuring our performance against our strategy. Indicator AUME We aim to grow AUME1 by building long‑term relationships with clients and developing new products and enhancing existing products resulting in net inflows to AUME Client numbers Client numbers represent the number of separate legal entities that have appointed Record directly as an investment manager or invested in a Record fund Average management fee rates Operating profit margin The Group aims to provide a premium level of service and expertise in exchange for a fair level of remuneration The Group aims to increase operating profit margin2 over the long term through investing in resources to maintain its premium products and service whilst building profitable and diversified revenue streams Basic earnings per share (“EPS”) The Group’s objective is to create shareholder value over the long term, reflected in consistent growth in EPS 1. As a currency manager Record manages only the impact of foreign exchange and not the underlying assets of its clients, therefore its AUM (Assets Under Management) are notional. To distinguish this from the AUM of conventional asset managers, Record uses the concept of Assets Under Management Equivalents (“AUME”) and by convention this is quoted in US dollars. 2. Operating profit margin is defined as operating profit divided by revenue. 12 Record plc Annual Report 2018Strategic reportThe Board and Executive Committee use a number of key performance indicators (“KPIs”) to monitor the performance of the Group. How we performed this year: Performance history: • AUME increased by +7% in US dollar terms but decreased by -5% in sterling terms • Client numbers remained at similar levels to last year, growing by +1 and reached 60 at the end of the year AUME ($ billion)1 FY-18 FY-17 FY-16 FY-15 FY-14 Client numbers FY-18 FY-17 FY-16 FY-15 FY-14 • Fee rates across the product range were broadly Management fee rates (bps p.a.) maintained during the year • Operating profit margin decreased to 31% for the year as a result of the continued investment in resources to enhance products and client service 20 18 16 15 14 12 4 3 Dynamic Hedging Passive Hedging Currency for Return Multi- product Operating profit margin FY-18 FY-17 FY-16 FY-15 FY-14 • Basic EPS increased by 4% for the year, as the result of EPS (pence per share) two factors – profit after tax fell by 3% whilst the £10 million share buy back in July 2017 reduced the number of issued shares by approximately 10% FY-18 FY-17 FY-16 FY-15 FY-14 62.2 58.2 52.9 54.7 51.3 60 59 58 55 48 FY-18 FY-17 31% 34% 33% 35% 33% 3.03 2.91 2.55 2.66 2.48 13 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationBUSINESS MODEL Our business model depends on our relationships and resources. Relationships and resources What we do OUR CLIENTS Client relationships are the keystone of our success. Only by building strong, long-term “trusted adviser” relationships with our clients can we fully understand their currency issues and develop effective solutions for their currency requirements. OUR EXPERIENCE We are a specialist currency manager with 35 years’ experience – we have a fundamental understanding of how currency markets operate which we’ve used to develop a leading position in managing currency for institutional clients. OUR PEOPLE We view our ability to attract, retain and motivate highly-talented staff as key to organisational stability and long-term success. Our recruitment process is carefully structured to ensure that talented people with the right skills and experience are recruited into the Group. OUR INFRASTRUCTURE Our operational infrastructure is built around how we service our clients and ensures a collaborative approach across all sections of the business. All of our investment, operational and support functions are based centrally at the Head Office in Windsor, UK and provide services to the Group as a whole. OUR FINANCIAL RESOURCES The business maintains a robust balance sheet and strong capital position. Positive cash generation allows us to reinvest for growth in the business and to drive shareholder value and returns. OUR INVESTMENT PROCESS INNOVATION We identify persistent inefficiencies and patterns of behaviour in FX markets EXPERIENCE AND KNOW HOW We design investment processes to exploit them OPERATIONAL RISK MANAGEMENT We assume full operational risk on behalf of our clients – our infrastructure, systems and processes are designed to mitigate and minimise the operational risk associated with managing clients’ currency mandates. INDEPENDENCE AND TRANSPARENCY We act as an independent agent for each of our clients under an investment management agreement. Being independent from any banks or brokerage firms, we remain unconflicted and fully able to act in our clients’ best interests and to fulfil our fiduciary obligations. Everything we do is for our clients – our only source of revenue is from client fees. We are never our clients’ counterparty and therefore make no money from spreads. 14 Record plc Annual Report 2018Strategic reportOUR INVESTMENT PROCESS RESEARCH We refine our products by continuing research BESPOKE We manage each mandate to meet client-specific needs OUR DISTRIBUTION PROCESS • Our products are delivered both through segregated mandates and pooled fund structures to suit individual client requirements. • We distribute through both direct sales to institutional clients, and through local and global investment consultants. • We build long-term relationships with investment consultants and help develop their understanding of our products and services. What we deliver OUR PRODUCTS (see page 16) Bespoke solutions – we operate Hedging mandates and unfunded Currency for Return mandates as bespoke, segregated mandates, managing each client’s unique characteristics through robust operational systems built to manage exposures efficiently and to minimise operational risk. Currency funds – our Currency for Return strategies are also delivered through a pooled fund structure. PREMIUM CLIENT SERVICE Superior service is core to our client proposition and we achieve this on various levels by assigning a dedicated and experienced relationship manager to oversee each client portfolio. Also, direct communication between our operational and administrative specialists with each client’s own internal functions is encouraged (for example on rebalancing or reporting issues), building on the general level of interaction with the client and underpinning the overall “trusted adviser” relationship. This high level of communication on multiple levels ensures all aspects of the currency issues facing our clients are fully considered and understood in terms of solutions. REWARDING CAREERS At Record we have created an environment which encourages bright, dynamic and committed individuals to flourish. Being a small business everyone has the opportunity to make a significant contribution to the company. We are able to provide excellent career prospects and the opportunity to work closely with senior and experienced people. THOUGHT LEADERSHIP Over the last 35 years Record has developed a leading position in its sector. Our knowledge of the currency market is sustained by our research and results in innovative products and continued process enhancement. SHAREHOLDER VALUE We aim to operate an effective and efficient capital policy, and to deliver business growth and maximise shareholder returns over the long term. The Group’s dividend policy is progressive and aims to return any excess of future earnings over ordinary dividends and additional capital requirements to shareholders, potentially in the form of special dividends. AUME by client type 31 March Government and public schemes 2018 2017 2016 42% 42% 41% Corporate schemes Foundations, trusts and fund managers 42% 44% 43% 16% 14% 16% 15 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationBUSINESS MODEL CONTINUED Our products The Group’s suite of core products is split into two main categories: Currency Hedging and Currency for Return products. Currency Hedging $57.3bn AUME Record’s primary risk management products are the hedging products and are predominantly systematic in nature. Record has the experience and expertise to deliver tailored hedging programmes to suit the individual currency needs of our clients. We continue to enhance our product offerings, so that they maintain their premium product status. In a competitive marketplace, our ability to differentiate our hedging products is key to maintaining and growing our market share further. Passive Hedging: $53.0bn AUME Passive Hedging mandates have the cost-effective reduction of exposure to currency risk as their sole objective by the symmetrical and unbiased elimination of currency volatility from clients’ international portfolios. Core Passive Hedging The core Passive Hedging product requires execution and operational expertise to a greater extent than investment judgement, and provides the following benefits to clients: • Independent, best execution • Custom benchmarks • Optimised exposure capture • Netting benefits • Regulatory reporting • Management of cash flows Enhanced Passive Hedging The enhanced Passive Hedging product offers the same benefits and requires the same level of execution and operational expertise as the core product but recognises the opportunities presented for adding value by taking advantage of structural inefficiencies and behavioural changes now arising in FX markets. It requires continuous monitoring, and investment judgement and skill to identify the opportunities and then to take advantage of them in a structured and risk-managed way. Currency for Return $1.6bn AUME Record’s Currency for Return strategies have the generation of investment return as their principal objective. The range includes four principal strategies being Carry, Emerging Market, Momentum and Value and these strategies can be offered in either a segregated or pooled fund structure. Record can combine these strategies in different weightings that appeal to particular market segments under the Multi-Strategy approach. Multi-Strategy The Multi-Strategy approach can be applied as an “overlay” to help clients achieve a variety of investment objectives, and offers clients access to the main sustainable sources of return in the currency market. Carry The Forward Rate Bias is the observation that higher yielding currencies tend to outperform lower yielding currencies over longer time periods, and is regarded by Record as a fundamental and structural currency risk premium. The Carry strategy aims to exploit this observation and generate returns by buying selected developed market higher interest rate currencies and selling selected lower interest rate currencies. One of Record’s medium to long-term aims is to develop currency as an asset class in its own right. The FTSE Currency FRB10 Index was launched in 2010, closely followed by the launch and seeding of Record’s pooled fund, the Record Currency – FTSE FRB10 Index Fund to track the index. Emerging Market (“EM”) Currency EM currencies offer investors an opportunity either to seek a return from such currencies or to seek to separate the currency effect from the underlying overseas domestic asset performance (typically equities or bonds). Record believes that as a result of convergence in the levels of economic output between emerging and developed markets, holding EM currencies offers the benefit of real exchange rate appreciation as well as offering higher positive real yields. This currency appreciation has historically been a significant contributor of returns to developed market holders of EM assets including equities and bonds. 16 Record plc Annual Report 2018Strategic reportWe also offer bespoke solutions tailored to individual client requirements. Dynamic Hedging: $4.3bn AUME Value is generated entirely through the asymmetric reduction of pre-existing currency risk. Record’s Dynamic Hedging product is an attractive alternative to Passive Hedging and has the reduction of exposure to currency risk as its principal objective and generating value as a secondary objective. The Dynamic Hedging product seeks to allow our clients to benefit from foreign currency strength while protecting them from foreign currency weakness relative to their own base currency. Other risk management products: Currency audit Fiduciary execution Signal hedging Clients receive a diversified return stream which performs well under a variety of market conditions and reduces the correlation of their currency programme to other asset classes. Currency Momentum This strategy exploits the periodic tendency of the spot exchange rate to appreciate after a prior appreciation, and to depreciate after a previous depreciation. This market inefficiency has persisted across different currencies and is present in other asset classes, such as equities. Currency is commonly thought of as trending and the Momentum strategy seeks to make a return from this phenomenon. Currency Value Research suggests that purchasing power parity (“PPP”) valuation models have been relatively good predictors of the long-term direction of spot movements. Currency Value strategies exploit this insight, buying currencies that are undervalued relative to PPP and selling currencies that appear overvalued. Multi‑product: $3.0bn AUME Multi‑product mandates typically have combined risk‑reducing and return‑seeking objectives, and are bespoke in nature. These may include a hedging mandate overlaid with selected elements of the Currency for Return product, which cannot readily be separated into its hedging and return‑seeking components for reporting purposes. These mandates are more variable in nature, attracting different levels of fees. 17 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationBUSINESS MODEL CONTINUED Other products Record has a licensing agreement with WisdomTree Investments, Inc. which, through its subsidiaries in the US, Europe and Japan (collectively “WisdomTree”), is an exchange-traded fund and exchange-traded product sponsor and asset manager headquartered in New York. Under the licensing agreement, Record provides signals that are used to dynamically hedge currency exposures within WisdomTree’s rules-based index family. We are optimistic that this will allow dynamic hedging strategies to be accessible to a wider range of investors than has previously been the case. Since Record is not managing the exchange-traded funds that seek to track the performance of their respective WisdomTree Dynamic Currency Hedged Indexes, assets under management in these funds do not contribute to Record’s AUME. Record reports revenues arising from this licensing agreement under “Other currency services income”. Further information on product investment performance is given in the Operating Review section (page 24). Distribution The Group’s sales and marketing activities are organised to ensure that resources are deployed where opportunities have been identified as giving the most likelihood of future success. To this end, the sales and marketing team is split between the offices in the UK, US and Switzerland which serve their local markets, and a centralised team that provides comprehensive technical and administrative support to the sales offices from the headquarters based in the UK. We distribute through both direct sales to institutional clients, and through local and global investment consultants. Building long-term relationships with investment consultants and developing their understanding of our products and services is important to our continued success and our ability to deliver quality services to our clients. By working closely both with clients and investment consultants we can identify new business opportunities as the currency landscape continues to change and evolve. 18 Record plc Annual Report 2018Strategic reportOur market The currency market represents the biggest and most liquid market available with exceptionally low transaction costs and daily FX volumes averaging $5.1 trillion per day (source: BIS Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets 2016). The FX market is essential to global trade and finance and includes a high proportion of not-for-profit or forced participants, resulting in profit-seeking financial institutions continuing to represent a minority of FX market participants. Consequently, the market displays persistent patterns of behaviour or inefficiencies which Record believes can best be exploited by a combination of systematic and discretionary processes. The FX market continues to offer opportunities for investors. Record’s expertise is in identifying and understanding these opportunities and then working with clients to understand how such opportunities may be used to their best advantage taking account of each client’s individual circumstances and attitude to risk. 19 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationBUSINESS MODEL CONTINUED Staff retention (%) 88% 83% 93% 2016 2017 2018 Our people Record views its ability to attract, retain, motivate and develop a diverse group of highly-talented staff as key to organisational stability and long-term success. Recruitment The recruitment process is carefully structured and run predominantly in-house to ensure that talented people with the right skills and experience are recruited into the Group. As part of this, the Group runs a successful internship programme, which gives the Group the opportunity to benefit from talented individuals who are in the early stages of their career and identified as potentially having the necessary skills required to be able to add value to the business in future. The process continues with a comprehensive induction programme for all new joiners to allow them to adapt to the specialist environment within Record. The Group has continued to recruit selectively throughout the year in order to maintain a flexible, scalable platform for future growth. Continued investment in resources to underpin product enhancements and sustain our ability to innovate has resulted in an increase in headcount during the year. The number of employees (including Directors) in the Group at 31 March 2018 was 83 (2017: 75). Staff retention, motivation and development We invest heavily in our people, offering opportunities and support for them to grow their knowledge, skills and capabilities. An effective performance review and objective-setting process, personal development planning including the development of career paths, together with our open and inclusive office culture, are all key priorities in the development and retention of our staff. In addition, the Group Share Scheme, the Group Profit Share Scheme and the Group Share Incentive Plan promote the acquisition of equity in the Company by staff, improving motivation and retention, as well as aligning employees’ interests with those of our clients and shareholders. At 31 March 2018, the proportion of employee shareholders stood at 72% (2017: 68%). Furthermore, the business ensures that wider factors, such as market trends in pay, are monitored closely to ensure risks to staff retention are limited as far as possible. 20 Record plc Annual Report 2018Strategic reportThe physical office environment and how this affects both the productivity and wellbeing of our employees is also considered crucial to the attraction, retention and motivation of our staff. Consequently we provide a collaborative office environment incorporating space designed around the wellbeing of employees, and utilising modern communication technology throughout the business. Our infrastructure The Group’s operational infrastructure is built around how we service our clients and ensures a collaborative approach across all sections of the business. To this end our teams are deliberately organised by function, rather than product. As such, all teams are involved (to a greater or lesser extent) in the day-to-day management or support of each client mandate. We maintain a purpose-built and fully integrated end-to-end operational process to allow for scalable and customisable implementation of our products. Teams take a collaborative approach to ensuring that each stage of implementation, from data capture through to client reporting, is seamlessly carried out with a client-centric focus. We continuously invest in technological and human capital resources to build upon the capability of our investment offering and ensure the continued integrity of our robust operational processes. In the year, there has been significant systems development to meet the requirements of MiFID II, in particular to manage the capture and processing of data required for transaction reporting, and to improve the process for exposure capture and rebalancing for Hedging mandates. Record considers cyber risk to be one of the principal risks to the business, and has continued to invest in both the latest cyber-security defences and in staff training (see Risk management on page 32). Trade execution Compliance and risk Data Investment decisions Trade confirmation/ notification Reporting Reconciliation Settlement 21 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationMARKET REVIEW For the most part, the year to 31 March 2018 saw a period of relative calm in financial markets, as improvements in developed market growth prospects and the apparent lack of inflationary pressures created a supportive environment for risk assets. In addition, and in contrast to the previous year, outcomes on the political front were much as anticipated and were not a major source of market uncertainty. Historically low asset price volatility was therefore a major theme for the year, though this ended somewhat abruptly early in 2018. With a lack of political stimulus, trends in the FX market were driven primarily by fundamental economic surprises, with euro strength standing out in particular. A lack of substantial changes to banking regulation over the past year led to a continuation of the dislocations between FX forwards and the money markets (FX basis). Monetary policy and interest rates Interest rates in developed markets remained low in relation to the historic norms, although central banks began to show signs of differentiation in their respective policy cycles. Those that raised interest rates faced a combination of reduced slack in the economy (in the US), wage and inflation pressures from stabilising commodity prices (in Canada), and an inflation target overshoot (in the UK). On the other end of the spectrum the Bank of Japan (“BoJ”) and Swiss National Bank (“SNB”) both committed to continued low interest rates. In between was the European Central Bank (“ECB”), which maintained expansionary policy but continued to guide market expectations around its normalisation strategy. The Swiss National Bank continued to pursue exceptionally low interest rates as inflationary pressures failed to materialise. The Swiss franc showed mixed performance and depreciated notably versus the euro yet strengthened against the US dollar. Overall, the franc fell on a trade-weighted basis, and this was broadly reflective of diverging monetary policy prospects vis-à-vis the rest of the world, and the absence of severe political upset in Europe. The Japanese yen traded in a range versus the US dollar for most of the financial year before strengthening in the first quarter of 2018. The BoJ continued to target a 10-year yield of 0%, though markets began to price the possibility of an increase in the target yield. This came despite only a modest improvement in core inflation – which remains well below the BoJ target – and was in reaction to hawkish verbal communications from BoJ Governor Haruhiko Kuroda. The Bank officially maintained that inflation would be allowed to overshoot the 2% target before monetary tightening occurs. FX basis developments Over the past few years, the historical relationship between the interest rates observed in the money markets and those implied by the FX forward market has weakened. This dislocation is known as the FX basis. Over the year, there has been no major change in the overall basis trends, although the magnitude of dislocations has varied across the developed markets due to currency specific factors. The Federal Reserve followed through on its promise of further policy normalisation, contrary to market expectations at the start of the year. An initial rate hike in June was followed by two more; one in December and one at newly appointed Federal Reserve Chairman Jerome Powell’s first meeting in March. Underlying measures of US inflation were broadly unchanged and remained below the Federal Reserve’s target. Despite a seemingly supportive economic backdrop, the US dollar fell on a trade-weighted basis, continuing a trend that first emerged in late 2016. The ECB maintained its ultra-accommodative policy stance, though altered the implementation of policy by lowering the size of monthly bond purchases and extending the expected end date of its QE programme. Easy policy in the Eurozone was overshadowed by an economic revival which saw Eurozone growth outstrip that of other G4 economies. Markets, and by extension the euro, responded accordingly with the single currency appreciating notably. Europe’s busy political calendar did little to upset the upward trend as the election of Emmanuel Macron in France and the formation of a coalition government in Germany contrasted with the success of more Eurosceptic parties in Italy’s general election. The Bank of England went some way towards reversing emergency stimulus deployed following the Brexit referendum, and, having turned cautiously optimistic on growth, hiked rates by 0.25% in November. In addition to a less severe than projected slowdown following the vote, the decision was simplified by inflation which, as a result of sterling’s decline in 2016, peaked above 3%. Though there has been a general perception of sterling strength, this was as much a story of US dollar weakness, as the pound appreciated only modestly on a trade-weighted basis. 22 Record plc Annual Report 2018Strategic reportRegulation Record’s main regulatory focus during the financial year, in addition to ensuring compliance with established regulatory regimes to which Record adheres around the world, was on implementing the requirements of new regulation. Foremost among these were the revised EU Markets in Financial Instruments Directive, known as MiFID II. This wide-ranging regulation had consequences across the business, of which the most impactful were in post-trade transparency and transaction reporting. We were pleased to achieve full compliance by the deadline of 3 January 2018, and have now embedded all the relevant requirements in our business-as-usual processes. The European Market Infrastructure Regulation, or EMIR, had also been expected to impose widespread changes, in particular by imposing mandatory variation margin on foreign exchange forward contracts for a wide range of EU market participants, including many of Record’s clients. We had long advocated against this approach, since the regulation was first proposed in 2014, and so we were ultimately satisfied to see the range of market participants affected by this reduced in scope in late 2017. Record reviewed and modified its processes to meet its obligations to safeguard personal data in order to meet the requirements of the General Data Protection Regulation (“GDPR”) when it came into force on 25 May 2018. Brexit This financial year covered the first half of the two-year Article 50 notice period. The ebb and flow of expectations as to the consequences of the UK’s exit from the EU was felt both in currency markets and in Record’s contingency planning. As noted on page 22, it became evident throughout the year that the immediate economic consequences of the Brexit referendum vote in June 2016 had been less severe than expected in some quarters at least. Despite the EU negotiating principle that “nothing is agreed until everything is agreed”, the year saw a gradual diminishing of concerns over a “hard” Brexit, as some consensus began to emerge between the UK and the EU. This was first evident in agreement in principle on the financial terms of separation, citizens’ right and the Irish border in December 2017. Similar agreement on an implementation or transition period was reached in March 2018. This consensus as well as the improved economic backdrop contributed to sterling’s appreciation over the year, particularly against the US dollar. The caveat that “nothing is agreed until everything is agreed” continues to hold however, and significant risks to the negotiation process remain. In particular, major issues such as customs arrangements have yet to be agreed, and the positions reached in principle on the items set out above may fail to be translated into detailed agreements. Furthermore any withdrawal agreement is subject to political risk in the form of ratification by UK and EU parliaments. The emergent consensus on a transition period has affected Record’s implementation of its Brexit contingency plan. Since the referendum, we have developed a plan focused on continuing to serve existing clients, and market to new clients, across the remaining EU27 countries. If this plan had to be implemented for March 2019, Record would anticipate relocating a modest number of existing staff to Dublin by the fourth quarter of 2018. Since the anticipated transition period would preserve the legal and regulatory status quo until December 2020, we have paused the implementation of some aspects of this plan. We are aware though of the remaining risks, and are further preparing for the risk that the transition period falls through. 23 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationOPERATING REVIEW This section discusses Record’s enhanced Passive Hedging service, including its performance track record, before reviewing investment performance of Record’s other products. Enhanced Passive Hedging Over the past four years, Record has developed an enhanced Passive Hedging service. This aims to reduce the cost of hedging by introducing new flexibility into the implementation of currency hedges, without changing the hedge ratio. Typically this involves varying the hedge implementation to reduce costs in two key areas, being the direct costs of maintaining the hedge (e.g. trading spreads), and the interest rate differential embedded in the forward contracts. While the strategy is partly systematic, the episodic nature of many opportunities exploited by the strategy means it requires a higher level of discretionary oversight than has historically been associated with Passive Hedging. The following table shows the total value added relative to a fixed-tenor benchmark for an enhanced Passive Hedging programme for a representative account. Value added by enhanced Passive Hedging programme relative to a fixed-tenor benchmark Source: Record. Product investment performance Our hedging products are predominantly systematic in nature. The effectiveness of each client mandate is assessed regularly and adjustments are made when necessary in order to respond to changing market conditions or to bring the risk profile of the hedging mandate in line with the client’s risk tolerance. The performance of our Dynamic Hedging product depends on how the foreign currencies change in value relative to the base currency of a client. During the year, US investors saw gains from currency on international assets when valuing positions in US dollars, as the US dollar depreciated against all G10 currencies. Record’s Dynamic Hedging product decreased hedge ratios in line with US dollar weakness, and allowed clients to keep the majority of these gains. Mandates for our UK-based Dynamic Hedging clients performed as expected in terms of allowing clients to benefit from periods of strengthening foreign currencies, whilst being generally protected against periods of weakening foreign currencies. The programmes generated mixed results in line with differences in hedgeable weights and active programme periods. Hedging gains came primarily from hedging the US dollar, while euro losses were contained as hedge ratios were reduced over the quarter in response to sterling movements. Record’s principal Currency for Return product during the year was the Currency Multi-Strategy. This combines a number of diversified return streams. Record’s Multi-Strategy mandates combining Carry, Emerging Market, Momentum and Value strategies delivered negative performance over the period. Return for year to 31 March 2018 Return since inception 0.12% 0.14% p.a. 24 Record plc Annual Report 2018Strategic report Fund name FTSE FRB10 Index Fund1 Emerging Market Currency Fund2 Gearing 1.8 1 Index/composite returns FTSE Currency FRB10 GBP Excess return3 Record Multi-Strategy composite4 Return for 12 months to 31 March 2018 % (2.61%) 1.01% Return for 12 months to 31 March 2018 % (1.47%) (1.74%) Return since inception % p.a. 1.44% 1.51% Return since inception % p.a. 2.22% 1.73% Volatility since inception % p.a. 7.04% 6.17% Volatility since inception % p.a. 4.57% 2.41% 1. FTSE FRB10 Index Fund return data is since inception in December 2010, GBP base. 2. Record Currency – Emerging Market Currency Fund return data is since inception in December 2010, GBP base. 3. FTSE Currency FRB10 GBP Excess return data is since December 1987, GBP base. 4. Record Multi-Strategy composite is since inception in July 2012, showing excess returns data gross of fees in USD base and has been scaled to a 4% target volatility. 25 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information OPERATING REVIEW CONTINUED Gearing The Currency for Return product group allows clients to select the level of exposure they desire in their currency programmes. The segregated mandates allow clients to individually pick the level of gearing and/or volatility target. The pooled funds have historically offered clients a range of gearing and target volatility levels. It should be emphasised that in this case “gearing” refers to the multiple of the maximum size of the aggregate forward contracts in the currency programme, to the segregated mandate size or the pooled fund’s net assets. This is limited by the willingness of counterparty banks to take exposure to the segregated client or pooled fund. Gearing in this context does not involve borrowing. AUME development AUME expressed in US dollar terms increased by 7% during the year ended 31 March 2018, finishing at $62.2 billion (2017: $58.2 billion). AUME expressed in sterling decreased to £44.3 billion (2017: £46.6 billion), broadly reflecting sterling strength versus the US dollar (+12%) and the Swiss franc (+7%) over the twelve months. AUME development bridge Year to 31 March 2018 ($bn) +3.8 +0.1 +1.3 -1.2 58.2 62.2 AUME at 1 April 2017 Net client flows Portfolio scaling adjustment Markets FX effects AUME at 31 March 2018 AUME movements The Group has seen net outflows of $1.2 billion during the year arising from inflows from both new and existing clients of $9.9 billion offset by outflows of $11.1 billion. Passive Hedging AUME grew by 10% to $53.0 billion at the end of the year (2017: $48.2 billion). Marginal net outflows of -$0.5 billion were more than offset by the net impact of market factors (+$1.7 billion). Movements in exchange rates contributed a further +$3.6 billion. Dynamic Hedging AUME decreased by -$2.0 billion ending the year at $4.3 billion, the majority of the decrease being represented by net outflows of -$1.7 billion. As reported during the year, Record’s remaining UK-based Dynamic Hedging clients either converted their mandates to Passive Hedging or terminated in the first half of the year as a result of the negative returns and cash flows experienced linked to persistent weakness in sterling following the EU referendum. External factors had an impact of -$0.3 billion. The Currency for Return product reached the fifth anniversary of its live track record in July 2017 and saw AUME inflows of +$0.6 billion in the first quarter, ending the year at $1.6 billion (2017: $1.0 billion). Multi-product AUME increased from $2.5 billion to $3.0 billion at year end, with inflows of +$0.3 billion from existing clients and the net impact of external factors of +$0.2 billion. Equity and other market performance Record’s AUME is affected by movements in equity and other market levels because substantially all the Passive and Dynamic Hedging, and some of the Multi-product mandates, are linked to equity and other market levels. Market performance increased AUME by $1.3 billion in the year to 31 March 2018. Further detail on the composition of assets underlying our Hedging and Multi-product mandates is provided below to help illustrate more clearly the impact of equity and fixed income market movements on these mandate sizes. AUME composition by underlying asset class as at 31 March 2018 Equity % 96% 29% —% Fixed income % —% 42% —% Other % 4% 29% 100% Dynamic Hedging Passive Hedging Multi-product 26 Record plc Annual Report 2018Strategic report Forex As 89% of the Group’s AUME is non-US dollar denominated, foreign exchange movements may have an impact on AUME when expressing non-US dollar denominated AUME in US dollars. Foreign exchange movements increased AUME by $3.8 billion over the year. This movement does not have an equivalent impact on the sterling value of fee income. At 31 March 2018, the split of AUME by base currency was 15% in sterling, 58% in Swiss francs, 11% in US dollars, 14% in euros and 2% in other currencies. Product mix AUME composition by product Dynamic Hedging Passive Hedging Currency for Return Multi-product Cash Total 31 March 18 31 March 17 US $bn 4.3 53.0 1.6 3.0 0.3 62.2 % 7% 85% 3% 5% —% 100% US $bn 6.3 48.2 1.0 2.5 0.2 58.2 % 11% 83% 2% 4% —% 100% Aggregate Hedging AUME represented 92% of the total AUME, remaining broadly consistent with the prior year (2017: 94%). However, the mix within Hedging products has changed with UK-based Dynamic Hedging clients choosing to either transfer to lower-margin Passive Hedging or to terminate during the first half of the year as a result of negative returns and cash flows following a period of sterling weakness after the EU referendum. Currency for Return and Multi-product strategies increased during the year predominantly as a result of aggregate net inflows of +$0.9 billion, and together now account for 8% of total AUME (2017: 6%). Client numbers Client numbers reached 60 at 31 March 2018 (2017: 59). The net increase of one client over the year was comprised of seven new clients and six clients whose mandates were terminated. AUME composition by product and base currency Base currency 31 March 18 31 March 17 31 March 18 31 March 17 31 March 18 31 March 17 31 March 18 31 March 17 Dynamic Hedging Passive Hedging Currency for Return Multi-product Sterling US dollar Swiss franc Euro Canadian dollar Singapore dollar Swedish krona — GBP 1.7bn GBP 6.6bn GBP 7.8bn — — — — USD 4.3bn USD 4.3bn USD 1.0bn USD 0.7bn USD 0.4bn USD 0.7bn USD 1.2bn USD 0.2bn — CHF 2.6bn CHF 2.3bn — — — — — — CHF 32.2bn CHF 31.6bn — EUR 7.1bn EUR 5.4bn — — — — — — CAD 0.5bn CAD 0.4bn — SGD 0.1bn SGD 0.1bn — SEK 2.6bn SEK 2.4bn — — — — — — — — — — — — 27 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information FINANCIAL REVIEW The Group saw increased revenues in the year and continues to invest in resources to further enhance its differentiated products and services. Steve Cullen Chief Financial Officer Overview The Group’s AUME grew to $62.2 billion (+7%) representing the highest ever year end AUME reported for the Group, when expressed in US dollars. Asset net outflows were -$1.2 billion (2017 net inflows: +$3.2 billion), and increases in underlying equity and other market movements totalled +$5.1 billion (2017: +$5.4 billion). Client numbers remained broadly consistent with last year, reaching 60 at the year-end (2017: 59). The Group’s total revenue increased by 4% over last year, notwithstanding the reversal in part of last year’s tailwind due to sterling’s depreciation following the UK referendum vote and its effect on those Group revenues denominated in the base currencies of our clients, when retranslated into sterling. The Group continued to invest in resources to maintain the level of innovation and product enhancement necessary to maintain Record’s differentiated and premium product and service offering over the long term. Total operating expenditure (excluding variable remuneration costs) increased by 13% over the prior year, including increases in both personnel costs (+11%) and non-personnel costs (+15%). Variable remuneration costs relating to the Group Profit Share (“GPS”) scheme decreased by 6% in line with the decrease in operating profit (calculated before GPS). The Group’s operating profit margin decreased to 31% (2017: 34%) for the year, and profit before tax decreased by 7% versus the prior year. Profit and loss (£m) Revenue Cost of sales Gross profit 2018 23.8 (0.3) 23.5 Personnel (excluding GPS) (7.9) Non-personnel cost (5.4) Other income or expense 0.2 2017 (as restated) 23.0 (0.3) 22.7 (7.1) (4.7) 0.2 Total expenditure (excluding GPS) GPS Operating profit (13.1) (11.6) (3.1) 7.3 (3.3) 7.8 Operating profit margin 31% 34% Net interest received Profit before tax Tax Profit after tax — 7.3 (1.2) 6.1 0.1 7.9 (1.6) 6.3 28 Record plc Annual Report 2018Strategic report Revenue Record’s principal revenue is from management fees earned from the provision of currency management services. Revenue analysis (£m) 2018 (as restated) 2017 Management fees Performance fees Other currency services income Total 23.5 — 0.3 23.8 22.7 — 0.3 23.0 Record charges management fees to its clients based upon the AUME of the product provided. Both Passive and Dynamic Hedging typically have management fee only arrangements although Dynamic and, more recently, enhanced Passive Hedging programmes can be offered with a performance fee element. Record has historically offered both management fee only, and management fee plus performance fee structures on Currency for Return mandates. Higher performance fee rates usually accompany lower management fee rates and vice versa. Management fees are normally invoiced on a quarterly basis, although Record may invoice management fees for some of its larger clients on a monthly basis. Performance fees are invoiced on the basis agreed with the client, and can include quarterly, six-monthly or annual performance periods. Management fees Management fees earned during the year increased by 3% to £23.5 million (2017: £22.7 million), notwithstanding the impact of sterling strength during the year on the conversion of non-sterling denominated fees. The year-on-year growth in Passive Hedging continues, with Passive Hedging management fees increasing by 56% over the last three years, and totalling £12.6 million for the year (2017: £12.1 million). Passive Hedging management fees comfortably cover the annual personnel costs of £7.9 million and the majority of the non-personnel costs (excluding variable remuneration) of £5.4 million. The increase in Passive Hedging management fees was primarily driven by the full-year effect of net AUME inflows totalling $2.5 billion in the prior year, alongside growth in equity and other market levels (+$1.7 billion) over the year increasing the underlying size of these mandates. Dynamic Hedging management fees reduced by 8% to £5.1 million (2017: £5.6 million). Net outflows totalled $1.7 billion over the year. Inflows of $0.6 billion into Currency for Return mandates in the year, alongside the full year effect of inflows of $0.3 billion in the prior year, resulted in an 80% increase to related management fees which totalled £1.8 million for the year. Total Multi-product management fees remained at £4.0 million for the year with fees from inflows of +$0.3 billion early in the year offsetting the reduced fees arising from net outflows of $0.5 billion in the latter half of the prior year. Management fees by product (£m) Dynamic Hedging Passive Hedging Currency for Return Multi-product Total 2018 5.1 12.6 1.8 4.0 2017 5.6 12.1 1.0 4.0 23.5 22.7 Management fees by product (£m) 22.7 4.0 1.0 23.5 4.0 1.8 12.1 12.6 5.6 5.1 2017 2018 Multi-product Currency for Return Passive Hedging Dynamic Hedging Average management fee rates for all product lines have remained broadly constant throughout the year ended 31 March 2018. Average management fee rates by product (bps) 2018 2017 Dynamic Hedging Passive Hedging Currency for Return Multi-product 14 3 16 18 12 4 15 20 Aggregate Currency for Return fee rates on AUME can change as a result of increasing or decreasing portfolio sizes for mandates with defined volatility targets, where the fee rate is linked to the target volatility. Certain Multi-Strategy portfolio sizes have been increased as volatility in the underlying strategies has fallen and as diversification between strategies has become greater, reducing the volatility of the aggregate return to the client. This effect may reverse in future periods. Fee rates based on volatility targets have not changed during the period. Performance fees Performance fees can be earned from Currency for Return, Dynamic Hedging and now more recently from some enhanced Passive Hedging programmes, dependent on the individual client agreement. Record had two Dynamic Hedging mandates during the year incorporating a performance fee component, both of which were for UK-based clients. As reported in October 2017, Record’s remaining UK-based Dynamic Hedging programmes ceased without any accrued performance fees. The first performance fees capable of being earned under the enhanced Passive Hedging programmes will be earned in the year ended 31 March 2019. There was no performance fee earned in the year (2017: nil). Other currency services income Other currency services income totalled £0.3 million (2017: £0.3 million) and consists of fees from ancillary currency management services including revenue from the licensing agreement with WisdomTree. Gains or losses made on derivative financial instruments employed by the Group’s seed funds or as a result of hedging activities, and other FX adjustments which were previously included within revenue as “other income” have been re-presented in expenditure as “other income or expense”. Details of the effect of this presentational change are provided in note 29 to the financial statements. 29 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information FINANCIAL REVIEW CONTINUED Expenditure Operating expenditure The Group continues to invest in personnel and resources to maintain its innovative approach and its premium products and levels of service. The enhanced Passive Hedging service has been developed with a view to saving costs and adding value for those Passive Hedging clients with the flexibility to take advantage of the episodic nature of the opportunities arising. This additional capability requires higher technical expertise and resource than the core Passive Hedging product alone. Group operating expenditure (excluding variable remuneration) increased by 13% to £13.1 million for the year (2017: £11.6 million). Personnel costs for the year increased to £7.9 million, an increase of 11% over the prior year reflecting the growth in employee numbers, which rose from an average of 73 last year to 81 this year. The increase in non-personnel costs of 15% was driven predominantly by the full-year impact of the increase in occupancy costs associated with the new lease on larger offices for Record’s headquarters in Windsor and the move of the US office from Atlanta to New York, both at higher market rentals than was previously the case. The Group also signed a lease for the new office in Zürich during the year (see note 23 of the financial statements for further detail). One-off costs of £0.2 million were incurred in the year relating to the Tender Offer in July 2017. Group Profit Share Scheme The Group operates a Group Profit Share Scheme such that a long-term average of 30% of underlying operating profit before Group Profit Share (“GPS”) is made available to be awarded to staff. The Remuneration Committee has agreed that for the year ended 31 March 2018, the Group Profit Share Scheme is 30% of pre-GPS operating profit. This represents £3.1 million, a decrease of 6% over the previous financial year and in line with Group financial performance. Directors and senior management in Record are required to take a proportion of this remuneration in the form of shares which are subject to lock-up arrangements under the scheme rules. 30 Subject to shareholder approval, the final ordinary dividend will be paid simultaneously with the special dividend on 1 August 2018 to shareholders on the register on 29 June 2018, the ex-dividend date being 28 June 2018. All ordinary and special dividends for the financial year will be fully covered by earnings. For the current and future financial years, the Board intends to continue to pursue a progressive dividend policy and to consider the return of excess earnings over ordinary dividends to shareholders, potentially in the form of special dividends. On this basis, such distributions to shareholders will be considered on a “total distribution” basis, such that the total distribution for any one financial year will at least be covered by earnings, whilst always being subject to market conditions at the time, and to any further excess capital assessed as required by the Board. Financial stability and capital management The Group’s balance sheet is strong and liquid with total net assets of £26.6 million at the end of the year, including current assets managed as cash totalling £22.7 million. The business remains cash generative, with net cash inflows from operating activities of £2.7 million for the year. The Board’s capital policy is to retain minimum capital (being equivalent to shareholders’ funds) within the business broadly equivalent to twelve months’ worth of future estimated operating expenses (excluding variable remuneration), plus capital assessed as sufficient to meet regulatory capital requirements and working capital purposes, and for investing in new opportunities for the business. To this end, the Group maintains a financial model to assist it in forecasting future capital requirements over a three year cycle under various scenarios and monitors the capital and liquidity positions of the Group on an ongoing and frequent basis. The Group has no debt. In July 2017, the Group returned £10 million of excess capital to shareholders by a repurchase of shares via a Tender Offer, whilst retaining a significant capital buffer in the business over its regulatory requirements in line with the capital policy. Operating profit and margins Notwithstanding the increase to management fees and revenue for the year, the continued investment in resources and the increase in non-personnel costs has resulted in a 6% decrease in operating profit for the year to £7.3 million, and a decrease in the Group operating margin to 31% (2017: 34%). Cash flow The Group’s year end cash and cash equivalents stood at £12.5 million (2017: £19.1 million). The cash generated from operating activities before tax was £4.3 million (2017: £8.7 million); the majority of the decrease year on year is the decrease in cash of £4.1 million following the loss of “control” and subsequent deconsolidation of the Record Currency – Emerging Market Currency Fund (see note 12 for further details). £1.6 million was paid in taxation (2017: £1.6 million) and £6.8 million paid in dividends (2017: £3.6 million). During the year the Group repurchased 22.3 million shares via a Tender Offer for cash of £10 million. At the year end, the Group held money market instruments with maturities between three and twelve months, worth £10.2 million (2017: £18.1 million). These instruments are managed as cash by the Group but are not classified as cash under IFRS rules (see note 16 of the financial statements for more details). Dividends Shareholders received an interim ordinary dividend of 1.15 pence per share paid on 22 December 2017, equivalent to £2.3 million. As disclosed in the Chairman’s statement on page 4, the Board is recommending an increased ordinary dividend in line with the progressive dividend policy and in addition a special dividend returning the excess of this year’s earnings over the total ordinary dividend and increased capital requirements, to shareholders. Consequently, the Board recommends paying a final ordinary dividend of 1.15 pence per share, equivalent to £2.3 million, and taking the overall ordinary dividend to 2.30 pence per share. Simultaneously, the Board is also paying a special dividend of 0.5 pence per share (equivalent to £1.0 million), making the total dividends paid for the year of £5.6 million equivalent to 92% of total earnings of 3.03 pence per share. The total ordinary and special dividend paid in respect of the prior year ended 31 March 2017, were 2.00 pence per share and 0.91 pence per share respectively. Record plc Annual Report 2018Strategic reportOur business model and Brexit The British government invoked Article 50 on 29 March 2017, beginning the two-year countdown to the UK withdrawing from the European Union. Notwithstanding the more recent progress made in negotiations, uncertainty remains on the possible outcomes and timeframes for many aspects of the withdrawal. Approximately 90% of our revenue was sourced from clients based outside of the EU27, so any decrease in our current EU27-sourced revenue would prove challenging, although not fundamental to our ability to continue to operate. However, the Group intends to take all reasonable steps to maintain its ability to continue to service current EU clients and to gain more EU clients in the future. In this respect, we continue to closely monitor the progress of negotiations, and have made sufficient progress with contingency plans that we would expect would allow us to achieve this objective, no matter what the outcome of the negotiations, including any transition period. For this reason, we consider Brexit to represent a level of risk to the continued operation and viability of the business that is lower than those principal risks used for the stress scenarios and modelled through the ICAAP. Cautionary statement This Annual Report contains certain forward-looking statements with respect to the financial condition, results, operations and business of Record. These statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied in this Annual Report. Nothing in this Annual Report should be construed as a profit forecast. Record Currency Management Limited (“RCML”) is a BIPRU limited licence firm authorised and regulated in the UK by the Financial Conduct Authority (“FCA”), and is a wholly owned subsidiary of Record plc. Both RCML and the Group submit semi-annual capital adequacy returns to its regulator (FCA), and held significant surplus capital resources relative to the regulatory financial resource requirement throughout the year. The Board has concluded that the Group is adequately capitalised both to continue its operations effectively and to meet regulatory requirements, due to the size and liquidity of balance sheet resources maintained by the Group. The Group held regulatory capital resources based on the audited financial statements as at 31 March, as follows: Regulatory capital resources (£m) Core Tier 1 capital 2018 26.6 Deductions: intangible assets (0.2) Regulatory capital resources 26.4 2017 36.8 (0.2) 36.6 Further information regarding the Group’s capital adequacy information can be found in the Group’s Pillar 3 disclosure, which is available on the Group’s website at www.recordcm.com. Viability statement In accordance with the UK Corporate Governance Code, the Directors have performed a robust assessment of the viability of the Group considering the business model, the Group’s expected financial position, Board strategy and risk appetite, the Group’s solvency and liquidity and its principal risks. Based on this assessment, the Directors have a current and reasonable expectation that the Group will continue to operate and meet its liabilities as they fall due up to 31 March 2021. The Directors review the financial forecasts and position of the Group on an ongoing basis. The capital and dividend policy reflects the stated objectives of maintaining a strong balance sheet whilst allowing the Group the flexibility to adapt its products and services to market conditions, or to take advantage of emerging business opportunities. The Group’s strategy and principal risks are assessed and reviewed regularly by the Board, as well as by the Executive Committee and operational sub-committees within the Group. Further detail on the Group’s strategy and principal risks is given in the Strategic report on pages 10 and 32 respectively. In assessing the viability of the Group the Directors have considered the principal risks affecting the Group, which underpin the basis for the stress testing of the business plan conducted as part of the Group’s Internal Capital Adequacy Assessment Process (“ICAAP”). The ICAAP uses severe but plausible stress scenarios assuming the crystallising of a number of these principal risks to assess the options for mitigating the impact on the Group, and for ensuring that the ongoing viability of the Group is sustained. Some of the stress scenarios include the following factors and assumptions: • Market downturn – causing a decrease to AUME (whether through outflows or a reduction in value due to the link to other financial markets) and hence revenue and profitability; • Operational risk event – causing AUME outflows and potentially reputational damage; and • Market intervention – by a government or regulatory body rendering some of the Group’s products ineffective and hence a reduction in AUME. The scenarios assume mitigating actions including the potential for non-critical cost reductions and reassessing the dividend policy, although any mitigating actions would need to be reassessed depending on the specific circumstances and expected duration of the factors affecting the business model at the time. The possibility that the impact and timing of factors potentially affecting the viability of the Group could be more severe than assumed plausible for the above testing should also be noted. The market and regulatory environment in which the Group operates continues to evolve at a pace. The Directors consider a three-year horizon over which to assess the viability of the Group to be appropriate under such circumstances, since any further planning horizon provides a greater level of uncertainty to financial projections. This approach is consistent with that of the ICAAP. Upon review of the results of the stress testing, the Directors concluded that the Group would have sufficient capital and liquid resources to withstand the stressed scenarios and ensure its ongoing viability, based on current information and the three-year viability horizon. 31 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationRISK MANAGEMENT The Record culture is one of integrity and accountability; core values that are embedded into the control environment surrounding all areas of the business. Capital adequacy risk is the risk that the Group is unable to support the strategic business objectives of the business due to its minimum regulatory capital restrictions. The Group has a capital and dividend policy, which seeks to ensure that capital retained is broadly equivalent to one year’s worth of estimated future overheads (excluding variable remuneration), in addition to capital assessed as required for regulatory purposes, for working capital purposes and for investing in new opportunities for the business. This policy ensures a significant capital buffer over regulatory requirements, and consequently capital adequacy risk is not considered a significant risk in terms of the top ten principal risks discussed further in the tables below. The business is also exposed to more wide-ranging risks being conduct risk and reputational risk. Conduct risk is defined as the risk of causing detriment to a client or damaging the integrity of the market because of poor systems or processes, or inappropriate judgement by staff in execution of the Group’s business. The conduct of our staff and the strength of our internal control systems and processes are fundamental to the effective operation of the Group’s risk management framework. The conduct risk is therefore evident and managed within each individual category of risk, and when combined equates to the overall conduct risk of the Group. Consequently, conduct risk is not considered a separate risk category. Reputational risk is the risk of loss or adverse impact arising from the unfavourable perception of the Group on behalf of clients, counterparties, employees, regulators, shareholders or other stakeholders. Reputational risk can manifest as a consequence of an occurrence of any of the Group’s principal risks, either in isolation or together with other risks, and is therefore considered to form an integral part of each of the Group’s principal risks. For this reason, reputational risk is not considered a separate risk category. Oversight Oversight of the risk management framework is governed by various committees as delegated by the Board. The Board has delegated authority to the Audit and Risk Committee to provide oversight and independent challenge in relation to internal controls, risk management systems and procedures and external financial reporting. The Executive Committee is the delegated decision-making body for the day-to-day operation of the business and includes executive Board members and other senior personnel. The Board has delegated authority to the Investment Committee to approve changes to any of the Group’s investment processes and to establish and maintain policies for these processes. The Committee’s membership includes Board members and senior personnel including the Chief Investment Officer, the Chairman, the Chief Executive Officer, the Head of Client Team, the Head of Portfolio Management and the Head of Investment Strategy. Investment Committee approval is required prior to implementation of any new or amended investment process or product. The Board has ultimate responsibility for risk and the oversight of the risk management process within the business. Recognising that risk is inherent in all of the Group’s business dealings, and in the markets and instruments in which the Group operates, it places a high priority on ensuring an integrated approach and a strong risk management culture is embedded throughout the Group, with accountability at all levels within the business. Effective risk management and strong internal controls are integral to the Group’s business model and are reflected in the risk management framework adopted within the business. Risk management framework Risk appetite As part of its responsibility for the risk and oversight of the risk management process, the Board determines the risk appetite of the business. This defines the risk tolerances within which the business must operate in order to achieve our strategic and business objectives, and takes into account the interests of clients, employees and shareholders as well as any capital or any other regulatory requirements. The Board’s ICAAP (Internal Capital Adequacy Assessment Process) includes the risk appetite statement and the process used for the monitoring of key risks against defined thresholds to ensure adverse trends or levels of heightened risk are identified and appropriately escalated for action if required. The Board reviews and considers the risk appetite and tolerances on a regular and ongoing basis in light of strategic plans, and changes in the business and regulatory environment. The Board currently considers the following categories of risk as appropriate for determination of the risk appetite of the Group: • Capital adequacy risk • Conduct risk • Reputational risk • Strategic and business risk • Market risk • Credit risk • Operational risk • Investment risk 32 Record plc Annual Report 2018Strategic reportExternal independent assurance for shareholders is gained through the statutory annual external audit process run by PricewaterhouseCoopers LLP (“PwC”), the Group External Auditor. The Group also commissions the External Auditor to perform the annual service auditor’s report under both the International Standard on Assurance Engagement (“ISAE”) 3402 and the American Institute of Certified Public Accountants Attestation Standard AT-C Section 320 (“AT-C 320”). In performing this work, PwC reports its opinion on the description of internal controls with respect to the investment management and information technology activities, the suitability of the design of the relevant controls, and the operating effectiveness of specific controls for the period 1 April to 31 March, in line with the Group’s financial year. The Group considers the strong capital buffer retained under the capital and dividend policy to effectively provide an additional line of defence in terms of mitigation when considering its principal risks. Principal risks The following section shows the Board’s assessment of the top ten inherent risks faced by the business during the year and currently, alongside an explanation of how these risks have been managed or mitigated down to a net risk position in line with the Group’s risk appetite, and how the significance of the risk has changed during the year. These risks fall into a number of distinct categories and the means used to mitigate them are both diverse and relevant to the nature of the risk concerned. Embedded culture of integrity and accountability External independent assurance activity 3rd line of defence Internal audit (independent assurance – Deloitte) 2nd line of defence Control and oversight functions Statutory external audit (independent assurance – PwC) 1st line of defence Business operations and support ISAE 3402 and AT-C 320 service auditor’s report on internal controls (independent assurance – PwC) The Board has established a Risk Management Committee which is chaired by the Chief Operating Officer and has the Chief Financial Officer, the Head of Operations, the Head of Trading, the Head of Portfolio Management, the Head of Portfolio Implementation, the Head of Front Office Risk Management and the Head of Compliance and Risk as members. As prescribed in terms of reference approved by the Audit and Risk Committee, the Risk Management Committee continually reviews existing and new risks, and the nature of any operational incidents with the objective of ensuring that adequate systems and controls are in place to minimise and preferably eliminate such incidents and their impact on clients and the Group. Lines of defence The Record culture is one of integrity and accountability; core values that are embedded into the control environment surrounding all areas of the business. The overall risk management framework is underpinned by three lines of defence and is overseen by the Audit and Risk Committee, as delegated by the Board. Within this framework the first line of defence provides management assurance and rests with line managers within their specific departments and with senior managers responsible for the implementation and maintenance of higher-level controls to ensure adherence to quality standards and regulatory requirements. Functions such as Front Office Risk Management, Compliance and Risk, Legal, HR and Finance provide the second line of defence through the drafting, implementation and monitoring of policies and procedures to align with best practice, to ensure compliance and to provide assurance and oversight for the Board and the Audit and Risk Committee. The third line of defence is performed by internal audit which provides independent assurance on the adequacy and effectiveness of the Group’s risk management, control and governance processes providing recommendations to improve the control environment. Internal audit is provided by Deloitte LLP (“Deloitte”). 33 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationRISK MANAGEMENT CONTINUED Strategic risks The risk of failing to identify and implement the correct strategy would impact expected outcomes, earnings and profitability of the Group. This risk is influenced by internal and external factors. Risk ownership: Delegated to: Record plc Board and Executive Committee Risk How risk is managed Board risk rating Medium Change Record has established a Brexit Working Group to monitor ongoing progress with EU negotiations. A contingency plan has been prepared, including engagement with the Central Bank of Ireland, with a view to ensuring the continued access to current and future EU27-based clients. Notwithstanding the temporary pause to the implementation of this plan due to the probable extension of the transition period to December 2020, we continue to prepare alternative plans in the event that the transition period does not materialise. Focus on bespoke solutions and added-value to differentiate products within the market. Medium Focus on offering premium service to clients differentiates Record from competition and builds long-standing and “trusted adviser” relationships. Continued investment into systems and process enhancements, plus flexible internal structure can accommodate new obligations (e.g. regulatory reporting) in most efficient way. Brexit Description of risk: the risk that Record will not be ready to comply with post-Brexit requirements in respect of the legal and structural framework under which banking, trading and regulatory rules will operate. Brexit may also reduce the ability of the business to attract and retain talented employees. Potential impact: the inability to service existing clients and to attract new clients from EU27 countries may result in outflows and the loss of future potential revenue streams. A lack of talent may also affect future product innovation and succession planning in the business. Margin compression Description of risk: the risk of a lower fee environment due to changes in investor demand or competitive pricing pressures, and/or rising costs within the industry arising from regulatory requirements and/or technological advances. Potential impact: reduced fee rates and/or increased costs lead to decreased margins. 34 Record plc Annual Report 2018Strategic reportBusiness risks The risk of the business being unable to generate fee income and to control costs in line with business plans. This risk is influenced by internal and external factors. Risk ownership: Delegated to: Record plc Board and Executive Committee Risk How risk is managed Concentration risk Description of risk: the risk of concentration either by product, client type or geographical location leading to over-reliance on any one category of revenue. Record has a relatively small number of high-value clients. For the year ended 31 March 2018, Record’s largest client generated 17% of revenue, and the largest five client relationships generated 60% of revenue. For the year ended 31 March 2018, 30% of revenues derived from Passive Hedging for Swiss pension funds, which are required by regulation to hedge currency risk above a certain threshold – this regulation could be abolished. Potential impact: Record’s products are all currency management based. A move away from currency by its core client base or a high-value client, or a change in Swiss regulation could result in material outflows and loss of revenue. People and employment risk Description of risk: the inability to attract or retain key employees could impact the Group’s ability to support business activities or achieve strategic objectives. Potential impact: not supporting business activities or achieving the strategic objectives of the Group would lead to a material negative impact on corporate performance. Diversification of investment capabilities across risk-reducing and risk-taking products to reduce single event/product exposure. Record’s non-hedging revenues increased from 22% to 25% of management fees during the year, and the Multi-Strategy product reached the fifth anniversary of its live track record leading to the launch of the Multi-Strategy fund in the final quarter of the year. Record’s clients are institutional and diverse, including government and public pension funds, charities, foundations, endowments, family offices, other fund managers and corporate clients. Record’s commitment to client services excellence, the transparency of the investment process and the regular reporting and face to face contact with clients is integral to retention. The Group seeks to build long-term and close trusted adviser relationships with its clients, which are intended to assist in retaining such mandates even in the event of regulatory change. The Group has continued to invest in resources to broaden capabilities in research, investment and client servicing thereby reducing the risk associated with the loss of key talent. The Group considers that its office environment and culture, as well as its remuneration policy and in particular the operation of the Group Profit Share and Share Schemes promotes key personnel retention and effective risk management. The Group’s investment process is steered by an Investment Committee comprising members of the Board and senior management and all products are managed on a predominantly systematic process which is not reliant on any individual employee. Board risk rating Medium Change Medium 35 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationRISK MANAGEMENT CONTINUED Market risk The risk of any impact on the Group’s financial condition due to adverse market movements caused by market variables such as interest rates, FX prices, etc. Risk ownership: Delegated to: Record plc Board and Executive Committee Risk How risk is managed Board risk rating Change Low The Group trades on behalf of clients in currency and related instruments with a large panel of banking counterparties. Currency is a particularly deep and liquid market that has continued to provide sufficient daily liquidity, despite disruptive market “shock” events such as the removal of the Swiss franc peg in January 2015, and the result of the UK referendum in June 2016. Market liquidity risk Description of risk: the risk of reduced or constrained market liquidity affecting Record’s investment process, which relies on trading a high turnover of client positions in both size and volume. In recent years although liquidity has routinely been sustained in normal market environments, it has become more fragile and less reliable in stressed market conditions. Potential impact: a reduction in market liquidity could affect Record’s ability to meet its contractual obligations to clients, resulting in outflows and reductions to revenue. Treasury risk Description of risk: more than 80% of Group revenues are denominated in a currency other than sterling, the Group’s functional and reporting currency, yet the Group’s cost base is predominantly sterling based. Potential impact: periods of sterling strength may have adverse effects on Group profit. Description of risk: the Group invests a limited amount of its resources in seed funds, exposing it to credit risk and foreign exchange risk Potential impact: may have adverse effects on Group profit. On a regular and ongoing basis, the Group hedges the non-sterling income not capable of being utilised for costs arising in the same currency, from the date that income is accrued until the anticipated date of receipt by using forward fixed rate currency sales contracts. High Monthly reporting of all balance sheet exposures to the Executive Committee and Board. The Group’s level of investment in seed funds is strictly limited in accordance with the Board’s risk appetite statement. Credit risk The risk that management does not appropriately mitigate balance sheet risks or exposures potentially resulting in an adverse impact on the financial performance or position of the Group. Risk ownership: Delegated to: Chief Financial Officer Risk How risk is managed Credit risk Description of risk: the risk that unexpected losses may arise as a result of the Group’s clients or market counterparties failing to meet their obligations to pay. Potential impact: may lead to reduced profitability and earnings. Record’s dedicated Cash Management Team manages the Group’s overall credit exposure in accordance with strict levels of exposure by instrument, counterparty, tier and duration. The Group has adopted a credit risk policy to manage its credit risks, under which it follows clear counterparty diversification and minimum credit rating criteria. Monthly reporting of all balance sheet exposures to the Executive Committee and the Board. Record has predominantly large institutional clients, including government and public pension funds, which typically offer less credit risk. Board risk rating Change Low 36 Record plc Annual Report 2018Strategic reportOperational risk Operational risks are broad in nature and inherent in all activities and processes performed across the business, and all other businesses. They include the risk that operational flaws result in business losses – through error or fraud, the inability to capitalise on market opportunities, or weaknesses in systems and controls. Risk ownership: Delegated to: Risk Management Committee (“RMC”) Risk How risk is managed Technology and information security risk Description of risk: the risk of failure of the Group’s technology and support systems, or penetration of such systems by third parties. Potential impact: consequential loss of data, or the significant disruption to, or prevention of the Group’s ability to operate, which could cause negative financial consequences. Operational control environment Description of risk: the risk of errors in execution and process management, dealing, portfolio implementation, settlement, managing bespoke requirements and reporting and the risk of non-compliance including monitoring of investment breaches. Potential impact: such errors or non-compliance would potentially lead to negative financial consequences. The Group has developed comprehensive disaster recovery (“DR”) and business contingency plans. These cover scenarios from server failure to destruction of the Group’s offices. Alternative office facilities and equipment are available at a DR site should the premises be compromised. DR procedures are tested on a regular basis at the site of the disaster recovery provider. Information technology policies and technical standards are deployed across the Group, including induction and security awareness training. Cyber risk is a recurring item on the annual internal audit plan of the business and cyber-related KPIs are reported in Management and Board information packs on a monthly basis. Regular review of the systems and controls in place ensures application of latest best practice and security procedures, as demonstrated during the year with the implementation of next generation end point protection across business systems. During the year, the training programme for employees was strengthened with the introduction of regular “phishing” tests to improve awareness of such threats as they evolve. A dedicated portfolio management team oversees the investment process and a dedicated and independent Front Office Risk Management team provides post-trade compliance assurances, including changes to any static data which may impact the behaviour of the systematic processes. Record’s compliance and risk department regularly reviews adherence to formal and established procedures via a structured monitoring programme, reporting directly to the RMC. Automated post-trade compliance tests are used to monitor whether programmes are running in line with expectations, and identify any potential issues that may need to be resolved in a timely manner. Record’s internal audit function reports independently to the Audit and Risk Committee and reviews higher-risk operational departments on a cyclical basis, ensuring regular independent coverage of deemed higher-risk operational areas. Record prepares an annual ISAE 3402 and AT-C 320 service auditor’s report on internal controls. The contents of this report, which has been independently reviewed and tested by PwC, provide assurances of the Group’s procedures and controls to mitigate operating risk. Board risk rating Change High Medium 37 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationRISK MANAGEMENT CONTINUED Investment risk The risk that long-term investment performance is not delivered, damaging prospects for winning and retaining clients, and putting management fee rates under pressure. Risk ownership: Delegated to: Investment Committee Risk How risk is managed Board risk rating Change Product underperformance risk Description of risk: risk of sustained periods of not delivering target investment performance. Experienced Investment Committee meets regularly. Medium Dedicated currency management research and investment focus. Potential impact: underperformance could result in AUME outflows and client losses with resultant loss of revenue. Diversification, both through offering multiple strategies, and through a client base which is diverse in geography and base currency. Remuneration policy links senior management’s remuneration to long-term performance of the Group. 38 Record plc Annual Report 2018Strategic reportCORPORATE SOCIAL RESPONSIBILITY The Board recognises that, through its actions, it has a direct impact upon its employees, the community and the environment. In conducting its business operations, the Group has a responsibility to its stakeholders and the environment. Our stakeholders, with whom we maintain an ongoing dialogue, include shareholders, clients, employees, regulators and the local community. Our approach to corporate social responsibility is built around three key areas: • Community • Workplace • Environment Community During the course of the year, the Group made charitable donations totalling £13,658. Our charitable giving is focused on employee choice, with the Group matching employee donations and sponsorship. We also provide financial assistance to students studying at Balliol College, Oxford through a half-bursary scheme, which provides grants to students who aim to pursue ambitions which will benefit the wider community, for example in medical or charitable fields. The Group continues to encourage employees to participate in fundraising activities for charitable causes. This year employees participated in a variety of events, including charity lunches and a number of dress-down days. In addition to these events, a group of employees participated in a volunteering day at a day centre for SHOC (Slough Homeless Our Concern). Employees assisted with a number of tasks including checking visitors into the day centre and cooking meals, as well as assisting with cleaning and maintenance of the centre itself. The Group has an established internship programme for students and during the year we welcomed interns from Oxford University, London School of Economics, ETH Zürich, University of Warwick, Royal Holloway and University of Bristol. Charitable donations (£’000) 16.1 14.7 13.7 2016 2017 2018 Human rights Record complies fully with appropriate human rights legislation in the countries in which it operates. 39 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationCORPORATE SOCIAL RESPONSIBILITY CONTINUED Workplace Record is committed to providing a working environment in which bright, dynamic and committed individuals thrive. We believe that investing in our staff and developing their potential is key to the success of the business and our policies and practices reflect this. The Group’s UK offices have been designed to allow all departments to work together in an open plan environment. The open plan office allows ease of communication between departments, as well as enabling staff to work closely with senior management. In addition to the open plan office, the UK office also has an additional floor which has been designed to accommodate additional meeting rooms as well as a generous breakout area for staff, with a large kitchen area and space for recreational and fitness activities. The office environment is indicative of the Group’s commitment to staff welfare and to providing a happy and stimulating working environment. The office environment and culture promotes staff development and training. All staff are invited to participate in monthly company update meetings which are led by the Chief Executive Officer. The Group also provides study support to employees who wish to pursue relevant professional qualifications. The Board has established a staff-run welfare committee which organises team-building and other social events enhancing interaction between different departments and different grades within the business. In addition, the Group provides a number of different benefits to employees including pension, private medical cover, life insurance, permanent health insurance and subsidised gym membership. All employees are rewarded through the Group Profit Share Scheme and have the opportunity to acquire shares in Record plc through this scheme, as well as through the Record plc Share Incentive Plan. Staff retention (%) 88% 83% 93% 2016 2017 2018 Equal opportunities and diversity The Group’s objectives include ensuring that all staff are provided with equal opportunities and that the workplace is free of discrimination. The Group aims to ensure that the recruitment process is fair and is carried out objectively, systematically and in line with the requirements of employment law. The Group ensures all staff are aware that it is not acceptable to discriminate, harass or victimise someone, and that it is also unlawful and such behaviour will not be tolerated under any circumstance. The Group believes that valuing what is unique about individuals and drawing on their different perspectives and experience will add value to the way the Group does business. By accessing, recruiting and developing talent from the widest possible pool the Group can gain an insight into different markets and better support client needs. The Group aims to create a productive environment, representative of different cultures and groups, where everyone has an equal chance to succeed. The gender diversity within the Group is shown below: As at 31 March 2018 Female Male Board Directors 3 33% 6 67% Senior management Other staff All employees 2 13% 14 87% 25 30 42% 35 58% 35% 55 65% 40 Record plc Annual Report 2018Strategic reportEnvironment Gross CO2 emissions (Tonnes) Gross CO2 emissions per head (Tonnes) 258 366 348 5.3 6.7 5.3 Scope 3 Scope 2 76 67 58 2016 2017 2018 Gross CO2 emissions by activity (Tonnes) 79 68 215 218 86 153 95 138 120 2016 2017 2018 Other Business travel Commuting 2016 2017 2018 The Group seeks to minimise its carbon footprint through recognising the environmental impact of its activities, reducing that impact through responsible procurement of goods and services, and offsetting its remaining carbon emissions. The Group first assessed its carbon footprint in July 2006, and has offset its carbon emissions since then through investment in renewable energy projects, currently in Kenya. The Group’s annual emissions1 (before offset) have been calculated using the WRI/WBCSD Greenhouse Gas Protocol. Scope 2 emissions principally relate to electricity and heat and Scope 3 emissions principally relate to travel. Scope 3 emissions accounted for 86% of emissions (2017: 85%). The Company’s Strategic report is set out on pages 2 to 41 of the Annual Report, and is comprised of the Introduction, Strategy and Business review, Risk Management and Corporate Social Responsibility report. The Strategic report outlines our performance against our strategic objectives, performance and financial position, as well as our outlook for the future. The Strategic report was approved by the Board on 14 June 2018 and signed on its behalf by: James Wood-Collins Chief Executive Officer 1. Gross emissions data relates to the calendar year preceding the given financial year. 41 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationRecord plc Annual Report 2018 Governance CORPORATE GOVERNANCE Chairman’s introduction Board of Directors Corporate governance report Nomination Committee report Audit and Risk Committee report Remuneration report Directors’ report Directors’ responsibilities statement 43 44 46 50 52 56 71 73 Compliance statement The Company complied with the provisions of the UK Corporate Governance Code published in April 2016, which applied throughout the financial year ended 31 March 2018. 42 CHAIRMAN’S INTRODUCTION The Board has continued to work closely with the Group’s highly experienced management team to maintain its strong governance framework which effectively supports Record’s operational teams in delivering a high-quality service to all our clients. As a Board we have always believed that the long-term growth and success of the Record Group is underpinned by our focus on culture, setting the tone from the top and establishing robust corporate governance practices. Succession planning has been a focus of the Board over the last 18 months as we have conducted a search for a new independent director to replace David Morrison who will cease to be deemed independent on 1 October 2018. I am delighted to confirm that we have identified and appointed a highly skilled individual, Tim Edwards, who I believe will add great value to the Board and bring extensive experience and good business insight to the Record Group. The UK and global regulatory and governance environments have continued to evolve at a rapid pace over recent months but I am confident that the Group’s governance arrangements remain both appropriate and highly effective and that going forward the Group will embrace further regulatory and governance change in its drive to best serve its stakeholders – clients, shareholders and employees. Neil Record Chairman 14 June 2018 Board overview The Board is responsible for the stewardship of the Company. Further information on the corporate governance framework is provided on pages 46 to 49. BOARD BOARD COMMITTEES NOMINATION REMUNERATION AUDIT AND RISK OPERATIONAL COMMITTEES EXECUTIVE INVESTMENT RISK MANAGEMENT Investment Management Group Portfolio Management Group OPERATIONAL SUB-COMMITTEES 43 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationBOARD OF DIRECTORS The Board continues to work hard to uphold Record’s values of diligence, transparency, accountability and probity, and to sustain them within the Group’s culture. Neil Record Chairman Neil Record founded Record in 1983 and has been its principal shareholder and Chairman since then. Prior to founding Record he was an economist at the Bank of England and worked in the commodity and currency trading department at Mars Inc’s UK subsidiary. N He is the author of numerous books and articles on currency and other risk management topics and is a frequent speaker at industry conferences and seminars worldwide. James Wood-Collins Chief Executive Officer James Wood-Collins joined Record in 2008 as a senior member of the Client Team. He was appointed as Chief Executive Officer in October 2010. He was previously at J.P. Morgan Cazenove where he had been a Managing Director advising financial institutions on M&A, IPOs and related corporate finance transactions. Steve Cullen Chief Financial Officer Steve Cullen joined Record in October 2003, and was appointed to the Board and made Chief Financial Officer in March 2013. Prior to joining Record, he qualified as a Chartered Accountant in 1994 and gained 15 years of audit experience within practice. Prior to being appointed to the Board, Steve led the Finance team for over nine years, reporting directly to the Chief Financial Officer, and was part of the internal management team at Record involved in the preparation for admission to trading on the London Stock Exchange in December 2007. Leslie Hill Head of Client Team Leslie Hill joined Record in 1992 and was appointed Head of Sales and Marketing in 1999. Her prior experience includes working at Lloyds Bank and Merrill Lynch where she was Director and Head of Corporate Foreign Exchange Sales worldwide. Bob Noyen Chief Investment Officer Bob Noyen joined Record in 1999 with responsibility for Investment and Research. He chairs Record’s Investment Committee and the Investment Management Group. He previously worked as Assistant Treasurer for Minorco (part of Anglo American plc). 44 Record plc Annual Report 2018GovernanceDavid Morrison Senior Independent Director A N R * David Morrison was appointed as a Non-executive Director in October 2009. David is the founder of Prospect Investment Management, a venture capital advisory firm which was responsible for several investments on behalf of a small group of investors. He is currently Chairman of both Be Heard Group plc and Maris Ltd, an investment holding company active in East Africa, and on the board of several private companies with which Prospect is associated. Jane Tufnell Non-executive Director A N R * Jane Tufnell was appointed as a Non-executive Director in September 2015. Jane co-founded the investment management firm Ruffer in 1994, and served on its management board until her retirement in June 2014. She is the senior independent director of The Diverse Income Trust plc, Chairman of Odyssean Investment Trust plc, and has been an independent Non-executive director of JPMorgan Claverhouse Investment Trust plc since October 2013. Rosemary Hilary Non-executive Director Rosemary Hilary was appointed as a Non-executive Director in June 2016. She was previously Chief Audit Officer of TSB Bank, and prior to that she held a number of senior financial services regulatory roles, transitioning from the Bank of England to the Financial Services Authority and then to the Financial Conduct Authority. Tim Edwards Non-executive Director *A N R Rosemary is also a Non-executive Director of Willis, the global broker, Vitality Life and Vitality Health, and the Pension Protection Fund. She is a member of the MBA Advisory Board at Cass Business School and a 30% Club mentor. A N R Tim Edwards was appointed as a Non-executive Director in March 2018. Tim is Chairman of Storm Therapeutics Limited, spun out of the Gurdon Institute, Cambridge University, and a Director of Ervaxx Limited, a company developing biological insights licensed from the Francis Crick Institute, London. Tim is also a Trustee of the Institute of Research in Schools, and was previously a member of the Governing Board of Innovate UK, the UK’s innovation agency; and a Non-executive Director of the Cell Therapy Catapult, and Chair of the UK BioIndustry Association. Gender diversity As at year end and as at the  date of report MALE 67% FEMALE 33% Board tenure 0-3 yrs 33% 4-6 yrs 11% 7+ yrs 56% A Audit and Risk Committee N Nomination Committee R Remuneration Committee * Chair 45 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationCORPORATE GOVERNANCE REPORT Corporate governance framework The Board has established a framework of committees and sub-committees to ensure robust corporate governance practices throughout the business. The Board is confident that this structure is appropriate and that the delegation of responsibilities allows the business to operate in a structured manner and to respond rapidly when issues arise. The Board of Directors Board responsibilities The Board has a schedule of matters specifically reserved to it for decision and approval, which includes but is not limited to: • determining the Group’s long-term strategy and objectives; • significant capital expenditure; • the Group’s annual and interim reports and preliminary announcements; • setting interim dividend and recommendation of final dividend payments; • effectiveness of internal controls; • authorisation of Directors’ conflicts or possible conflicts of interest; and • communication with shareholders and the stock market. Board membership The Board is headed by Neil Record (Chairman), with the Executive Directors, James Wood-Collins (Chief Executive Officer), Steve Cullen (Chief Financial Officer), Bob Noyen (Chief Investment Officer) and Leslie Hill (Head of Client Team). There are currently four Non-executive Directors, David Morrison, being the Senior Independent Director, Jane Tufnell, Rosemary Hilary and Tim Edwards. The biographical details of the Board members are set out on pages 44 and 45. Tim Edwards was appointed to the Board on 21 March 2018. Corporate culture Since the business was first established in 1983 Record has endeavoured to put the interests and needs of our clients first and this cultural belief is encouraged and deeply embedded within all business functions. The Board has worked hard to ensure that the importance of client focus through diligence, transparency, accountability and probity has been disseminated to all staff, contractors and consultants across the Group. The UK Corporate Governance Code The Board has adopted the principles established in the UK Corporate Governance Code April 2016 and its previous versions (all referred to as “the Code”) since its Admission to the Official List of the UK Listing Authority in December 2007. Copies of the Code can be obtained from the FRC’s website at www.frc.org.uk. Listed companies are required under the Financial Conduct Authority Listing Rules either to comply with the provisions of the Code or explain to investors in their next annual report why they have not done so. As a non-FTSE 350 company, Record plc is classed as a smaller company under the Code. The Group has been in compliance with the Code since Admission, except in particular limited circumstances where the provisions apply specifically to FTSE 350 companies: • the Board does not comprise a majority of independent non-executive directors on an ongoing basis (B.1.2.); • the annual Board performance evaluation is not externally facilitated (B.6.2.); • Directors are not re-appointed on an annual basis (B.7.2.). In all such instances Record plc has reviewed the appropriateness of the provisions to determine whether they should be applied or if departure is justified. The Board is satisfied that these decisions are in the best interest of the business and are not detrimental to the high standards of corporate governance they have established for the Group. The departures from the Code are fully explained in the following narrative. On an ongoing basis at least half the Board members have not been independent Non-executive Directors as required by the Code for FTSE 350 companies but the Board does comply with the Code’s provision for smaller companies to have at least two independent Non-executive Directors. The Board considers that the existing composition and the planned structure to have three independent Non-executive Directors going forward is appropriate given the current size and structure of the business. All Directors have access to independent professional advice, when required, at the Company’s expense as well as to the advice and services of the Company Secretary. The division of responsibilities between Chairman and Chief Executive Officer is clearly established, set out in writing and agreed by the Board. Role of the Chairman The Chairman is responsible for leadership of the Board. He is also responsible for overseeing the activities of the Chief Executive Officer and providing advice, guidance and support to the Executive Team. He works with the Board to develop Company strategy and support its implementation. The Chairman is a principal ambassador of Record and a guardian of the Group’s ethos and values. Role of the Chief Executive Officer The Chief Executive Officer is responsible for the executive management of the Group to grow the business profitably while acting in the interests of all stakeholders – clients, shareholders, employees and industry regulators and upholding the core values of Record. 46 Record plc Annual Report 2018GovernanceRole of the independent Non-executive Directors The Non-executive Directors are responsible for upholding high standards of integrity and probity; providing constructive challenge and helping to develop proposals on strategy. The Senior Independent Director’s role is to act as a sounding board for the Chairman, oversee the evaluation of the Chairman’s performance and serve as an intermediary for the other Directors if necessary. He is also available as an additional point of contact for shareholders and other stakeholders should they wish to raise matters with him rather than the Group Chairman or the Chief Executive Officer. In determining the independence of Non-executive Directors, the Board has taken into consideration the guidance provided by the Code. The Board considers David Morrison, Jane Tufnell, Rosemary Hilary and Tim Edwards to be independent at the current time. Neil Record is a Non-executive Chairman, although he is not considered to be independent. Re-election of directors Under the Code, all directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. The Code states that all directors of FTSE 350 companies should be subject to annual election by shareholders. All other directors should be subject to election by shareholders at the first Annual General Meeting after their appointment, and to re-election at the Annual General Meeting thereafter at intervals of no more than three years. Under the Company’s Articles of Association, the minimum number of Directors shall be two and the maximum shall be twelve. Directors appointed by the Board must offer themselves for election at the next Annual General Meeting of the Company following their appointment but they are not taken into account in determining the Directors or the number of Directors who are to retire by rotation and stand for re-election at that meeting. The minimum number of Directors who should retire by rotation is one third. The Board has reviewed these provisions in the Articles against the recommendations of the Code and has determined that, given the size and structure of the business, the Articles are appropriate and annual re-election is unnecessary. Board member diversity The Board has three female members in a board of nine and thus women make up 33% of the Board. It is the Board’s aim to maintain a diverse mix of skills, experience, knowledge and backgrounds across its members to ensure that the Board operates effectively. The Board’s opinion is that the current composition of members meets these criteria and is therefore appropriate for the business at the present time. Future executive director succession planning will take into account the benefits of diversity including gender diversity as set out in the Group’s Board Diversity Policy. Diversity in the workplace is detailed on page 40. Board meetings The Board met six times between 1 April 2017 and 31 March 2018 to review financial performance and to follow the schedule of matters reserved for its decision and approval. Comprehensive Board papers, comprising an agenda and formal reports and briefing documents are sent to Directors in advance of each meeting. Directors are regularly informed by senior executives and external advisers on the Group’s affairs, including commercial, regulatory, legal, corporate governance and other relevant matters. Appropriate and timely notice is given of all Board meetings and all Directors receive information in advance so that if they are not able to attend their input can be tabled and taken into consideration. The Board has twice-yearly offsite strategy meetings and additional meetings as required to address specific issues. Any concerns raised by Directors which are not resolved are recorded in the Board minutes. No such matters were noted during the year ended 31 March 2018. Board meeting and Committee meeting attendance Directors are expected to attend all meetings of the Board and Committees on which they serve. Details of Board and Committee attendance are included in the table below. Board/Committee member Board Audit and Risk Committee Remuneration Committee Nomination Committee Meetings in the year Neil Record David Morrison Jane Tufnell Rosemary Hilary James Wood-Collins Steve Cullen Leslie Hill Bob Noyen Tim Edwards 6 6/6 5/6 6/6 6/6 6/6 6/6 6/6 6/6 0/0 6 n/a 4/6 6/6 6/6 n/a n/a n/a n/a 0/0 9 n/a 7/9 9/9 9/9 n/a n/a n/a n/a 0/0 6 6/6 5/6 6/6 6/6 n/a n/a n/a n/a 0/0 David Morrison was unable to attend the Audit and Risk Committee, Remuneration and Nomination Committee meetings held in May 2017, the Board meeting held in June 2017 and the Audit and Risk Committee and Remuneration Committee meetings held in January 2018 due to medical reasons. The Board also met on 20 June 2017 to discuss the return of excess capital to shareholders and formally agreed a tender offer and share repurchase, further details of which are provided in the Chairman’s statement. The Non-executive Directors met without the Executive Directors on several occasions throughout the year, prior to scheduled meetings. 47 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationCORPORATE GOVERNANCE REPORT CONTINUED As in previous evaluations, the review of the comments made during the evaluation process identified no serious concerns over the functioning of the Board, its members or its Committees. Individual appraisal of each Director’s performance is undertaken by the Chief Executive Officer and the Chairman. The Senior Independent Director conducted an appraisal of the performance of the Chairman with input from the other Board members. The outcome of these appraisals in 2018 was positive and all roles were considered to be undertaken effectively. Board committees The Board has established three Board committees and delegated authority to each committee to enable it to execute its duties appropriately. The annual reports of the three committees provide a statement of each committee’s activities in the year: • Nomination Committee – report set out on pages 50 and 51; • Audit and Risk Committee – report set out on pages 52 to 55; and • Remuneration Committee – report set out on pages 56 to 70. The committees operate on written terms of reference, which are reviewed annually and which are available on the Company’s website or on request from the Company Secretary at the registered office address. The Chair of each Committee reports regularly to the Board. The work undertaken by the Audit and Risk, Remuneration and Nomination Committees was reviewed by the respective Committee Chair to assess each committee’s effectiveness during the year. The reviews concluded that the committees were operating in an effective manner and no concerns were raised and these conclusions were reported to the Board accordingly. Operational Committees The Board has also established three committees responsible for operational oversight and decision making as follows: Executive Committee The Executive Committee is the decision- making body for all day to day operations as delegated from the Board and Record plc’s subsidiaries. The Committee comprises the Chief Executive Officer as chair, the three other Executive Directors, the Chief Operating Officer, a Managing Director and the Head of Human Resources. In February 2018 the Board approved the addition of the Head of Human Resources to the Executive Committee membership, acknowledging that staff retention and development is key to the success of the Group going forward and that therefore Human Resources representation on the Committee would be highly beneficial. The appointment was subject to FCA approval of the Head of Human Resources performing a CF29 role. This approval was granted on 26 March 2018 so the Head of Human Resources did not attend any meetings as a Committee member in the year although he attended two meetings as an observer and four other meetings to present specific personnel-related issues. The Committee meets formally once a month and holds weekly operational update meetings. Standing agenda review items for formal meetings include clients and client prospects, the management accounts, departmental KPI data, compliance issues, projects and resourcing. Operational policy documents are regularly reviewed by the Committee prior to formal approval by the Board or the appropriate Board Committee. The Head of Compliance and Risk is a regular attendee of meetings (attending ten out of twelve meetings in the year under review). Minutes of all meetings are circulated to the Board for review and comment. Board induction and training New Directors appointed to the Board receive advice as to the legal obligations arising from the role of a director of a UK-listed company as part of a tailored induction programme. This training includes briefings with the Chairman, Executive Directors and Senior Management to help new directors to familiarise themselves with their duties and the Group’s culture and values, strategy, business model, businesses, operations, risks and governance arrangements. The Company Secretary, under the direction of the Chairman, is responsible for maintaining an adequate continuing education programme, reminding the Directors of their duties and obligations on a regular basis, ensuring good information flow between the Board, its committees and management and assisting with Directors’ continuing professional development needs. Board performance evaluation The Board is required by the Code to undertake an annual evaluation of its performance. The Code states that “evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness”. The Code recommends that evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years. The Board agreed that an external evaluation of performance was not necessary at the current time and delegated responsibility for the review to Jane Tufnell, Chair of the Nomination Committee. Jane held individual meetings with all the Board members to canvas opinions. The comments made during these meetings were recorded and a report produced which documented the observations made and assessed the activities and achievements of the Board and its committees during the period under review. Members were also invited to separately approach the Chairman or Company Secretary with any individual concerns or comments they had. No concerns were raised directly to the Chairman or the Company Secretary. 48 Record plc Annual Report 2018GovernanceInvestment Committee The Board has delegated the responsibility for authorising changes to existing investment processes and for approving new investment strategies to the Investment Committee. The Committee consists of the Chief Investment Officer, the Chief Executive Officer, the Head of Client Team, the Group Chairman, the Head of Portfolio Management, and the Head of Investment Strategy. The Committee meets as necessary responding both to internal developments and external events. Reports on the activities of the Committee are presented at each formal Board meeting for review and comment. Risk Management Committee The Audit and Risk Committee has delegated to the Risk Management Committee the task of overseeing and mitigating risks arising across the activities of Record Currency Management Limited, the regulated entity within the Group. The Chief Operating Officer, the Chief Financial Officer, the Head of Operations, the Head of Portfolio Management, the Head of Portfolio Implementation, the Head of Trading, the Head of Compliance and Risk and the Head of Front Office Risk Management are all members of the Committee. The Committee meets at least once a month and as necessary in response to individual or specific events requiring review. The minutes of meetings are circulated to the Audit and Risk Committee and a report on the Risk Management Committee’s activities is presented by the Chief Operating Officer, as the Committee Chair, at each Audit and Risk Committee meeting. Operational Sub-Committees The Investment Committee has further delegated certain investment process activities to the following sub-committees: Investment Management Group The Investment Committee has delegated to the Investment Management Group the authority to make certain decisions to override systematic investment processes and manage discretionary investment processes. The Investment Management Group consists of the Chief Investment Officer, the Head of Portfolio Management and the Head of Investment Strategy. The Group meets as necessary and minutes are circulated to the Portfolio Management Group, the Investment Committee and the Risk Management Committee once approved and are available for inspection by the Board and Executive Committee. Portfolio Management Group The Investment Committee has delegated to the Portfolio Management Group the authority to plan and implement process overrides as instructed by the Investment Management Group. The Portfolio Management Group consists of the Chief Operating Officer, the Head of Portfolio Implementation, the Head of Trading, the Head of Operations, the Head of Investment Strategy and the Head of Reporting and is chaired by the Head of Trading. The Group meets as frequently as necessary to fulfil its obligations and minutes are available to the Investment Management Group, the Risk Management Committee and the Investment Committee, the Executive Committee and the Board. Internal control and risk management The Board has overall responsibility for the Group’s systems of internal control and the management of significant risks. The Board sets appropriate policies on internal control which are reviewed annually, and authority is delegated to the following committees and senior personnel to implement and apply those policies: • the Executive Committee; • the Investment Committee; • the Audit and Risk Committee; and • the Risk Management Committee The Board seeks ongoing assurance from these Committees and Senior Management about the effectiveness of the internal controls, which include operational and compliance controls, risk management and the Group’s high-level internal control arrangements. Such a system of internal controls is designed to manage, rather than eliminate, risk of failure to meet business objectives and can only provide reasonable and not absolute assurance against material misstatements or loss. Further information on the Group’s risk management systems is provided on pages 32 to 38 of the Strategic report. The Audit and Risk Committee has undertaken a review of the effectiveness of internal controls for the year ended 31 March 2018 and is satisfied that the internal control environment is appropriate (see ‘Internal controls and risk management’ on page 54). Approved by the Board and signed on its behalf by: Joanne Manning Company Secretary 14 June 2018 49 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationNOMINATION COMMITTEE REPORT • identifying and nominating for the Board’s approval, candidates to fill Board vacancies as and when they arise; • reviewing annually the time commitment required from non-executive Directors; • preparing, and reviewing regularly, job specifications for the Chairman and Chief Executive officer, including the time commitment expected; • preparing, and reviewing regularly, a policy on Board diversity, including gender, and determining measurable policy objectives as deemed appropriate; • overseeing Significant Influence Function competency reviews as required by the FCA and conducted by the CEO and Chairman on an annual basis; • reviewing the re-appointment of any Non-executive Director at the conclusion of their specified term of office; • recommending to the Board the re-election by shareholders at the Annual General Meeting (“AGM”) of the Company of any Director under the retirement by rotation provisions in the Company’s Articles of Association; and • reviewing the membership of the Audit and Risk and Remuneration Committees, in consultation with the relevant Committee Chairman. The full terms of reference of the Committee comply with the UK Corporate Governance Code (“the Code”) and are available on the Group’s website or from the Company Secretary at the registered office address. Membership of the Committee The Committee has been chaired by Jane Tufnell since September 2016. Jane is supported by the other independent Directors; David Morrison, Rosemary Hilary and Tim Edwards and the Group Chairman, Neil Record. Tim Edwards was appointed on 21 March 2018 and so did not attend any Committee meetings in the year under review. Committee meetings The Committee met on six occasions during the year ended 31 March 2018 and invited the Chief Executive Officer, Company Secretary and the Head of Human Resources to join the meetings as the Committee considered appropriate. Committee member meeting attendance is detailed on page 47. Jane Tufnell as Chair of the Nomination Committee reported regularly to the Board on the Committee’s activities, identifying any matters where any action was deemed to be required and recommendations as considered appropriate. Key Committee activities Independent director search The principal focus has been the selection and appointment of a new independent director to replace David Morrison who will no longer be deemed to be independent from 1 October 2018. The appointment process started in early 2017 when the Committee worked with the Head of Human Resources to prepare an Independent Director Specification, detailing the personal attributes required together with a job description for the role. The Committee delegated the responsibility for managing the recruitment process to Jane Tufnell and Neil Record. With the Committee’s approval, Jane and Neil appointed London-based executive search firm Norman Broadbent in June 2017 to assist in the selection process. Norman Broadbent is a signatory to the Voluntary Code of Conduct on Gender Diversity and is independent of Record. A shortlist of 14 candidates was subsequently identified and interviews held with four candidates in August and September 2017. This search identified Tim Edwards as the preferred candidate to take forward in the selection process. During the selection process Tim met all the Board members, the Head of Compliance and Risk, the Chief Operating Officer, the Head of Human Resources and the Company Secretary and their feedback was obtained prior to the Committee’s final review of Tim’s suitability for the role. Role of the Committee The Nomination Committee is responsible for reviewing the composition of the Board, the Audit and Risk Committee, the Remuneration Committee and the Nomination Committee and making recommendations to the Board as necessary. The Committee serves both Record plc and the Group’s FCA regulated entity, Record Currency Management Limited. The Boards of the two companies are identical to facilitate full regulatory oversight and common corporate governance practices. References to the “Board” refer to the Boards of both Record plc and Record Currency Management Limited. Committee duties Under its terms of reference the Committee is tasked with the following: • reviewing the structure, size and composition of the Board and making recommendations to the Board as necessary with respect to the role, capabilities and expected time commitment required for each appointment; • giving full consideration to succession planning for Directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the Group and the skills and expertise needed on the Board in the future; • keeping under review the leadership needs of the Group, both executive and non-executive, with a view to ensuring the Group’s continued ability to compete effectively in the marketplace; 50 Record plc Annual Report 2018GovernanceLooking forward As well as considering its standing items of business, the Committee will continue to focus on succession planning. The Committee will continue to consider the required skillset for the Board and is keen to consider the appointment of suitable external candidates should they present themselves. Approved by the Committee and signed on its behalf by: Jane Tufnell Chair of the Nomination Committee 14 June 2018 Committee evaluation An internal review of Committee effectiveness was overseen by the Chair of the Committee in May 2018. The conclusion was that the Committee had been effective in carrying out its duties. Annual General Meeting Neil Record, Steve Cullen and Bob Noyen are due to retire by rotation and stand for re-election at the 2018 AGM. The Committee (without Neil) met to review the Directors standing for re-election, taking into account their ongoing effectiveness and commitment. The Committee agreed that Neil, Steve and Bob continue to make valuable contributions to the Board’s deliberations and accordingly the Committee has recommended the Board approve a resolution in respect of their re-election by shareholders. Under the Company’s Articles of Association when the Board of Directors appoints a new Director, that Director must stand for election at the next AGM. Accordingly, Tim Edwards will retire and stand for election as an independent director at this year’s AGM. Under Listing Rules the appointment of independent directors must be approved by a simple majority of all shareholders and by a simple majority of the independent shareholders. Further details are set out in the 2018 Notice of Annual General Meeting. The Nomination Committee has reviewed the election of Tim and has recommended the Board approve a resolution in respect of his election by shareholders. The Chair of the Nomination Committee will be available to answer any questions relating to the Committee and its activities at the AGM. The Nomination Committee met in November 2017 to review the suitability of Tim and it was agreed that he has the necessary skills and background for an independent Director role at Record. A formal recommendation to the Board was made accordingly, proposing that the Board offer the role of independent Director to Tim. This recommendation was unanimously approved by the Board subject to FCA approval of Tim’s appointment as a Director of Record Currency Management Limited. Regulatory approval was granted by the FCA on 21 March 2018 and Tim’s appointment became effective on that date. The Committee is satisfied with the outcome of the Independent Director selection process and is confident that Tim will rise to the demands of challenging the Board, ensuring the business meets its objectives and helping it to maintain its strong approach to governance and client-focused culture. Board diversity and membership The Board Diversity Policy was last reviewed by the Committee in November 2017. The Committee agreed the policy remained appropriate but that it should be enhanced to include the objective that the minority gender should represent at least one-third of the Board. The Committee believes that the recent independent director search took into account the benefits of diversity. The Committee has also acknowledged that future executive director succession planning should embrace the benefits of diversity, including gender diversity, to ensure that any individual selected will add to the Board’s mix of perspective, experience, background and personal attributes. The Committee is satisfied that the current composition of the Board remains appropriate and meets the gender target set in the Board Diversity Policy. The Committee is also content that the time commitment required of independent Directors is consistent with the nature and size of the business. 51 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationAUDIT AND RISK COMMITTEE REPORT • approving the remuneration and terms of engagement of the external auditor; • reviewing and monitoring the independence and objectivity of the external auditor, and reviewing the effectiveness of the audit process; and • overseeing the provision of any non-audit services by the external auditor. The full terms of reference of the Committee comply with the UK Corporate Governance Code (“the Code”) and are available on the Group’s website or from the Company Secretary at the registered office address. Membership of the Committee The Committee has been chaired by Rosemary Hilary since September 2016. Rosemary is supported by the other independent Directors: David Morrison, Jane Tufnell and Tim Edwards. Tim Edwards was appointed on 21 March 2018 and so did not attend any Committee meetings in the year under review. Given her accounting and regulatory background the Board considers that Rosemary Hilary is the most appropriate independent Director for the role of Audit and Risk Committee Chair and this view is supported by the other members of the Committee. The Board is satisfied that by virtue of their previous experience gained in other organisations, the Committee members collectively have competence relevant to the sector in which the Group operates. The biographical details of the Committee members are set out on pages 44 and 45. The composition of the Committee complies with the Code provision for smaller companies requiring at least two independent Non-executive Directors throughout the year. However, Record has confirmed with the FCA that it will have at least three independent Non-executive Directors serving on the Committee at all times. Committee meetings The Committee met six times during the year ending 31 March 2018, being four quarterly meetings plus two additional meetings ahead of results announcements. All meetings were also attended by the Head of Compliance and Risk, the Chief Financial Officer and the Chief Operating Officer. Following an invitation from the Committee Chair, the Chief Executive Officer is now a regular attendee and he attended five meetings during the year under review. The internal audit partner was present at all six meetings and the current external audit partner attended three meetings. Two further meetings have been held since the year end. Committee member meeting attendance is detailed on page 47. The Committee also separately met the Group’s external auditor and the internal auditor after each meeting at which they were present, providing an opportunity for them to privately and in confidence raise matters of concern. No significant issues were raised in these meetings. The Committee discharged its responsibilities under the terms of reference by the following actions: • reviewing the form, content and integrity of financial information prior to release, including the Annual and Interim Reports, and each of the Interim Management Statements; • reviewing the adequacy and effectiveness of the Group’s internal controls and risk management systems; • considering the Risk Appetite statement, ICAAP and Pillar 3 disclosures prior to their recommendation for acceptance by the Board; • receiving and reviewing internal audit reports and discussing their findings and management’s responses; • evaluating the performance of the internal auditor during the engagement period; • reviewing the independence of the Group’s external auditor and the nature of non-audit services supplied by the auditor; • reviewing the external auditor’s audit strategy and concluding report for the 2018 financial statements; and • evaluating the performance of the external auditor over the period. Standing items on the agenda for Audit and Risk Committee meetings included: • regular reports by the Head of Compliance and Risk reviewing internal compliance and risk management activities and issues which also highlighted relevant UK and global regulatory developments which will or may impact the Group; • review of a high level “Risk Heat Map” to ensure that key risks and risk movements are identified and addressed; • a report from the Internal Auditor highlighting progress made against the agreed Internal Audit plan, findings from the audits, and the status of management’s responses and actions to observations and recommendations made; Role of the Committee The role of the Audit and Risk Committee is to encourage and safeguard a high standard of integrity in financial reporting, risk management and internal control for the Group, having regard to laws and regulations applicable to the Group and the provisions of the UK Corporate Governance Code. The Committee serves both Record plc and the Group’s FCA regulated entity, Record Currency Management Limited. The Boards of the two companies are identical to facilitate full regulatory oversight and common corporate governance practices. References to the “Board” refer to the Boards of both Record plc and Record Currency Management Limited. Committee duties Under its terms of reference the Committee is tasked with the following: • monitoring the integrity of the Group’s financial statements and any other formal announcements relating to the Group’s performance; • overseeing whistleblowing arrangements by which staff may raise concerns about possible improprieties in financial reporting or other matters; • reviewing the Group’s internal control and risk management procedures; • reviewing the operational conflicts of interest framework and making recommendations to the Board and Management as appropriate; • reviewing the terms of reference for the Risk Management Committee; • monitoring and reviewing the effectiveness of the Group’s internal audit function; • making recommendations relating to the appointment, re-appointment and removal of the external auditor; 52 Record plc Annual Report 2018Governance• review of departmental KPI and KRI data to ensure operational risks are identified and appropriately addressed by Management; and • review of Risk Management Committee meeting minutes with a summary activity report by the Chief Operating Officer as Chair of the Risk Management Committee. During the year the Chair of the Committee separately met the key people involved in the Company’s governance, including the Board Chairman, the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer and the Head of Compliance and Risk to obtain updates and insights into business activities. The Chair of the Committee reported regularly to the Board on the Committee’s activities, identifying any matters on which the Committee considered that action was required, and made recommendations on the steps to be taken. Key Committee activities Cyber security The Committee has continued to focus on the cyber security risks to the business and the need to ensure that the Group’s systems and client data are properly safeguarded at all times. Key reporting indicators on cyber security have been provided in the monthly Chief Executive’s KPI pack allowing the Committee to monitor cyber security issues and the actions being taken by Management on an ongoing basis. In October 2017 the Head of Systems provided a detailed insight into the current cyber security landscape, the threats faced by the Group and the approach being taken to defend its systems. The Committee continues to be vigilant about this risk. The Committee was also briefed on the following cyber security initiatives being implemented and was supportive of these developments: • facilitating home and mobile working; • monitoring and protecting information assets; • reviewing the content and frequency of existing end user training and the evaluation and implementation of alternative training methods for staff; and • reviewing internal vulnerability management. The Committee further agreed that an in-depth cyber security review should be undertaken by a specialist external provider. The scope for this review was agreed as follows: Compliance and risk Under the standing agenda item of Compliance and Risk the Committee considered and confirmed they were content with the following: • to assess Record’s current cyber security capability to protect the Group against internal and external threats and prevent unauthorised access to sensitive information assets; and • to provide an independent assessment of Record’s current state maturity against Deloitte’s Cyber Security Capability and Maturity Model. The fieldwork was started in May 2018 and the final report will be presented to the Committee in July 2018. MiFID II In preparation for the implementation of MiFID II in January 2018, work started in 2016 with a gap analysis exercise and an action plan to address the issues identified was formulated by Management in early 2017. Over the course of 2017 regular updates were provided to the Committee by the Chief Operating Officer and Head of Compliance and Risk who were the project leads on the MiFID II implementation project. The Committee monitored progress and discussed any issues arising. The MiFID II project came to fruition on 3 January 2018 and, whilst Management is vigilant for aspects that may need further embedding, no material issues have arisen either at implementation or since. GDPR During 2017 the Head of Compliance and Risk provided regular updates on the work being undertaken by the Group to prepare for the introduction of the EU General Data Protection Regulation (“GDPR”) which came into force in May 2018. In early 2018 the Committee reviewed the Group’s preparations for the introduction of GDPR, noting that a gap analysis had been completed, Department Heads were briefed on the actions required and monitoring had been put in place to ensure compliance by the implementation deadline. As at the GDPR implementation date of 25 May 2018 the Group was compliant with the requirements of the legislation. • The compliance monitoring plan for 2018, noting that the plan was risk based, proportionate and appropriate for the nature and scale of the business. • A Financial Crime Risk Assessment prepared by the Head of Compliance and Risk based on the FCA guidance “Financial Crime: a Guide for Firms” published in July 2016 and concluding that the Group continues to have proportionate and adequate procedures and controls concerning the specific risk posed by financial crime on its operations. • A revised whistleblowing policy, updated to reflect the provisions of the Criminal Finances Act 2017. • Conduct risk reviews, conducted by the Head of Compliance and Risk on a six-monthly basis and considered by the Executive Committee. Financial reporting The Committee has reviewed the half-year and annual results and the Annual Report, before recommending them to the Board for approval. During the interim report process Management reviewed the basis of preparation of the Group’s consolidated accounts and implemented two changes, which had a material impact on the presentation of the primary statements. The first change related to the classification of the external investment in the Group’s seed funds (formerly classified as non-controlling interest) and the second change to the presentation of other income. The changes do not impact the profit attributable to owners of the parent, earnings per share or equity attributable to owners of the parent, as previously reported. The Committee considered these adjustments in detail, accepted they were appropriate and agreed they were content with the revised presentation and the restated numbers as set out in the Interim Report. 53 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationAUDIT AND RISK COMMITTEE REPORT CONTINUED Key committee activities continued Financial reporting continued During the year, the Committee also considered the significant financial and regulatory reporting issues and judgements made in connection with the financial statements and the appropriateness of accounting policies. In particular the Committee considered Management reports providing an assessment of the internal controls environment and going concern. The Committee is satisfied that all judgements made by Management which affect financial reporting have been made in accordance with the Group’s accounting policies. The Committee further considered reports from the external auditor, in particular its report on the forementioned change in presentation of the accounts and the change in revenue recognition, and additionally the independent assessment of financial reporting and key controls, the audit opinion on the Annual Report and the independent report on the half-year results. The Committee is satisfied that the financial reporting control framework, including the operation of a Group-wide general ledger, consolidation system and preventative and detective controls, operated effectively after considering reports from both management and from PricewaterhouseCoopers LLP (“PwC”), as external auditor. The Committee has reviewed the narrative statements in the report and accounts to ensure they were reasonable and consistent with the reported results, and also the auditor’s findings report which identified no significant issues. The Committee was satisfied with the content of the Annual Report and confirmed there were no significant issues or concerns to be addressed. Therefore it unanimously recommended that the Annual Report be approved by the Board. Internal controls and risk management A significant part of the work of the Committee is in providing oversight and independent challenge to the internal controls and risk management systems of the Group. Management owns and maintains a high-level “Risk Heat Map” which identifies key risk areas that may impact the Group. This analysis is used by the Committee and compared against a risk assessment prepared by the internal auditor to ensure that material risk areas are being appropriately identified and addressed by Management and that movements in risks and business impact are identified promptly so that appropriate action can be taken. The Committee reviews all minutes of Risk Management Committee meetings and the Chief Operating Officer as Chair of the Risk Management Committee was present at all meetings to answer questions raised. The Committee has reviewed and evaluated the system of internal controls and risk management operated within the Group, and is satisfied that the internal control environment is appropriate. Detailed information on the Group’s risk management process is given in the Strategic report on 32 to 38. Internal audit The internal audit function undertakes a programme of reviews as approved by the Committee, reporting the results together with its advice and recommendations to the Committee. The function is provided by Deloitte LLP (“Deloitte”) under an outsourcing contract which commenced in May 2010. The objectives and responsibilities of internal audit are set out in a charter first approved by the Committee in July 2012. An updated charter was reviewed and approved by the Committee in May 2018. Deloitte reports directly to the Committee and the relationship is subject to periodic review. The Committee and the internal auditor have developed a planning process to ensure that the audit work performed focuses on significant risks. The plans include a number of cyclical reviews of key operational functions (Trading, Portfolio Implementation, Operations, IT systems and Compliance) together with thematic reviews and ongoing internal audit activities including reporting to the Committee. This ensures that, whilst there is focus on areas deemed to be higher risk, broader coverage across the whole business is achieved over the full cycle. Each review is scoped at the start of the audit to ensure an appropriate focus reflecting business activities, the market environment and regulatory matters. The annual plans are periodically reviewed to ensure they are adapted as necessary to capture changes in the Group’s risk profile. The Committee has received regular reports on the programme of reviews and internal audit findings at each of its meetings during the course of the year, has reviewed the findings and recommendations made by the internal auditor and has ensured that any issues arising are suitably addressed by Management in an effective and timely manner. The Committee has reviewed Deloitte’s work and discussed the delivery of internal audit with Management and is satisfied with the internal audit work conducted and the coverage and standard of the reports produced. The Committee is content that sufficient and appropriate resources are dedicated to the internal audit function and this has been reported to and noted by the Board. External audit Following an external audit tender process conducted in early 2017, detailed in the previous Annual Report, the Committee and Board’s recommendation to appoint PwC was approved by shareholders at the 2017 AGM. Following PwC’s appointment the Committee agreed the external auditor’s fees and reviewed and agreed the terms of the audit engagement letter. 54 Record plc Annual Report 2018GovernanceThe Committee has reviewed reports from the external auditor on the audit plan (including the proposed materiality level for the performance of the annual audit), the status of its audit work and issues arising. Particular focus was given to its testing of internal controls, its work on the key audit matters and possible audit adjustments. In particular the Committee considered the auditor’s comments in respect of the process for determining revenue, which involves a manual calculation of fees, noting the level of testing performed on the effectiveness of key controls, procedures for identifying and valuing AUME and the contractual terms associated with individual mandates. The Committee discussed the findings and was satisfied with the conclusion reached by the auditor that no further audit testing was required and no evidence of material misstatements was identified. The Committee has confirmed that no material items remained unadjusted in the financial statements. Each year, following the annual audit, the Committee evaluates the performance of the external auditor. In May 2018 the Audit and Risk Committee members liaised with senior management within the Finance Team to review the audit process. There were no significant adverse findings from the 2018 evaluation and the Committee concluded that PwC had provided an external audit service which was appropriate for the Group given its size and structure. External auditor independence Policy on provision of non-audit services by the external auditor The Committee operates a policy covering the provision of non-audit services by the external auditor to ensure that the ongoing independence and objectivity of the external auditor is not compromised. The policy ensures adherence to the Financial Reporting Council’s revised Ethical Standard issued on 17 June 2016, which implements new EU audit regulations restricting the supply of non-audit services to Public Interest Entities (“PIEs”) by statutory auditors, and which applies to audits for financial years beginning on or after that date. The policy restricts the nature and value of non-audit services that can be provided by the external auditor by documenting a “black list” of prohibited services, setting a cap on the level of permitted non-audit services and establishing the requirement that permitted services above a pre-determined limit should be approved by the Committee before the assignment is undertaken. Under the Ethical Standard the aggregate of fees for all non-audit services, excluding audit related assurance services required under regulation, may not exceed 70% of the average of the audit fees for the preceding three year period. The Committee considers it best practice to adhere to the fee cap on an annual basis, effective from the first year of application for Record of the Ethical Standard (i.e. the year ended 31 March 2018) and monitors fees accordingly. The policy is reviewed by the Committee on an annual basis. This review was conducted in May 2018 and it was agreed the policy remained appropriate and it was approved by the Committee accordingly. Non-audit services undertaken by the external auditor The following permitted non-audit services, pre-approved by the Committee and within a pre-determined cost limit, have been undertaken by PwC in the year under review: Assessment of external auditor independence The Committee was satisfied that the quantity and type of non-audit work undertaken during the year did not impair PwC’s independence or objectivity and that their appointment for these assignments was in the best interests of the Group and its shareholders. The Committee is satisfied that the external auditor has maintained its independence and objectivity over the period of its engagement. Committee evaluation An internal review of Committee effectiveness was overseen by the Company Secretary in May 2018. The review was based on input from Board members, Senior Management, the internal audit partner and the external audit partner. The conclusion was that the Committee was effective in carrying out its duties. Annual General Meeting The Chair of the Audit and Risk Committee will be available to answer any questions relating to the Committee and its activities at the Annual General Meeting. Looking forward As well as considering the standing items of business, the Committee will focus on the following areas during the year ahead: • provision of other assurance services in respect of controls reports; • cyber security; • risk monitoring; • independent auditor report to the FCA on compliance with client asset rules; • the regulatory landscape; and • succession planning. • the interim review work performed on the half-year accounts; and • advice and assistance on employee work visas and applications. Details of the total fees paid to PwC are set out in note 4 to the accounts. Non-audit fees, excluding audit related assurance services required under regulation, were equivalent to 48% (2017: 46%) of audit fees and were therefore within the permitted cap of 70%. No fees were paid to the outgoing external auditor, Grant Thornton UK LLP, in respect of the year under review. Approved by the Committee and signed on its behalf by: Rosemary Hilary Chair of the Audit and Risk Committee 14 June 2018 55 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationREMUNERATION REPORT Chairman’s summary statement Our remuneration policy is designed to act in the interests of all our key stakeholders: our clients, shareholders, employees and regulators. Remuneration philosophy The alignment of the motivation of our colleagues with our incentive structure is paramount to the long term success of the company. Our remuneration policies are designed to act in the interests of all of our stakeholders and to continue to link reward with performance in a transparent and straightforward way. Remuneration is an important component of our succession planning and is an area on which the Committee is focused. Identifying, developing and appropriately compensating those who will be the successors to our existing senior management team is critical and the Committee is concerned to ensure that our remuneration structure and policies work at all levels. Company performance and Directors’ remuneration The year to March 2018 has seen growth in our revenue, AUME and an increase in client numbers. As a result of investing in our people and resources to maintain innovation and service enhancement, our costs have risen, leading to a decline in profits during the period. Our Group Profit Share Scheme pool is 30% of operating profits, directly linking the Company’s financial performance to the size of the variable remuneration pool, so the value delivered under the Group Profit Share Scheme fell by 6% in consequence. A 3% Company-wide salary increase was implemented in April 2018. Our Chief Financial Officer was included in this year’s award, due to his salary being below market levels but no salary increases were made for other Executive Directors within the financial year. Executive Directors were awarded profit share units by the Remuneration Committee based on their individual level of performance. The Committee used its discretion in setting the awards after receiving input from the Head of Compliance and Risk, who reports any legal or compliance issues that relate to Directors who are due to receive awards under the Scheme. Payments were made in accordance with the Group Profit Share Scheme rules and were approved by the Committee. Share options were granted to each of the Directors in accordance with the Share Scheme rules. The Committee used its discretion in determining the number of options granted, considering the role and performance of each individual Director. The purpose of these awards is to align Directors’ interests with those of our shareholders and to reward growth of the business over a period of years. We continue to see the award of share options, with appropriate performance conditions, as the best way to achieve this. Implementation of Remuneration Policy changes The changes that were approved to the Group Profit Share Scheme have been implemented this year. The legacy arrangement of a Group Profit Share Pool operating at 27% of operating profits distributed between all staff and a Matching Pool operating at 3% of operating profits distributed between staff electing to receive part of their Group Profit Share in the form of shares has been replaced by a single Group Profit Share Pool of 30% of operating profits distributed between all staff. These changes have been made to ensure that the Scheme is simple to understand for both employees and shareholders and provides an incentive structure suitable for all staff. No changes have been made to the structure of Group Profit Share Scheme payments for Directors. Remuneration Committee Chairman’s summary statement Introduction This has been my first full year as Chairman of the Remuneration Committee, during which we have implemented the Directors’ remuneration policy approved by shareholders at the last AGM, which included certain changes (detailed in my statement in the 2017 Annual Report) to the policy it replaced. The Committee continues to review the policy for Directors, whilst also considering remuneration policies and structures for staff below Director level. The Company will next be required to put a Directors’ remuneration policy to shareholders at the 2020 AGM, or earlier if changes to the policy should be required before then. 56 Record plc Annual Report 2018GovernanceCommittee membership The Remuneration Committee is comprised of the Non-executive Directors, namely Jane Tufnell, Rosemary Hilary, Tim Edwards and myself, acting as Chairman. Tim Edwards joined the Committee from March 2018, following his appointment as Non-executive Director. Shareholder consultation It remains our policy to discuss any substantive proposed changes to the Group’s remuneration structures with key external shareholders in advance of any implementation. An advisory vote to approve the Remuneration Committee Chairman’s summary statement and the Annual report on remuneration will be held at the 2018 AGM. David Morrison Remuneration Committee Chairman 14 June 2018 The new GPS contains a rule that no profit share units will be granted after the tenth anniversary of the later of the date on which the GPS was adopted by the Company (17 November 2017) or the date it was amended by the Company’s shareholders (being the date of the 2018 AGM). The Record Share Scheme (the “Share Scheme”) rules were adopted by the Company on 1 August 2008 and contain a similar rule imposing a ten year limit on the life of the scheme. The Committee proposes to change this rule such that it refers to the date that the scheme was amended by shareholders (being the date of the 2018 AGM), aligning the period during which the GPS and the Share Scheme will operate. Directors’ remuneration report This year’s report is split into two sections: • the Directors’ remuneration policy in full (for reference purposes); and • the Annual report on remuneration. The current Directors’ remuneration policy was approved by shareholders at last year’s AGM. The policy begins with an overview, followed by the Executive Director and Non-executive Director remuneration policy tables and an outline of the remuneration structures which are currently in place. The annual report on remuneration explains how the policy has been implemented this year. Approved share options were granted to a range of senior and junior staff below Director level for both incentive and retention purposes using the flexibility that we have now included in the Share Scheme. This meant aligning performance conditions for our Approved and Unapproved options. We continue to use the full allocation each year of granting options over shares to the value of 2% of the market capitalisation of Record plc to Directors and staff, in accordance with our policy and consistent with our philosophy of aligning long-term business growth with equity ownership. Regulation We continue to review our remuneration structures in line with regulatory changes and good practice. This year we have updated the FCA policy statement and made changes to meet the remuneration requirements of MiFID II, as well as ensuring that our pension scheme meets the auto enrolment contribution levels. Proposed amendments to the rules of the Record Group Profit Share Scheme and the Record Share Scheme Having had shareholder approval for our remuneration policy last year, we do not intend to make any changes at this point. The policy permits Executive Directors to participate in the Group Profit Share Scheme (the “GPS”) as was the case under the GPS which was in operation on the date the policy was approved by shareholders. No new awards could be made under the GPS after November 2017, as the rules included, in line with good practice, a rule limiting the life of the GPS to ten years. The new GPS was therefore adopted in November 2017 by the Company’s remuneration committee (on identical terms to the previous GPS) in order that awards could be made to employees in April 2018. As Executive Directors cannot participate in the new GPS without shareholder approval, the policy is currently wider in this respect than the rules of the new GPS. These will be aligned if shareholder approval is forthcoming at the 2018 AGM to amend the new GPS to permit participation by Directors. 57 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationREMUNERATION REPORT CONTINUED Directors’ remuneration policy Policy overview The remuneration structure for the Executive Directors is designed to incentivise the delivery of sustained performance consistent with the Group’s strategic goals and appropriate risk management, and to reward success in doing so. Changes to our remuneration policy that were implemented last year were designed to incentivise and engage our high potential senior managers and staff. Our remuneration structures are similar for all staff and Executive Directors, providing a base salary, participation in the Group Profit Share Scheme and participation by invitation to the Group Share Scheme. For Executive Directors, a higher proportion of the total annual remuneration will be in the form of variable compensation, directly linked to the profitability of the Group. The table below sets out the key components of the remuneration policy for employees and the policy that applies to Executive Directors. The key elements of the remuneration policy for Non-executive Directors are set out separately. Remuneration of Executive Directors is determined within the limits of the Company’s Articles of Association whilst remuneration of the Non-executive Directors is determined by the Chairman. Remuneration Policy table for employees and Executive Directors Current operation for employees Application to Executive Directors Salaries are paid monthly through the payroll and reviewed annually by management. The Remuneration Committee reviews salaries for Executive Directors on an annual basis. Any review will take into account market rates, business performance and individual contribution. Element, purpose and link to strategy Base salary To pay a salary that reflects the role, responsibilities, experience and knowledge of the individual, ensuring that the salary paid is competitive with other employers in our industry. There is no prescribed maximum salary. However, increases are normally expected to be in line with the typical level of increase awarded across the Group, except under certain circumstances such as: • a new Executive Director being appointed at lower than typical market salary to allow for growth in the role; • larger increases in salary may be awarded to position salary closer to market levels as experience increases; • higher increases may be awarded to reflect an increase in responsibilities or promotion; and • where there has been a significant change in market practice. Executive Directors receive benefits on the same basis as all other employees. There is no maximum level of benefit. Executive Directors receive an employer pension contribution of 15.5% of salary which can be paid into the Group Personal Pension Scheme. Executive Directors can choose to make a personal contribution in addition to the Company contribution. If Executive Directors have elected not to make contributions into the Group Personal Pension Scheme then they will be paid a cash amount equivalent to their employer pension contribution through the payroll, with the appropriate tax and national insurance deductions. Benefits To provide a benefits package that provides for the wellbeing of our colleagues. A range of benefits are offered including, but not limited to private medical insurance, dental insurance, permanent health insurance, life assurance, personal accident insurance and annual holiday. Pension To provide an appropriate retirement income. There is the option to exchange medical insurance for the cash equivalent. Benefit schemes are reviewed on an annual basis to ensure that the costs and service of the schemes are appropriate. All staff are entitled to join the Group Personal Pension Scheme. This is a defined contribution plan to which the Group makes employer contributions and staff can choose to make additional personal contributions. There are differing levels of employer contribution. Base salary is the only pensionable element of remuneration. 58 Record plc Annual Report 2018GovernanceCurrent operation for employees Application to Executive Directors The Group Profit Share Scheme is based on pre-tax profitability of the business for the financial year and is paid semi-annually. Executive Directors are eligible to participate in the Group Profit Share Scheme, together with all employees. Element, purpose and link to strategy Group Profit Share To reward individual and collective performance, aid retention and to align interests with those of our shareholders. Share Scheme To incentivise long-term performance, aid long-term retention and to align interests with those of our shareholders. The Remuneration Committee sets the quantum of the Scheme with the intention of maintaining this at an average of 30% of operating profits. The profit share scheme range is capped at 25% to 35% of operating profits with the intention of this being an average of 30%. The allocation of the Profit Share pool is determined by the Remuneration Committee and management and is based on the role and performance of the individual. Senior Managers are required to take one third of their payment in shares subject to lock up conditions of one to three years and in addition are offered the opportunity for up to a further third of the Profit Share to be paid in shares. The remaining amount is in cash. Staff members can take their profit share in cash or elect for up to a third in shares. The Share Scheme allows the Remuneration Committee to grant options over up to 2% of the market capitalisation of Record plc (being approximately 4 million shares) per annum. Of this total, 1% (approximately 2 million shares) can be granted to Executive Directors and the other 1% can be granted to staff. Approved and Unapproved Options can be granted under the Share Scheme at various exercise prices and conditions. Approved options are limited to a maximum grant value of £30,000. All staff members are eligible to participate in the Share Scheme. Share Incentive Plan To incentivise long-term performance, aid long-term retention and to align interests with those of our shareholders. The Group has an approved Share Incentive Plan (“SIP”). All staff are able to buy shares from pre-tax salary up to an HMRC-approved limit (£1,800 for the financial year ended 31 March 2018), which is matched at a rate of 50%. The Remuneration Committee approves all payments to Executive Directors. Executive Directors are required to take one third of their payment in shares subject to lock up conditions of one to three years. In addition they are offered the opportunity for up to a further third of their Profit Share to be paid in shares. The remaining amount will be paid in cash. Clawback provisions are in place in the event of adverse restatement of accounts or material misconduct, at the discretion of the Remuneration Committee. Whilst the profit share pool is capped based on the profitability of the Group and range stated above, there is no individual maximum entitlement set within this limit. Key features of the scheme may be amended to the advantage of Executive Directors only with prior shareholder consent. Executive Directors are eligible to participate in the Share Scheme. The Remuneration Committee limits the value of shares over which an option is granted to any Director in any year to a maximum of 200% of that Director’s salary for that year. All share options awarded to Executive Directors are granted with an exercise price equal to the market value of the shares on the date of grant and are subject to a performance condition based on Record’s cumulative annual EPS growth with vesting proportions directly related to this growth. Clawback provisions are in place for all options should there be any restatement of accounts or breach of contract, at the discretion of the Remuneration Committee. Key features of the scheme may be amended to the advantage of Executive Directors only with prior shareholder consent. Executive Directors may participate in the SIP on the same basis as other employees. 59 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationREMUNERATION REPORT CONTINUED Directors’ remuneration policy continued Remuneration Policy table for the Chairman and Non-executive Directors The table below sets out the remuneration policy for the Chairman and Non-executive Directors. Element, purpose and link to strategy Operation, performance measures, deferral and claw back Further information Salary/fees To pay a salary / fee that reflects the role, responsibilities, time, experience and knowledge of the individual, ensuring that the salary / fee paid is competitive with other employers in our industry. Salaries and fees are reviewed annually. Any review will take into account market rates, business performance and individual contribution. Whilst there is no prescribed maximum salary / fee, increases are expected to be in line with the typical level of increase awarded across the Group. The Chairman’s salary is recommended by the Remuneration Committee and approved by the Board. The Chairman does not participate either in the Group Profit Share Scheme or in the Share Scheme. The Non-executive Directors’ fees are approved by the Chairman and they do not participate either in the Group Profit Share Scheme or in the Share Scheme. The Chairman’s salary and the Non-executive Directors’ fees are reviewed annually. The Non-executive Directors’ fees have been reviewed this year and received the Company-wide 3% increase. Benefits To provide a benefit package that provides for the wellbeing of our colleagues. The Chairman receives a range of benefits including, but not limited to, private medical insurance, permanent health insurance, life assurance, personal accident insurance and annual holiday. The Non-executive Directors do not receive any additional benefits although the Board may introduce additional benefits if it is considered appropriate to do so. Pension To provide an appropriate retirement income. The Chairman is entitled to join the Group Personal Pension Scheme. The Chairman has chosen to opt out of the Group Personal Pension Scheme and in line with the policy for Executive Directors receives the employer pension contribution of 15.5% of his salary as taxable income. The Company reimburses the Chairman and Non-executive Directors for reasonable expenses in performing their duties. The Non-executive Directors do not receive pension benefits. Other elements of remuneration The Chairman and the Non-executive Directors do not participate in the Group Profit Share Scheme, Share Scheme, or the SIP Scheme. None. Group Profit Share Scheme Record operates a Group Profit Share Scheme (the “Scheme”), which allocates a profit share pool to be distributed between all employees of the Group. The Remuneration Committee has the discretion to vary the quantum of the Scheme between 25% and 35% of operating profits, and the intention is to maintain an average level of 30% of operating profits over the medium term. The continuation of the Scheme remaining at 30% of operating profits has created a transparent and predictable link between variable compensation and profitability, and has aligned the interests of employees with those of our shareholders. Further to shareholder approval last year, the changes to the Group Profit Share Scheme have been implemented this year. Following shareholder approval last year, the changes that were approved to the Group Profit Share Scheme have been implemented this year. The legacy arrangement of a Group Profit Share Pool operating at 27% of operating profits distributed between all staff and a Matching Pool operating at 3% of operating profits distributed between staff electing to receive part of their Group Profit Share in the form of shares has been replaced by a single Group Profit Share Pool of 30% of operating profits distributed between all staff. The Scheme is payable through a combination of profit share payments in cash and share-based payments. The allocation of the profit share pool for Executive Directors is determined by the Remuneration Committee and for all other employees is delegated to management. The Scheme is discretionary and employees do not have a contractual right to receive awards. In addition, all payments made to Executive Directors and other Code Staff (those in Significant Influence Functions) are subject to Remuneration Committee approval and no payments are made automatically. Payments are awarded after input from the Head of Compliance and Risk, who reports any legal or compliance issues that relate to individuals who are due to receive awards under the Scheme. Any issues would also be monitored through compliance and risk reports at Audit and Risk Committee and Board meetings. 60 Record plc Annual Report 2018GovernanceTo ensure that the interests of management and shareholders are aligned, Directors, Code staff and Senior Managers are required to take a proportion (initially a third) of their Profit Share in shares rather than cash, subject to a three-year “lock up” period. These shares are released from “lock up” in three equal tranches on the first, second and third anniversary of the Profit Share payment date. Additionally, Directors, Code Staff and Senior Managers are offered the opportunity to elect for up to a further third of their Profit Share to be paid in shares, which has no lock up. The remaining amount will be paid in cash. The Record plc Share Scheme It is of great importance for the long-term success of the business that the Group retains and motivates its current and future key employees, and that they are incentivised over the longer term in a manner which aligns their interests with shareholders. The Record plc Share Scheme (the “Share Scheme”) has been designed to award share options to Directors and employees of Record. The Share Scheme allows the Committee to grant HMRC approved options (“Approved Options”) under Part 2 of the Share Scheme alongside Part 1 which allows for the grant of unapproved options (“Unapproved Options”). It is the intention of the Group to continue to use the Share Scheme for Executive Directors and staff. In total the size of the Share Scheme will be limited to 2% per annum of the market capitalisation of Record plc (being approximately 4 million shares). Of this total the Remuneration Committee will continue to be able to award up to 1% as options to Executive Directors and up to 1% to staff. Last year the Share Scheme for staff below Executive Director level was amended to introduce more flexibility to the Scheme rules when granting options. The Committee now has the flexibility to allow Unapproved Option grants to be granted with an exercise price equal to the market value of the shares on the date of grant, or at a discounted price or nil cost. Performance conditions of both Approved and Unapproved Option grants have also been aligned. These changes have given the Committee the flexibility to implement a different mix of reward, retention and alignment benefits and can be used according to the environment and business objectives. For example, in a period of share price growth, market price options will be a strong incentive and retention benefit. Nil cost or discounted options have the greatest immediate reward effect and could be used to retain and motivate high performing staff in the shorter term. With this added flexibility, the Committee will be responsible for approving the structure of any option awards to Executive Directors and staff. Each participant may be granted Approved Options over shares with a total market value of up to £30,000 on the date of grant. There is no such limit on the value of Unapproved Options, which may be granted with any exercise price (including nil), although the Committee’s policy is for Unapproved Options awarded to Executive Directors to be granted with an exercise price equal to the market value of the shares on the date of grant. The terms of options for Executive Directors differ to those for all other staff. For Executive Directors, the Remuneration Committee will limit the value of shares over which an option is granted to any Director in any year to a maximum of 200% of that Director’s salary for that year. All Executive Director option awards will be subject to a performance condition based on Record’s annual cumulative EPS growth. One third of the award will vest on each of the third, fourth and fifth anniversaries of the date of grant, subject to an EPS hurdle linked to the annualised EPS growth for the respective three, four and five year periods from date of grant. Vesting is on a stepped basis, with 25% of each tranche vesting if EPS growth over the relevant period is at least RPI plus 4% per annum, increasing through 50% and 75% to 100% vesting if EPS growth exceeds RPI plus 13% per annum over the same period. Options under both the Approved and Unapproved schemes will be granted with an exercise price equal to the market value of the shares on the date of grant and the exercise price per share of Approved Options must be no lower than the market value of a share on the dealing day immediately preceding the date of grant. For staff below Executive Director, Approved Options become exercisable on the fourth anniversary of grant subject to the employee remaining in employment with the Group and, should they have been set, any other performance conditions being met. One quarter of any Unapproved Option becomes exercisable each year for four years, subject to the employee remaining in employment and, should they have been set, any other performance conditions being met. The Remuneration Committee retains the power to grant options under the Share Scheme, and granted options to Board Directors during the year, although it can and has delegated to management the task of identifying suitable recipients of options and the number of shares to be put under option for those below Board level. Details of the option awards made to Board Directors during the year can be found on page 65 and all awards were made in accordance with the Scheme rules. Management used the full allocation for granting options to staff below Board Director this year and made Approved awards in accordance with the Share Scheme rules. The Remuneration Committee retains the ability to vary or waive existing performance targets where, in its absolute discretion, it considers the target has become unfair or impractical or to take account of exceptional circumstances. Clawback provisions The Group Profit Share Scheme rules contain clawback provisions which allow for the repayment of profit share payments in the event of a material breach of contract, material misconduct or a re-statement of financial accounts which would have led to a reduction in any prior Profit Share award. Both Approved and Unapproved Options granted under the Share Scheme for Executive Directors are subject to clawback provisions in addition to the performance conditions set by the Remuneration Committee. Source and funding of shares Share awards under the Group Profit Share Scheme are covered wherever possible through market purchases by the Company’s Employee Benefit Trust (“EBT”) rather than through the issue of new shares, and this has been the case since the inception of the Scheme in 2007. It remains our intention to continue to operate in this manner in order to minimise potential dilution of shareholders’ interests. Similarly, options under the Share Scheme are not normally satisfied by the issue of new shares, in order to minimise potential dilution. The Company provides funds to the EBT to allow it to purchase shares in the market with which to satisfy the exercise of options. The number of shares purchased by the Group to hedge the award of options is based on an appropriate hedge ratio at each grant date, as calculated by management and approved by the Remuneration Committee. 61 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationNon-executive Directors are appointed for an initial three-year period. Their continued engagement is subject to the Company’s Articles relating to the retirement of Directors by rotation. The terms and conditions of appointment of the Executive Directors and Non-executive Directors are available for inspection at the Company’s registered office. When an Executive Director leaves the Group, the Remuneration Committee will review the circumstances and apply the appropriate treatment. Any payments that are made will be in line with contractual entitlements and statutory requirements only. Where applicable the broad aim in making termination payments is to avoid rewarding poor performance. Salary and benefits will continue to be paid throughout the notice period although the Committee has the discretion to make a payment in lieu of notice. The treatment of payments for the Group Profit Share Scheme and the Share Scheme will be in accordance with the relevant scheme rules at the time the Director leaves. REMUNERATION REPORT CONTINUED Directors’ remuneration policy continued Accounting treatment The Share Scheme is accounted for in accordance with IFRS 2 – Share-based Payments and is not part of the Group Profit Share costs. Share Incentive Plan The Group operates an HMRC-approved Share Incentive Plan (“SIP”) which is offered to all staff, including Executive Directors, who are able to buy shares from pre-tax salary up to a defined HMRC limit (£1,800 worth of shares in the financial year ended 31 March 2018). To encourage employee share ownership the Group matches any shares purchased through this scheme at a rate of 50%, although staff will only receive the full benefit of the matched shares if they remain with the Group for three years. To qualify for full tax benefits, these shares must be left in the SIP for five years. How the views of shareholders are taken into account The Remuneration Committee takes into account shareholder views received in relation to resolutions to be considered at the AGM each year. The Committee values shareholder feedback when forming remuneration policy and any material changes proposed to Executive Directors’ remuneration will be discussed in advance with major institutional shareholders. Considering the views of employees When determining Executive Director remuneration arrangements the Committee takes into account pay conditions throughout the Group to ensure that the structure and quantum of Executive Directors’ pay remains appropriate in this context. The Committee seeks advice from the Head of Compliance and Risk prior to approving or amending the remuneration policy. The Committee does not consider that it is appropriate to consult directly with colleagues when developing the Directors’ remuneration policy. However, the Committee does actively seek feedback from staff about the remuneration structures that are in place. A significant proportion of our colleagues are shareholders so are able to express their views in the same way as other shareholders. Approach to remuneration for new Executive Directors On the recruitment of a new Executive Director the level of fixed remuneration will be appropriate to the candidate’s skills and experience and the responsibility that they will be undertaking. New Executive Directors would be eligible to join the Group Profit Share Scheme and would be eligible to be considered for the Share Scheme as deemed appropriate by the Remuneration Committee. The Remuneration Committee recognises that a new Executive Director may forfeit remuneration as a result of leaving a previous employer and the Committee will consider mitigating that loss or part of that loss by making an award in addition to the remuneration outlined above. The Committee will consider any relevant factors including any performance conditions attached to any previous incentive arrangements and the likelihood of these conditions being met and will take reasonable steps to ensure that any payment is at an appropriate level. When recruiting a new Non-executive Director, fees will be in line with the prevailing fee schedule paid to other Board members and Non-executive Directors at that time. Service contracts and loss of office payment policy All Executive Directors have service agreements with effect from 15 November 2007, with the exception of James Wood-Collins, who has a service agreement dated 1 October 2010, reflecting his promotion to Chief Executive Officer and Steve Cullen who has a service agreement dated 15 March 2013, reflecting his promotion to Chief Financial Officer. None of the service agreements is for a fixed term and all include provisions for termination on six months’ notice by either party. Service agreements do not contain any contractual entitlement to receive bonuses, nor to participate in the Group Profit Share Scheme or the Group Share Scheme, nor to receive any fixed provision for termination compensation. 62 Record plc Annual Report 2018GovernanceDetails of service contracts for Directors standing for re-election at the forthcoming AGM are as follows: Re-election Neil Record Steve Cullen Bob Noyen Contract date Notice period Expiry/review date 15 November 2007 15 March 2013 15 November 2007 Six months Six months Six months Rolling Rolling Rolling Remuneration illustrations The charts below show the lowest, highest and average remuneration for the Executive Directors over the past three years. Fixed remuneration is comprised of salary, pension contributions, other benefits and any cash alternative. Variable remuneration comprises Group Profit Share, including cash and share payments, as well as any gains on share options. As variable remuneration is not capped at the individual level, we have used the three-year average, highest and lowest remuneration as an indication of the Executive Director’s earnings potential. Future remuneration will be determined based on profitability and performance as described in the Remuneration policy. Fixed Variable James Wood-Collins Bob Noyen Minimum 100% £331,141 Minimum 100% £331,546 3 year low 3 year high 3 year average 50% 47% 48% 50% £642,865 53% £697,887 52% £678,782 3 year low 3 year high 3 year average 51% 48% 50% 49% £628,508 52% £678,447 50% £654,361 £ 0 100k 200k 300k 400k 500k 600k 700k 800k 900k 1,000k £ 0 100k 200k 300k 400k 500k 600k 700k 800k 900k 1,000k Leslie Hill Steve Cullen Minimum 100% £332,137 Minimum 100% £152,092 3 year low 3 year high 3 year average 46% 40% 44% 54% £680,985 60% £818,973 56% £740,866 3 year low 3 year high 3 year average 63% 58% 59% 37% £235,238 42% £256,522 41% £248,261 £ 0 100k 200k 300k 400k 500k 600k 700k 800k 900k 1,000k £ 0 50k 100k 150k 200k 250k 300k Compliance with the FCA Remuneration Code The Committee regularly reviews its remuneration policies to ensure compliance with the principles of the Remuneration Code of the UK financial services regulator, as applicable to the Group. The remuneration policy is designed to be consistent with the prudent management of risk, and the sustained, long-term performance of the Group. The Chief Financial Officer and the Head of Compliance and Risk are involved in reviewing the remuneration policy and practice to ensure that it is aligned with sound risk management, and keep the Committee informed of the firm’s risk profile so that this can be taken into account in remuneration decisions. 63 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information REMUNERATION REPORT CONTINUED Annual report on remuneration Annual report on remuneration This part of the report has been prepared in accordance with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended), and relevant sections of the Listing Rules. The annual report on remuneration will be put to an advisory shareholder vote at the 2018 AGM. The information on pages 64 to 70 has been audited where required under the regulations and is indicated as audited information where applicable. Directors’ remuneration as a single figure (audited information) The remuneration of the Directors for the year ended 31 March 2018 is detailed below together with their remuneration for the previous year. Year ended 31 March 2018 Executive Directors James Wood-Collins Leslie Hill Bob Noyen Steve Cullen Non-executive Directors Neil Record David Morrison Jane Tufnell Rosemary Hilary Tim Edwards (appointed 21 March 2018) Salaries and fees £ 285,913 285,913 285,913 126,210 79,310 61,800 42,230 48,410 7,038 Gain on share options £ Short-term incentive (GPS-cash) £ Benefits1 £ Short-term incentive (GPS-shares)2 Pensions3 £ £ Total £ 912 1,908 1,317 1,946 2,137 240 — — — 39,872 216,388 108,194 44,316 695,595 — — — — — — — — 163,563 226,939 44,316 722,639 216,388 108,194 44,316 656,128 36,101 50,089 20,892 235,238 — — — — — — — — — — 12,293 — — — — 93,740 62,040 42,230 48,410 7,038 Total 1,222,737 8,460 39,872 632,440 493,416 166,133 2,563,058 Year ended 31 March 2017 Executive Directors James Wood-Collins Leslie Hill Bob Noyen Steve Cullen Non-executive Directors Neil Record David Morrison Jane Tufnell Rosemary Hilary (appointed 1 June 2016) Salaries and fees £ 280,361 280,361 280,361 123,760 77,770 51,100 41,410 39,637 Cees Schrauwers (resigned 22 September 2016) 39,500 Andrew Sykes (resigned 22 September 2016) 20,500 Gain on share options £ Short-term incentive (GPS-cash) £ Benefits4 £ Short-term incentive (GPS-shares)2 Pensions3 £ £ Total £ 863 1,705 1,256 2,609 1,935 — — — — — 19,833 235,583 117,791 43,456 697,887 — — — — — — — — — 117,787 375,664 43,456 818,973 235,583 117,791 43,456 678,447 25,998 82,710 21,445 256,522 — — — — — — — — — — — — 12,054 — — — — — 91,759 51,100 41,410 39,637 39,500 20,500 Total 1,234,760 8,368 19,833 614,951 693,956 163,867 2,735,735 1. This value includes matching shares on SIP scheme, medical benefits, payments made in lieu of medical benefits, overtime payments and reimbursement of taxable travel expenses. 2. There are no performance conditions attached to short-term incentives. The shares vest immediately but are subject to lock up restrictions and are calculated based on the overall profitability of the Group. 3. This includes payments made in lieu of pension contributions. 4. This value includes matching shares on SIP scheme, payments made in lieu of medical benefits and overtime payments. 64 Record plc Annual Report 2018Governance Payments made to former Directors Andrew Sykes, a former Non-executive Director, received £4,000 for consultancy services in the year ended 31 March 2018. No payments were made to Andrew Sykes or Cees Schrauwers for loss of office. Allocation of the Profit Share pool to Executive Directors The Remuneration Committee is able to exercise discretion over the level of Group Profit Share awarded to the Executive Directors. On two occasions during the year, the Committee has approved awards to the Directors after considering the role and performance of each individual Director and also reports from the Head of Compliance and Risk, regarding any legal or compliance issues relevant to the award. Pensions (audited information) Executive Directors are entitled to join the Group Personal Pension Scheme. This is a defined contribution plan and for the financial year ending 31 March 2018, the Group made contributions of at least 15.5% of each Director’s salary which could either be paid into the Group Personal Pension Scheme, taken as cash or a combination of the two. All Directors who make personal contributions into the Company pension scheme via salary sacrifice receive an amount equivalent to the employer’s national insurance saved by the Company into their pension as an additional contribution. The employer pension contributions for the financial years ending 31 March 2017 and 31 March 2018 are detailed in the table on page 64. Directors’ share options and share awards (audited information) During the financial year ended 31 March 2018 option awards were made to all of the Executive Directors in accordance with the scheme rules. All of the Executive Directors have previously been awarded share options and the table below sets out details of Executive Directors’ outstanding share option awards, which may vest in future years subject to continued service and performance conditions, as well as any options that have lapsed or been exercised. Total options at 1 April 2017 Options granted in period Options lapsed in period Options exercised in period Date of grant Total options at 31 March 2018 Exercise price Earliest exercise Latest exercise James 18/11/13 933,334 Wood-Collins 27/11/14 630,000 01/12/15 450,000 27/01/16 100,000 30/11/16 550,000 — — — — — 26/01/18 — 1,300,000 Leslie Hill 27/11/14 630,000 01/12/15 450,000 27/01/16 100,000 30/11/16 550,000 — — — — 26/01/18 — 280,000 Bob Noyen 27/11/14 630,000 01/12/15 450,000 27/01/16 100,000 30/11/16 550,000 — — — — 26/01/18 — 280,000 Steve Cullen 27/11/14 270,000 01/12/15 450,000 27/01/16 100,000 30/11/16 550,000 — — — — 26/01/18 — 125,000 (233,334) (233,333) 466,667 30.00p 18/11/17 17/11/19 (210,000) — — — — (210,000) — — — — (210,000) — — — — (90,000) — — — — — — — — — — — — — — — — — — — — — — — — 420,000 35.86p 27/11/17 26/11/20 450,000 28.875p 01/12/18 30/11/21 100,000 24.50p 27/01/19 26/01/22 550,000 34.0718p 30/11/19 29/11/22 1,300,000 43.50p 26/01/21 25/01/24 420,000 35.86p 27/11/17 26/11/20 450,000 28.875p 01/12/18 30/11/21 100,000 24.50p 27/01/19 26/01/22 550,000 34.0718p 30/11/19 29/11/22 280,000 420,000 43.50p 26/01/21 25/01/24 35.86p 27/11/17 26/11/20 450,000 28.875p 01/12/18 30/11/21 100,000 24.50p 27/01/19 26/01/22 550,000 34.0718p 30/11/19 29/11/22 280,000 180,000 43.50p 26/01/21 25/01/24 35.86p 27/11/17 26/11/20 450,000 28.875p 01/12/18 30/11/21 100,000 24.50p 27/01/19 26/01/22 550,000 34.0718p 30/11/19 29/11/22 125,000 43.50p 26/01/21 25/01/24 The outstanding share options above vest subject to performance conditions which are detailed on page 66. The value of shares over which the award of options was made in the year to James Wood-Collins was £565,500, to Leslie Hill and Bob Noyen was £121,800 and to Steve Cullen was £54,375 all based on the exercise prices of £0.4350 per share, which equated to the market share price upon grant. None of the awards will vest if the lowest threshold level of performance is not exceeded. 65 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information REMUNERATION REPORT CONTINUED Annual report on remuneration continued Directors’ share options and share awards (audited information) continued Vesting of awards made to Executive Directors is on a stepped basis and is linked to Record’s average annualised EPS growth over the relevant period since grant as follows: Record’s annualised EPS growth over the period from grant to vesting Percentage of shares subject to the award which vest >RPI growth + 13% >RPI growth + 10%, =RPI growth + 7%, =RPI growth + 4%, = 3 months Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Corporation tax liabilities Financial liabilities Derivative financial liabilities Total current liabilities Total net assets Equity Issued share capital Share premium account Capital redemption reserve Retained earnings Total equity Approved by the Board on 14 June 2018 and signed on its behalf by: Note 10 11 12 13 14 15 16 16 17 17 18 15 19 2018 £’000 910 228 1,115 86 2,339 6,775 266 10,198 12,498 29,737 32,076 Restated 2017 £’000 881 245 — 102 1,228 6,972 53 18,102 19,120 44,247 45,475 (2,630) (3,013) (399) (804) (2,467) (4,779) (29) (48) (5,525) (8,644) 26,551 36,831 50 2,237 26 24,238 26,551 55 1,971 20 34,785 36,831 Neil Record Chairman Steve Cullen Chief Financial Officer The notes on pages 85 to 115 are an integral part of these consolidated financial statements. The comparative period has been restated. A reconciliation of the previously published statement of financial position to the restated statement is provided in note 29. 79 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended 31 March 2018 As at 1 April 2017 Profit and total comprehensive income for the year Dividends paid Share buy-back and cancellation Own shares acquired by EBT Release of shares held by EBT Share-based payment reserve movement Transactions with shareholders As at 31 March 2018 Year ended 31 March 2017 (restated) As at 1 April 2016 Profit and total comprehensive income for the year Dividends paid Own shares acquired by EBT Release of shares held by EBT Share-based payment reserve movement Transactions with shareholders As at 31 March 2017 Called up share capital £’000 55 — — (5) — — — (5) 50 Called up share capital £’000 55 — — — — — — 55 Share premium account £’000 1,971 — — — — 266 — 266 2,237 Share premium account £’000 1,899 — — — 72 — 72 1,971 Capital redemption reserve £’000 20 — — 6 — — — 6 26 Capital redemption reserve £’000 20 — — — — — — 20 Retained earnings £’000 34,785 6,146 (6,810) (10,000) (952) 1,241 (172) Total equity £’000 36,831 6,146 (6,810) (9,999) (952) 1,507 (172) (16,693) (16,426) 24,238 26,551 Retained earnings £’000 31,715 6,316 Total equity £’000 33,689 6,316 (3,592) (3,592) (775) 992 129 (775) 1,064 129 (3,246) (3,174) 34,785 36,831 The notes on pages 85 to 115 are an integral part of these consolidated financial statements. The comparative period has been restated. A reconciliation of the previously published statement of changes in equity to the restated statement is provided in note 29. 80 Record plc Annual Report 2018Financial statements CONSOLIDATED STATEMENT OF CASH FLOWS Year ended 31 March Net cash inflow from operating activities Cash flow from investing activities Purchase of intangible software Purchase of property, plant and equipment Sale/(purchase) of money market instruments with maturity > 3 months Interest received Net cash inflow/(outflow) from investing activities Cash flow from financing activities Exercise of share options Purchase of own shares Dividends paid to equity shareholders Cash outflow from financing activities Net decrease in cash and cash equivalents in the year Effect of exchange rate changes Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Closing cash and cash equivalents consist of: Cash Cash equivalents Cash and cash equivalents Note 24 2018 £’000 2,746 (82) (236) Restated 2017 £’000 7,107 (189) (899) 7,904 (5,082) 77 112 7,663 (6,058) — (10,367) 8 (6,810) (17,177) (6,768) 146 19,120 12,498 4,411 8,087 16 12,498 28 (221) (3,592) (3,785) (2,736) 136 21,720 19,120 7,457 11,663 19,120 The notes on pages 85 to 115 are an integral part of these consolidated financial statements. The comparative period has been restated. A reconciliation of the previously published statement of cash flows to the restated statement is provided in note 29. 81 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information COMPANY STATEMENT OF FINANCIAL POSITION As at 31 March Non‑current assets Investments Total non‑current assets Current assets Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Corporation tax liabilities Total current liabilities Total net assets Equity Issued share capital Share premium account Capital redemption reserve Retained earnings Total equity Note 12 16 17 17 19 2018 £’000 5,288 5,288 2 2 2017 £’000 4,197 4,197 2 2 5,290 4,199 (1,093) — (1,093) 4,197 50 1,809 26 2,312 4,197 (11) (67) (78) 4,121 55 1,809 20 2,237 4,121 The Company’s total comprehensive income for the year (which is principally derived from intra-group dividends) was £16,688,038 (2017: £3,855,425). Approved by the Board on 14 June 2018 and signed on its behalf by: Neil Record Chairman Steve Cullen Chief Financial Officer The notes on pages 85 to 115 are an integral part of these consolidated financial statements. 82 Record plc Annual Report 2018Financial statements COMPANY STATEMENT OF CHANGES IN EQUITY Year ended 31 March 2018 As at 1 April 2017 Profit and total comprehensive income for the year Share buy back Dividends paid Share option reserve movement Transactions with shareholders As at 31 March 2018 Year ended 31 March 2017 As at 1 April 2016 Profit and total comprehensive income for the year Dividends paid Share option reserve movement Transactions with shareholders As at 31 March 2017 Called up share capital £’000 55 — (5) — — (5) 50 Called up share capital £’000 55 — — — — 55 Share premium account £’000 1,809 — — — — — 1,809 Share premium account £’000 1,809 — — — — 1,809 Capital redemption reserve £’000 Total Retained shareholders’ equity earnings £’000 £’000 20 — 6 — — 6 26 2,237 16,688 (10,000) (6,810) 197 4,121 16,688 (9,999) (6,810) 197 (16,613) (16,612) 2,312 4,197 Capital redemption reserve £’000 20 — — — — 20 Retained earnings £’000 1,773 3,855 Total shareholders’ equity £’000 3,657 3,855 (3,592) (3,592) 201 (3,391) 2,237 201 (3,391) 4,121 The notes on pages 85 to 115 are an integral part of these consolidated financial statements. 83 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information COMPANY STATEMENT OF CASH FLOWS Year ended 31 March Net cash inflow from operating activities Cash flow from investing activities Dividends received Investment in subsidiaries Investment in seed funds Interest received Net cash inflow from investing activities Cash flow from financing activities Purchase of own shares Dividends paid to equity shareholders Cash outflow from financing activities Net increase in cash and cash equivalents in the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Closing cash and cash equivalents consist of: Cash Cash equivalents Cash and cash equivalents The notes on pages 85 to 115 are an integral part of these consolidated financial statements. Note 24 2018 £’000 1,015 2017 £’000 — 16,810 3,592 (16) (1,000) 1 — — — 15,795 3,592 19 8 (10,000) (6,810) (16,810) — (3,592) (3,592) — 2 2 2 — 2 — 2 2 2 — 2 84 Record plc Annual Report 2018Financial statements NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2018 These financial statements exclude disclosures that are both immaterial and judged to be unnecessary to understand our results and financial position. 1. Accounting policies In order to provide more clarity to the notes to the financial statements, accounting policy descriptions appear at the beginning of the note to which they relate, and are shown in purple text. The principal accounting policies adopted in the preparation of these consolidated financial statements are set out in the notes below. These policies have been consistently applied to all periods presented unless otherwise stated. (a) Accounting convention Basis of preparation The Group and Company have prepared their financial statements under International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. IFRSs comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) as adopted in the European Union as at 31 March 2018. The financial statements have been prepared on a historical cost basis, modified to include fair valuation of derivative financial instruments. The Directors are satisfied that the Company and the Group have adequate resources with which to continue to operate for the foreseeable future. Please refer to the Directors’ report on page 72 for more detail. For this reason the financial statements have been prepared on a going concern basis. The preparation of financial statements in accordance with the recognition and measurement principles set out in IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The bases for management judgements, estimates and assumptions are discussed further in note 2. Restatement of prior year financial statements Management has reviewed the basis of preparation of the Group’s consolidated financial statements, and has implemented two changes, which have a material impact on the presentation of the primary statements. The first change relates to the classification of the external investment in the seed funds (formerly classified as non-controlling interest) and the second change to the presentation of other income. Although the changes give rise to material changes on the face of the statement of comprehensive income, the statement of financial position and the statement of changes in equity, there is no change to profit attributable to owners of the parent, earnings per share or equity attributable to owners of the parent. A reconciliation of the primary financial statements for the previously published comparative period (year ended 31 March 2017) to the restated primary statements is provided in note 29, together with a reconciliation of the primary financial statements for the year ended 31 March 2018 prepared under the historic basis of interpretation to the primary financial statements under the new basis of interpretation. Impact of new accounting standards There have been no new or amended standards adopted in the financial year beginning 1 April 2017 which have had a material impact on the Group or Company. The following standards and interpretations relevant to the Group’s operations were issued by the IASB but are not yet mandatory: IFRS 9 – Financial Instruments IFRS 9 is effective for annual periods beginning on or after 1 January 2018. IFRS 9 replaces the classification and measurement models for financial instruments in IAS 39 (Financial Instruments: recognition and measurement) with three classification categories: amortised cost, fair value through profit or loss and fair value through other comprehensive income. Under IFRS 9, the Group’s business model and the contractual cash flows arising from its investments in financial instruments will determine the appropriate classification. The Group has assessed its balance sheet assets in accordance with the new classification requirements, and does not anticipate any changes in the classification and measurement for any of the Group’s financial assets or liabilities. In addition, IFRS 9 introduces an expected loss model for the assessment of impairment of financial assets. The current (incurred loss) model under IAS 39 requires the Group to recognise impairment losses when there is objective evidence that an asset is impaired. Under the expected loss model, impairment losses are recorded if there is an expectation of credit losses, even in the absence of a default event. This model is not applicable for investments held at fair value through profit or loss. Therefore the assets on the Group’s balance sheet to which the expected loss model applies are receivables (note 14), which do not have a history of credit risk or expected future recoverability issues. Therefore, no change to the carrying values of the Group’s assets is expected as a result of adoption of the new standard. The new hedging requirements under IFRS 9, which are optional to adopt, provide increased flexibility in relation to hedge effectiveness in order to better align hedge accounting with a company’s risk management policies. The Group has not applied hedge accounting in the past, and does not anticipate applying the IFRS 9 hedge accounting requirements in the future. The Group does not anticipate that IFRS 9 will have a material impact on its reported results but notes that IFRS 9 also requires increased disclosures in relation to the Group’s risk management strategy. 85 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationNOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 1. Accounting policies continued (a) Accounting convention continued Impact of new accounting standards continued IFRS 15 – Revenue from Contracts with Customers IFRS 15 is effective for annual periods beginning on or after 1 January 2018, replacing IAS 18 “Revenue” and related interpretations. IFRS 15 establishes a single, principles-based revenue recognition model to be applied to all contracts with customers. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. IFRS 15 introduces a five-step approach to revenue recognition: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognise revenue when or as the entity satisfies a performance obligation. IFRS 15 is more prescriptive in terms of its recognition criteria, with certain specific requirements in respect of variable fee income such that it is only recognised where the amount of revenue would not be subject to significant future reversals. New disclosure requirements are also introduced. The Group has assessed how these changes impact the timing of management and performance fee recognition in the context of its existing investment management agreements. Management fee revenues are recorded on a monthly basis as the underlying currency management service occurs, there are no performance or other obligations (excluding standard duty of care requirements). Performance fee revenues are not considered to be highly probable until the end of a contractual performance period and therefore are not recognised until they crystallise, at which time they are payable by the client and cannot be clawed-back. There are no other performance obligations or services provided which suggest these have been earned either before or after crystallisation date. As a result of this assessment the Group has not identified any material changes to current revenue recognition principles. The Group does not anticipate that IFRS 15 will have a material impact on its reported results. IFRS 16 – Leases IFRS 16 is effective for annual periods beginning on or after 1 January 2019 and replaces IAS 17 “Leases” and related interpretations. This introduces a comprehensive model for the identification of lease arrangements and accounting treatment for both lessors and lessees, which distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. There is substantially no change to the accounting requirements for lessors. IFRS 16 requires operating leases, where the Group is the lessee, to be included on the Group’s balance sheet, recognising a right-of-use (“ROU”) asset and a related lease liability representing the present value obligation to make lease payments. Certain optional exemptions are available under IFRS 16 for short-term (less than twelve months) and low-value leases. The ROU asset will be assessed for impairment annually (incorporating any onerous lease assessments) and depreciated on a straight-line basis, adjusted for any remeasurements of the lease liability. The lease liability will subsequently be adjusted for lease payments and interest, as well as the impact of any lease modifications. IFRS 16 also requires extensive disclosures detailing the impact of leases on the Group’s financial position and results. The adoption of IFRS 16 will result in a significant gross-up of the Group’s reported assets and liabilities on the balance sheet. The operating lease expense which is currently recognised within operating lease rentals in the Group’s income statement (note 4) will no longer be incurred and instead depreciation expense (of the ROU asset) and interest expense (unwind of the discounted lease liability) will be recognised. This will also result in a different total annual expense profile under the new standard (with the expense being front-loaded in the earlier years of the lease term as the discount unwind on the lease liability reduces over time). The Group has considered the available transition options, and has provisionally decided to apply modified retrospective option 1 and currently estimates that the impact will be a gross-up of up to £1.6 million for ROU lease assets and £1.8 million in relation to lease liabilities, with £0.2 million deducted from brought-forward reserves on transition date in 2019. The initial reserves impact will be offset over time by a lower annual Group income statement charge, as the total charge over the life of each lease is the same as under the current IAS 17 requirements. No other standards or interpretations issued and not yet effective are expected to have an impact on the Group’s financial statements. (b) Basis of consolidation The consolidated financial information contained within the financial statements incorporates financial statements of the Company and its subsidiaries drawn up to 31 March 2018. Subsidiaries are entities controlled by the Company and are included from the date that control commences until the date that control ceases. Control is achieved where the Company is exposed to or has rights over variable returns from its involvement with the entity and it has the power to affect returns. An Employee Benefit Trust has been established for the purposes of satisfying certain share-based awards. As the Group has “de facto” control over this special purpose entity, the trust is fully consolidated within the financial statements. The Group has investments in four funds. These funds are held by Record plc and represent seed capital investments by the Group. If the Group is in a position to be able to control a fund by virtue of holding a majority of units in the fund, then the fund is consolidated within the Group financial statements. We consider that the Group exerts such control in cases where it (either in isolation or together with its related parties) holds a majority of units in the fund. Such funds are consolidated either on a line-by-line basis, or if it meets the definition of a disposal group held for sale it is classified and accounted for on that basis. In the case that the Group does not control a fund for the complete reporting period, then the fund is consolidated only for the part of the reporting period for which the Group has control over the entity. 86 Record plc Annual Report 2018Financial statementsWhere the Group controls an entity, but does not own all the share capital of that entity, the interest of the other shareholders’ non-controlling interests is stated within equity at the non-controlling interests’ proportion of the fair value of the recognised assets and liabilities. In the case of the funds controlled by the Group, the interests of any external investor is recognised as a financial liability as investments in the fund are not considered to be equity instruments. The financial statements of subsidiary undertakings, which are prepared using uniform accounting policies, are coterminous with those of the Company apart from those of the seeded funds which have accounting reference dates of 30 September. The consolidated financial statements incorporate the financial performance of the seeded funds in the year ended 31 March 2018 and the financial position of the seeded funds as at 31 March 2018. The Company is taking advantage of the exemption under the Companies Act 2006 s408(1) not to present its individual statement of comprehensive income and related notes that form part of the financial statements. The Group’s total comprehensive income for the year includes a profit of £16,688,038 attributable to the Company (2017: £3,855,425). All intra-Group transactions, balances, income, expenses and dividends are eliminated on consolidation. (c) Foreign currencies The financial statements are presented in sterling (£), which is the functional currency of the parent company. Foreign currency transactions are translated into the functional currency of the parent company using prevailing exchange rates which are updated on a monthly basis. Foreign exchange gains and losses resulting from the settlement of such transactions and from the re-measurement of monetary items at year-end exchange rates are recognised in profit or loss. (d) Financial instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognised when the contractual rights to the cash flows from the financial assets expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Impairment of assets (e) The Group assesses whether there is any indication that any of its assets have been impaired at least annually. If such an indication exists, the asset’s recoverable amount is estimated and compared to its carrying value. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Impairment losses are recognised in profit or loss. (f) Provisions and contingent liabilities Provisions are recognised when present obligations as a result of a past event will probably lead to an outflow of economic resources from the Group and amounts can be estimated reliably. Timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Provisions are discounted to their present values, where the time value of money is material. Any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognised as a separate asset. However, this asset may not exceed the amount of the related provision. All provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resources as a result of present obligations is considered improbable or remote, no liability is recognised. (g) Equity Share capital represents the nominal (par) value of shares that have been issued. Share premium includes any premium received on issue of share capital. Retained earnings includes all current and prior period retained profits and share-based employee remuneration. All transactions with owners of the parent are recorded separately within equity. 2. Critical accounting estimates and judgements The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Note 1 describes the basis which the Group uses to determine whether it controls seed funds, further detail on the consolidation of seed funds is provided in note 12. Note 20 covers the assumptions made in calculating the fair value of share options offered by the Group to its employees. The Directors have judged that the Group does not bear substantially all the risks and rewards of ownership of its leasehold premises and therefore accounts for the leases as operating leases as described in note 23. 87 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional informationNOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 3. Revenue Revenue recognition Revenue is recognised in profit or loss when the amount of revenue can be measured reliably, it is probable that economic benefits will flow to the entity, the stage of completion can be measured reliably, and the costs incurred and costs to complete the transaction can be measured reliably also. Management fees are accrued on a daily basis, typically based upon an agreed percentage of the assets under management equivalents (“AUME”) denominated in the client’s chosen base currency. The Group is entitled to earn performance fees from some clients where the performance of the clients’ mandates exceeds defined benchmarks by an agreed level of outperformance over a set time period. Performance fees are recognised at the end of each contractual performance period as this is the first point at which the fee amount can be estimated reliably and it is probable that the fee will be received. Segmental analysis The Directors, who together are the entity’s Chief Operating Decision Maker, consider that its services comprise one operating segment (being the provision of currency management services) and that it operates in a market that is not bound by geographical constraints. The Group provides Directors with revenue information disaggregated by product, whilst operating costs, assets and liabilities are presented on an aggregated basis. This reflects the unified basis on which the products are marketed, delivered and supported. (a) Product revenues The Group has split its currency management revenues by product. Other currency services income includes fees from signal hedging and fiduciary execution. Revenue by product type Management fees Dynamic Hedging Passive Hedging Currency for Return Multi-Product Total management fee income Performance fee income Other currency services income Total revenue 2018 £’000 5,111 12,569 1,803 4,014 Restated 2017 £’000 5,542 12,130 1,025 4,021 23,497 22,718 — 337 — 234 23,834 22,952 (b) Geographical analysis The geographical analysis of revenue is based on the destination i.e. the location of the client to whom the services are provided. All turnover originated in the UK. Revenue by geographical region Management and performance fee income UK US Switzerland Other Total management and performance fee income Other currency services income Total revenue Other currency services income is not analysed by geographical region. All of the Group’s tangible non-current assets are located in the UK. 2018 £’000 2,834 6,478 10,404 3,781 23,497 337 Restated 2017 £’000 3,863 4,979 11,576 2,300 22,718 234 23,834 22,952 (c) Major clients During the year ended 31 March 2018, three clients individually accounted for more than 10% of the Group’s revenue. The three largest clients generated revenues of £4.0 million, £3.4 million and £2.9 million in the year (2017: four largest clients generated revenues of £3.7 million, £3.4 million, £2.9 million and £2.5 million in the year). 88 Record plc Annual Report 2018Financial statements 4. Operating profit Operating profit for the year is stated after charging/(crediting): Staff costs Depreciation of property, plant and equipment Amortisation of intangibles Auditor fees Fees payable to the Group’s auditor for the audit of the Company’s annual accounts Fees payable to the Group’s auditor for the audit of subsidiary undertakings Fees payable to the Group’s auditor and its associates for other services: Corporation tax services Audit-related assurance services Other non-audit services Operating lease rentals: land and buildings (Gain)/loss on forward FX contracts held to hedge cash flow Gain on derivative financial instruments held by seed funds Exchange loss/(gain) on revaluation of external holding in seed funds Other exchange losses/(gains) 5. Staff costs The average number of employees, including Directors, employed by the Group during the year was: Corporate Client relationships Investment research Operations Risk management Support Annual average The aggregate costs of the above employees, including Directors, were as follows: Wages and salaries Social security costs Pension costs Other employment benefit costs Aggregate staff costs 2018 £’000 2017 £’000 11,062 10,434 206 99 45 39 — 26 55 596 (424) (53) 406 265 99 243 45 40 — 24 44 502 506 (612) (420) (450) 2018 2017 8 15 15 26 5 12 81 2018 £’000 8,280 1,184 432 1,166 9 14 12 22 5 11 73 2017 £’000 7,499 1,059 376 1,500 11,062 10,434 Other employment benefit costs include share-based payments, share option costs, and costs relating to the Record plc Share Incentive Plan. 89 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 6. Taxation – Group Current tax is the tax currently payable based on taxable profit for the year. Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting periods, that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. The total charge for the year can be reconciled to the accounting profit as follows: Profit before taxation Taxation at the standard rate of tax in the UK of 19% (2017: 20%) Tax effects of: Other disallowable expenses and non-taxable income Capital allowances for the year higher than depreciation Higher tax rates on subsidiary undertakings Adjustments recognised in current year in relation to the current tax of prior years Adjustments recognised in current year in relation to Research and Development claims for the years ended 31 March 2016 and 31 March 2017 Other temporary differences Total tax expense The tax expense comprises: Current tax expense Deferred tax expense/(income) Total tax expense 2018 £’000 7,328 1,392 51 (20) 5 (10) (240) 4 Restated 2017 £’000 7,856 1,571 18 (14) 11 — — (46) 1,182 1,540 1,166 16 1,182 1,599 (59) 1,540 The standard rate of UK corporation tax for the year is 19% (2017: 20%). A full corporation tax computation is prepared at the year end. The actual charge as a percentage of the profit before tax may differ from the underlying tax rate. Differences typically arise as a result of capital allowances differing from depreciation charged, and certain types of expenditure not being deductible for tax purposes. Other differences may also arise. The tax charge for the year ended 31 March 2018 was £1,182,498 (2017: £1,539,580) which was 16% of profit before tax (2017: 20%). 90 Record plc Annual Report 2018Financial statements 7. Earnings per share Basic earnings per share is calculated by dividing the profit for the financial year attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share is calculated as for the basic earnings per share with a further adjustment to the weighted average number of ordinary shares to reflect the effects of all potential dilution. There is no difference between the profit for the financial year attributable to equity holders of the parent used in the basic and diluted earnings per share calculations. Weighted average number of shares used in calculation of basic earnings per share Effect of potential dilutive ordinary shares – share options 2018 2017 202,613,441 217,401,660 3,855,924 591,036 Weighted average number of shares used in calculation of diluted earnings per share 206,469,365 217,992,696 Basic earnings per share Diluted earnings per share pence 3.03 2.98 pence 2.91 2.90 The potential dilutive shares relate to the share options granted in respect of the Group’s Share Scheme (see note 20). There were share options in place at the beginning of the year over 13,656,564 shares. During the year 1,760,583 share options were exercised, and a further 1,527,834 share options lapsed or were forfeited. The Group granted 3,975,000 share options with a potentially dilutive effect during the year. Of the 14,343,147 share options in place at the end of the period, all have a dilutive impact at the year end. 8. Dividends Interim and special dividends are recognised when paid and final dividends when approved by shareholders. The dividends paid by the Group during the year ended 31 March 2018 totalled £6,810,361 (3.235 pence per share) which comprised a final dividend in respect of the year ended 31 March 2017 of £2,564,080 (1.175 pence per share), a special dividend in respect of the year ended 31 March 2017 of £1,985,798 (0.91 pence per share) and an interim dividend for the year ended 31 March 2018 of £2,260,483 (1.15 pence per share). The dividends paid by the Group during the year ended 31 March 2017 totalled £3,591,603 (1.65 pence per share) which comprised a final dividend in respect of the year ended 31 March 2016 of £1,790,888 (0.825 pence per share) and an interim dividend for the year ended 31 March 2017 of £1,800,715 (0.825 pence per share). For the year ended 31 March 2018, a final ordinary dividend of 1.15 pence per share has been proposed and a special dividend of 0.50 pence per share has been declared. 9. Retirement benefit obligations The Group operates defined contribution pension plans for the benefit of employees. The Group makes contributions to independently administered plans, such contributions being recognised as an expense when they fall due. The assets of the schemes are held separately from those of the Group in independently administered funds. The Group is not exposed to the particular risks associated with the operation of Defined Benefit plans and has no legal or constructive obligation to make any further payments to the plans other than the contributions due. The pension cost charge represents contributions payable by the Group to the funds and amounted to £432,180 (2017: £375,845). 91 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 10. Property, plant and equipment – Group All property, plant and equipment assets are stated at cost less accumulated depreciation. Depreciation of property, plant and equipment is provided to write off the cost, less residual value, on a straight-line basis over the estimated useful life: • Leasehold improvements – period from lease commencement to the earlier of the lease termination date and the next rent review date • Computer equipment – 2 to 5 years • Fixtures and fittings – 4 to 6 years Residual values, remaining useful economic lives and depreciation methods are reviewed annually and adjusted if appropriate. Gains or losses on disposal are included in profit or loss. The Group’s property, plant and equipment comprise leasehold improvements, computer equipment and fixtures and fittings. The carrying amount can be analysed as follows: Leasehold improvements £’000 Computer equipment £’000 Fixtures and fittings £’000 635 26 — 661 36 114 — 150 511 599 542 177 (48) 671 423 50 (48) 425 246 119 304 33 (13) 324 141 42 (12) 171 153 163 Leasehold improvements £’000 Computer equipment £’000 Fixtures and fittings £’000 534 635 (534) 635 534 36 (534) 36 599 — 542 106 (106) 542 483 46 (106) 423 119 59 244 158 (98) 304 222 17 (98) 141 163 22 Total £’000 1,481 236 (61) 1,656 600 206 (60) 746 910 881 Total £’000 1,320 899 (738) 1,481 1,239 99 (738) 600 881 81 2018 Cost At 1 April 2017 Additions Disposals At 31 March 2018 Depreciation At 1 April 2017 Charge for the year Disposals At 31 March 2018 Net book amounts At 31 March 2018 At 1 April 2017 2017 Cost At 1 April 2016 Additions Disposals At 31 March 2017 Depreciation At 1 April 2016 Charge for the year Disposals At 31 March 2017 Net book amounts At 31 March 2017 At 1 April 2016 92 Record plc Annual Report 2018Financial statements 11. Intangible assets Intangible assets are shown at historical cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of the intangible assets unless such lives are indefinite. Amortisation is included within operating expenses in the statement of comprehensive income. Intangible assets are amortised from the date they are available for use. Useful lives are as follows: • Software – 2 to 5 years Amortisation periods and methods are reviewed annually and adjusted if appropriate. The Group’s intangible assets comprises both purchased software and the capitalised cost of software development. The carrying amounts can be analysed as follows: 2018 Cost At 1 April 2017 Additions Disposals At 31 March 2018 Amortisation At 1 April 2017 Charge for the year Disposals At 31 March 2018 Net book amounts At 31 March 2018 At 1 April 2017 2017 Cost At 1 April 2016 Additions Disposals At 31 March 2017 Amortisation At 1 April 2016 Charge for the year Disposals At 31 March 2017 Net book amounts At 31 March 2017 At 1 April 2016 Software £’000 Total £’000 1,377 1,377 82 (1) 82 (1) 1,458 1,458 1,132 1,132 99 (1) 99 (1) 1,230 1,230 228 245 Software £’000 228 245 Total £’000 1,189 1,189 189 — 189 — 1,378 1,378 890 243 — 890 243 — 1,133 1,133 245 299 245 299 Intangible assets includes the capitalised development costs of the Group’s middle and back office system which was completed in June 2012 and has an estimated useful economic life of five years. The annual contractual commitment for the maintenance and support of software is £179,664 (2017: £174,941). All amortisation charges are included within administrative expenses. 93 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 12. Investments Company Investments in subsidiaries are shown at cost less impairment losses. The capitalised investment in respect of share-based payments offered by subsidiaries is equal to the cumulative fair value of the amounts payable to employees recognised as an expense by the subsidiary. Investment in subsidiaries (at cost) Record Currency Management Limited Record Group Services Limited Record Portfolio Management Limited Record Currency Management (US) Inc. Record Currency Management (Switzerland) GmbH Record Fund Management Limited N P Record Trustees Limited Total investment in subsidiaries (at cost) Capitalised investment in respect of share‑based payments Record Currency Management (US) Inc. Record Group Services Limited Total capitalised investment in respect of share‑based payments Total investment in subsidiaries Particulars of subsidiary undertakings Name Nature of business 2018 £’000 2017 £’000 10 10 10 — 16 — — 46 77 978 1,055 1,101 10 10 10 — — — — 30 68 789 857 887 Record Currency Management Limited Currency management services (FCA registered) Record Group Services Limited Management services to other Group undertakings Record Portfolio Management Limited Dormant Record Currency Management (US) Inc. US advisory and service company (SEC and CFTC registered) Record Currency Management (Switzerland) GmbH Swiss advisory and service company Record Fund Management Limited N P Record Trustees Limited Dormant Dormant trust company The Group’s interest in the equity capital of subsidiary undertakings is 100% of the ordinary share capital in all cases. Record Currency Management (US) Inc. is incorporated in Delaware (registered office: Corporation Service Company, 251 Little Falls Drive, Wilmington, DE 19808) and Record Currency Management (Switzerland) GmbH is incorporated in Zürich (registered office: Münsterhof 14, 8001 Zürich). All other subsidiaries are registered in England and Wales with their registered office at Morgan House, Madeira Walk, Windsor, Berkshire, SL4 1EP, UK. Investment in funds In addition to the subsidiaries listed above, the Company holds investments in several funds These funds are seed investments, which have various investment objectives and policies and are subject to the terms and conditions of their offering documentation. The principal activity of each is to invest capital from investors in a portfolio of assets in order to provide a return for those investors. Group Funds are consolidated on a line by line basis where the Group has determined that a controlling interest exists through an investment holding in the fund, in accordance with IFRS 10 “Consolidated Financial Statements”. Otherwise, investments in funds are measured at fair value through profit or loss. The Group has controlled both the Record Currency – FTSE FRB10 Index Fund and the Record Currency – Strategy Development Fund throughout the year ended 31 March 2018 and the comparative year, the year ended 31 March 2017, and both were consolidated in full, on a line-by-line basis in the Group’s financial statements throughout these periods. The Group was in control of the Record Currency – Emerging Market Currency Fund until 21 March 2018, at which point the Group no longer consolidated the fund on a line-by-line basis, but the Group did consolidate the fund in full on a line-by-line basis until that date. In February 2018, the Company invested in the Record – Currency Multi-Strategy Fund. The Group has controlled this fund since inception and the fund is consolidated in full on a line-by-line basis. 94 Record plc Annual Report 2018Financial statements Company Investments in funds are measured at fair value through profit or loss. All four fund investments are presented within investments in the Company statement of financial position. Investment in funds Record Currency – FTSE FRB10 Index Fund Record Currency – Emerging Market Currency Fund Record Currency – Strategy Development Fund Record – Currency Multi-Strategy Fund Total Group Company 2018 £’000 — 1,115 — — 1,115 2017 £’000 — — — — — 2018 £’000 1,116 1,115 952 1,004 4,187 2017 £’000 1,146 1,104 1,060 — 3,310 All four fund entities are sub-funds of the Record Umbrella Fund, an open-ended umbrella unit trust authorised in Ireland. 13. Deferred taxation – Group Deferred tax is the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities shown on the statement of financial position. The amount of deferred tax provided is based on the expected manner of recovery or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the statement of financial position date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The carrying amount of the deferred tax assets are reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. A deferred tax liability is generally recognised for all taxable temporary differences. Deferred tax assets or liabilities arising on goodwill are not recognised but are however recognised on separately identifiable intangible assets. Deferred tax arising on the initial recognition of an asset or liability, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit or loss, is not recognised. (Charge)/credit to income statement in year Asset brought forward Asset carried forward The deferred tax asset consists of the tax effect of temporary differences in respect of: Deferred tax allowance on unvested share options Shortfall of taxation allowances over depreciation on fixed assets Total 2018 £’000 (16) 102 86 2018 £’000 98 (12) 86 2017 £’000 59 43 102 2017 £’000 191 (89) 102 At the year end the Group had deferred tax assets of £85,758 (2017: £101,606). At the year end there were share options not exercised with an intrinsic value for tax purposes of £945,864 (2017: £1,006,095). On exercise the Group will be entitled to a corporation tax deduction in respect of the difference between the exercise price and the strike price. There is no unprovided deferred taxation. 95 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 14. Trade and other receivables Trade and other receivables are stated at their original invoice value, as the interest that would be recognised from discounting future cash receipts over the short credit period is not considered to be material. Individual receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. Impairment of trade receivables is presented within administrative expenses. An analysis of the Group’s receivables is provided below: Trade receivables Accrued income Other receivables Prepayments Total 2018 £’000 5,279 582 56 858 6,775 2017 £’000 5,937 85 29 921 6,972 All amounts are short-term. The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. All of the Group’s trade and other receivables have been reviewed for indicators of impairment; no such indicators were noted. The Group has not renegotiated the terms of any receivables in the year ended 31 March 2018. The carrying amount of receivables whose terms have been renegotiated, that would otherwise be past due or impaired is £nil (2017: £nil). 15. Derivative financial assets and liabilities Derivative financial instruments are initially recognised at cost on the date on which the contract is first entered into unless the fair value at acquisition is different to cost, in which case fair value is recognised. Subsequently they are measured at fair value with gains and losses recognised in profit or loss. Transaction costs are immediately recognised in profit or loss. The fair values of derivative financial instruments are determined by reference to active market transactions. The Group holds derivative financial instruments for two purposes. The Group uses forward foreign exchange contracts to reduce the risk associated with assets denominated in foreign currencies, and additionally uses both foreign exchange options and forward foreign exchange contracts in order to achieve a return within the seed funds. The instruments are recognised at fair value. The fair value of the contracts is calculated using the market rates prevailing at the period end date. The net gain or loss on instruments is included within revenue. Derivative financial assets Forward foreign exchange contracts held to hedge non-sterling based assets Forward foreign exchange contracts held for trading Total Derivative financial liabilities Forward foreign exchange contracts held to hedge non-sterling assets Forward foreign exchange contracts held for trading Total 2018 £’000 199 67 266 2018 £’000 — (29) (29) 2017 £’000 18 35 53 2017 £’000 (5) (43) (48) Derivative financial instruments held to hedge non-sterling based assets At 31 March 2018 there were outstanding contracts with a principal value of £9,951,185 (31 March 2017: £7,786,158) for the sale of foreign currencies in the normal course of business. The fair value of the contracts is calculated using the market forward contract rates prevailing at 31 March 2018. The Group does not apply hedge accounting. The net gain or loss on forward foreign exchange contracts held to hedge non-sterling based assets is as follows: Derivative financial instruments held to hedge non‑sterling based assets Net gain/(loss) on forward foreign exchange contracts at fair value through profit or loss 2018 £’000 424 2017 £’000 (506) 96 Record plc Annual Report 2018Financial statements Derivative financial instruments held for trading The Record Currency – FTSE FRB10 Index Fund, the Record Currency – Emerging Market Currency Fund and the Record – Currency Multi-Strategy Fund, use forward foreign exchange contracts in order to achieve a return. The Record Currency – Strategy Development Fund may use a variety of instruments including forward foreign exchange contracts, options and futures in order to achieve a return. All derivative financial instruments held by the Record Currency – Strategy Development, the Record Currency – FTSE FRB10 Index Fund and the Record – Currency Multi-Strategy Fund were classified as held for trading throughout the period. The derivative financial instruments held by the Record Currency – Emerging Market Currency Fund were classified as held for trading from inception until 21 March 2018 when the fund was deconsolidated from the Group financial statements. At 31 March 2018 there were outstanding contracts with a principal value of £15,012,327 (31 March 2017: £16,085,621). The net gain or loss on derivative financial instruments held for trading for the year was as follows: Derivative financial instruments held for trading Net gain on forward foreign exchange contracts and foreign exchange options at fair value through profit or loss 2018 £’000 53 2017 £’000 612 16. Cash management The Group’s cash management strategy employs a variety of treasury management instruments including cash, money market deposits and treasury bills. Whilst the Group manages and considers all of these instruments as cash, which are subject to its own internal cash management process, not all of these instruments are classified as cash or cash equivalents under IFRS. IFRS defines cash and cash equivalents as cash in hand, on demand and collateral deposits held with banks, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Moreover, instruments can only generally be classified as cash and cash equivalents where they are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. In the Group’s judgement, bank deposits and treasury bills with maturities in excess of 3 months do not meet the definition of short-term or highly liquid and are held for purposes other than meeting short-term commitments. In accordance with IFRS, these instruments are not categorised as cash or cash equivalents and are disclosed as money market instruments with maturities >3 months. Group Company Assets managed as cash Bank deposits with maturities > 3 months Treasury bills with maturities > 3 months 2018 £’000 9,698 500 2017 £’000 15,203 2,899 Money market instruments with maturities > 3 months 10,198 18,102 Cash Bank deposits with maturities <= 3 months Cash and cash equivalents Total assets managed as cash Cash and cash equivalents Cash and cash equivalents – sterling Cash and cash equivalents – USD Cash and cash equivalents – CHF Cash and cash equivalents – other currencies Total cash and cash equivalents The Group cash and cash equivalents balance incorporates the cash and cash equivalents held by any fund deemed to be under control of Record plc (refer to notes 1 and 12 for explanation of accounting treatment). As at 31 March 2018, the cash and cash equivalents held by the seed funds over which the Group had control totalled £4,969,231 (31 March 2017: £5,140,828) and the money market instruments with maturities > 3 months held by these funds were £500,000 (31 March 2017: £2,899,233). Group Company 4,411 8,087 12,498 22,696 7,457 11,663 19,120 37,222 2018 £’000 3,827 2,680 4,610 1,381 2017 £’000 14,174 1,026 3,846 74 12,498 19,120 2018 £’000 2017 £’000 — — — 2 — 2 2 — — — 2 — 2 2 2018 £’000 2017 £’000 2 — — — 2 2 — — — 2 97 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 17. Current liabilities Trade and other payables are stated at their original invoice value, as the interest that would be recognised from discounting future cash payments over the short payment period is not considered to be material. Trade and other payables Trade payables Amounts owed to Group undertaking Other payables Other tax and social security Accruals Total Group Company 2018 £’000 325 — 4 234 2,067 2,630 2017 £’000 418 — 82 324 2,189 3,013 2018 £’000 — 1,093 — — — 1,093 2017 £’000 — 11 — — — 11 The Directors consider that the carrying amount of trade and other payables approximates to their fair value. Current tax liabilities Corporation tax Group Company 2018 £’000 399 2017 £’000 804 2018 £’000 — 2017 £’000 67 18. Financial liabilities Record plc has made investments in a number of funds where it is in a position to be able to control those funds by virtue of the size of its holding. When Record plc is not the only investor in such funds and the external investment instrument does not meet the definition of an equity instrument under IAS 32 then the instrument is classified as a financial liability. The financial liabilities are measured at cost plus movement in value of the third party investment in the fund. Record has seeded four funds which have been active during the year ended 31 March 2018. The Record Currency – FTSE FRB10 Index Fund was considered to be under control of the Group as the combined holding of Record plc and its Directors constituted a majority interest throughout the year. Similarly, the Record Currency – Strategy Development Fund is considered to be under control of the Group as the combined holding of Record plc and its Directors has constituted a majority interest since inception. The Record Currency – Emerging Market Currency Fund was under the control of the Group until 21 March 2018, when the redemption of units by two Record plc Directors meant that Record could no longer control the fund as the combined holding of Record plc and its Directors no longer constituted a majority interest from that point onwards. This fund has therefore been consolidated into the Group’s financial statements until 21 March 2018. In February 2018, the Company invested in the Record – Currency Multi-Strategy Fund. The Group has controlled this fund since inception and the fund is consolidated in full on a line-by-line basis. The mark to market value of units held by investors in these funds other than Record plc are shown as financial liabilities in the Group financial statements, in accordance with IFRS. Mark to market value of external holding in seeded funds consolidated into the accounts of the Record Group Record Currency – Emerging Market Currency Fund Record Currency – FTSE FRB10 Index Fund Record – Currency Multi-Strategy Fund Record Currency – Strategy Development Fund 2018 £’000 — 459 2,008 — Restated 2017 £’000 4,308 471 n/a — 2,467 4,779 The financial liabilities relate only to the fair value of the external investors’ holding in the seed funds, and are in no sense debt. Financial liabilities relating to the fair value of external investors’ holdings in the seed funds were previously classified in equity as non-controlling interests. A reconciliation of the historic presentation to the revised presentation is provided in note 29. 98 Record plc Annual Report 2018Financial statements 19. Issued share capital The share capital of Record plc consists only of fully paid ordinary shares with a par value of 0.025p each. All shares are equally eligible to receive dividends and the repayment of capital and represent one vote at the shareholders’ meeting. Authorised Ordinary shares of 0.025p each Called up, allotted and fully paid Ordinary shares of 0.025p each 2018 2017 £’000 Number £’000 Number 100 400,000,000 100 400,000,000 50 199,054,325 55 221,380,800 On 17 July 2017 a total of 22,326,475 ordinary shares were purchased by the Company for a total cost of £10,000,028.15. The share purchase was made following the Tender Offer announced on 21 June 2017 and approved by special resolution at the General Meeting on 14 July 2017. Following the share purchase, the 22,326,475 shares were cancelled. Movement in Record plc shares held by the Record plc Employee Benefit Trust (“EBT”) The EBT was formed to hold shares acquired under the Record plc share-based compensation plans. Under IFRS the EBT is considered to be under de facto control of the Group, and has therefore been consolidated into the Group financial statements. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the Group statement of comprehensive income. Record plc shares held by EBT as at 31 March 2016 Adjustment for net sales by EBT Record plc shares held by EBT as at 31 March 2017 Adjustment for net sales by EBT Record plc shares held by EBT as at 31 March 2018 Number 4,942,248 (1,323,253) 3,618,995 (1,225,563) 2,393,432 The holding of the EBT comprises own shares that have not vested unconditionally to employees of the Group. Own shares are recorded at cost and are deducted from retained earnings. Further information regarding the Record plc share-based compensation plans and relevant transactions made during the year is included in note 20. 20. Share-based payments During the year ended 31 March 2018 the Group has managed the following share-based compensation plans: a) The Group Profit Share Scheme: share awards issued under the Group Profit Share Scheme are classified as share-based payments with cash alternatives under IFRS 2. b) The Record plc Share Scheme: share options issued under the Record plc Share Scheme are classified as equity-settled share-based payments under IFRS 2. c) The Record plc Share Incentive Plan: the Group operates the Record plc Share Incentive Plan (“SIP”) to encourage more widespread ownership of Record plc shares by employees. The SIP is a tax-approved scheme offering attractive tax savings for employees retaining their shares in the scheme over the medium to long term. All obligations arising from the three schemes have been fulfilled through purchasing shares in the market. (a) Group Profit Share Scheme Share-based payments with cash alternatives These transactions are compound financial instruments, which include a debt element and a cash element. The fair value of the debt component of the amounts payable to the employee is calculated as the cash amount alternative offered to the employee at grant date and the fair value of the equity component of the amounts payable to the employee is calculated as the market value of the share award at grant date less the cash forfeited in order to receive the share award. The debt component is charged to profit or loss over the period in which the award is earned and remeasured at fair value at each reporting date. The equity component is charged to profit or loss over the period in which the award is earned. The Group Profit Share Scheme allocates a proportion of operating profits to a profit share pool to be distributed between all employees of the Group. The Remuneration Committee has the discretion to vary the proportion allocated to the profit share pool between 25% and 35% of operating profits, with the intention of maintaining an average level of 30% of operating profits over the medium term. Directors and senior employees receive one third of their profit share in cash, one third in shares (“Earned Shares”) and may elect to receive the final third as cash only or to allocate some, or all, of the amount for the purchase of Additional Shares. The charge to profit or loss in respect of Earned Shares in the period was £682,758 (2017: £733,858). Other employees receive two thirds of their profit share in cash and may elect to receive the final third as cash only or to allocate some, or all, of the amount for the purchase of Additional Shares. 99 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 20. Share-based payments continued (a) Group Profit Share Scheme continued Share-based payments with cash alternatives continued Prior to 1 October 2017, if an individual elected to receive Additional Shares, the Group simultaneously awarded a Matching Share value amount using a multiple decided by the Remuneration Committee. The multiple was dependent on the level of seniority of the employee. The number of shares was determined by the post-tax cash attributed to Earned Shares plus Additional Shares plus Matching Shares divided by the aggregate market value achieved on the purchase of all such shares in the market. The charge to profit or loss in respect of Matching Shares in the period was £141,078 (2017: £292,525). From 1 October 2017, as a result of changes to the Group Profit Share Scheme, Matching Shares are no longer awarded by the Group. Shares awarded under the Group Profit Share Scheme do not include any vesting restrictions but rather restrictions over subsequent sale and transfer. All shares which are the subject of share awards vest immediately and are transferred to a nominee allowing the employee, as beneficial owner to retain full rights in respect of the shares purchased. However, these shares cannot be sold, transferred or otherwise disposed of without the consent of the Remuneration Committee except as follows: • Earned Shares – one third on each anniversary of the Profit Share Payment date; and • Matching Shares, and Additional Shares received in respect of elections made prior to 1 October 2017 – the third anniversary of the Profit Share Payment date for Directors and senior employees and the second anniversary of the Profit Share Payment date for all other employees. The Group Profit Share Scheme rules contain clawback provisions allowing for the repayment of profit share payments under certain circumstances including a material breach of contract, an error in performance of duties or a restatement of accounts which leads to a change in any prior award under the scheme. Shares awarded under this scheme have been purchased in the market. (b) The Record plc Share Scheme Equity-settled share-based payments The fair value of the amounts payable to employees under these awards is recognised as an expense over the vesting period of the award, with a corresponding increase in equity. All such awards made by the Group involve the parent company granting rights to its equity instruments to employees of its subsidiary. Consequently the subsidiary measures the services received from its employees in accordance with the above classification under IFRS 2 and recognises a corresponding increase in equity as a contribution from the parent. The parent has the obligation to settle the transaction with the subsidiary’s employees and therefore recognises an increase in its investment in the subsidiary and a corresponding increase in equity. The fair value of options granted is measured at grant date using an appropriate valuation model, taking into account the terms and conditions upon which the instruments were granted. The fair value amounts for the options issued since flotation were determined using quoted share prices. The Record plc Share Scheme allows deferred share awards to be granted to employees and Directors in the Record Group. Part 1 of the Record plc Share Scheme allows the grant of Unapproved Options to employees and Directors and Part 2 allows the grant of HMRC Approved Options to employees and Directors. Each participant may be granted Approved Options over shares with a total market value of up to £30,000 on the date of grant. There is no such limit on the value of grant for Unapproved Options, which have historically been granted with a market value exercise price in the same way as for the Approved Options. Options over an aggregate of 3,975,000 shares were granted under the Share Scheme during the year (2017: 4,197,521), of which 2,261,000 were made subject to Unapproved Options and 1,714,000 to Approved Options (2017: 3,790,000 made subject to Unapproved Options and 407,521 to Approved Options). All options were granted with an exercise price per share equal to the share price prevailing at the time of grant. The 1,662,000 Approved Options issued to employees on 26 January 2018 each become exercisable on the fourth anniversary of the date of grant, subject to the employee being in employment with the Group at the relevant vesting date and to the extent performance conditions have been satisfied. The 328,000 Unapproved Options issued to employees on 26 January 2018 each become exercisable in four equal tranches on the first, second, third and fourth anniversary of the date of grant, subject to the employee being in employment with the Group at the relevant vesting date and to the extent performance conditions have been satisfied. The 52,000 Approved Options issued to Directors on 26 January 2018 each become exercisable in three equal tranches on the third, fourth and fifth anniversary of the date of grant, subject to the employee being in employment with the Group at the relevant vesting date and to the extent performance conditions have been satisfied. The 1,933,000 Unapproved Options issued to Directors on 26 January 2018 each become exercisable in three equal tranches on the third, fourth and fifth anniversary of the date of grant, subject to the employee being in employment with the Group at the relevant vesting date and to the extent performance conditions have been satisfied. 100 Record plc Annual Report 2018Financial statementsThe fair value of the services provided by employees has been calculated indirectly by reference to the fair value of the equity instruments granted. Fair value amounts for the options granted in the year ended 31 March 2018 were determined using a Black-Scholes option-pricing method and the following assumptions: Model input Share price Exercise price Expected volatility Option life Risk-free interest rate (%) Expected volatility is based on historical volatility. Weighted average value 43.5p 43.5p 37% 4.0 years 1.28% The Group share-based payment expense in respect of the Share Scheme was £197,740 for the year ended 31 March 2018 (2017: £200,220). Outstanding share options At 31 March 2018, the total number of ordinary shares of 0.025p outstanding under Record plc share compensation schemes was 14,343,147 (2017: 13,656,564). These deferred share awards and options are over issued shares, a proportion of which are hedged by shares held in an Employee Benefit Trust. Details of outstanding share options and deferred shares awarded to employees are set out below: Granted Exercised Lapsed/ At 31 March 2018 forfeited Earliest vesting date Latest vesting date1 Exercise price Date of grant 27/09/13 27/09/13 18/11/13 26/11/14 24/03/15 24/03/15 01/12/15 27/01/16 27/01/16 27/01/16 27/01/16 30/11/16 30/11/16 30/11/16 31/01/17 26/01/18 26/01/18 26/01/18 26/01/18 At 1 April 2017 480,000 327,500 933,334 2,160,000 270,000 1,385,250 1,800,000 993,750 709,209 327,500 72,500 328,574 1,590,000 2,200,000 78,947 — — — — — — — — — — — — — — — (480,000) — (302,500) (25,000) — — 27/09/17 27/09/17 £0.3085 27/09/14 27/09/17 £0.3085 (233,333) (233,334) 466,667 18/11/16 18/11/18 £0.3000 — — (720,000) 1,440,000 26/11/17 26/11/19 £0.3586 (42,000) 228,000 24/03/19 24/03/19 £0.3450 (372,250) (268,500) 744,500 24/03/16 24/03/19 £0.3450 — — — — — — — 1,800,000 01/12/18 01/12/20 £0.2888 (75,000) 918,750 27/01/17 27/01/20 £0.2450 (24,000) 685,209 27/01/20 27/01/20 £0.2450 — — 327,500 27/01/19 27/01/21 £0.2450 72,500 27/01/19 27/01/21 £0.2450 (40,000) 288,574 30/11/20 30/11/20 £0.34072 (372,500) (100,000) 1,117,500 30/11/17 30/11/20 £0.34072 — — — — — — — — — — — — 2,200,000 30/11/19 30/11/21 £0.34072 78,947 31/01/21 31/01/21 £0.38000 1,662,000 26/01/22 26/01/23 £0.4350 328,000 26/01/19 26/01/23 £0.4350 52,000 26/01/21 26/01/24 £0.4350 1,933,000 26/01/21 26/01/24 £0.4350 — — — — 1,662,000 328,000 52,000 1,933,000 Total options 13,656,564 3,975,000 (1,760,583) (1,527,834) 14,343,147 Weighted average exercise price of options £0.32 £0.44 £0.32 £0.34 £0.35 During the year 1,760,583 options were exercised. The weighted average share price at date of exercise was £0.47. At 31 March 2018 a total of 678,500 options had vested and were exercisable. 1. Under the terms of the deeds of grants, options are exercisable for a year following the vesting date. 101 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 20. Share-based payments continued (b) The Record plc Share Scheme continued Outstanding share options continued The Directors’ interests in the combined share schemes are as follows: Record plc Group Profit Share Scheme (interest in restricted share awards) James Wood-Collins Leslie Hill Bob Noyen Steve Cullen Record plc Share Scheme (interest in unvested share options) James Wood-Collins Leslie Hill Bob Noyen Steve Cullen Ordinary shares held as at 31 March 2018 31 March 2017 375,408 573,568 1,008,518 759,618 324,614 374,641 361,076 380,429 3,286,667 2,663,334 1,800,000 1,730,000 1,800,000 1,730,000 1,405,000 1,370,000 Performance measures Performance conditions attached to all options granted to Board Directors differ to those granted for all other staff. All Executive Director option awards are subject to a performance condition and vest on each of the third, fourth and fifth anniversaries of the date of grant subject to an earnings per share (“EPS”) hurdle linked to the annualised EPS growth for the respective three, four and five-year periods from grant. Vesting is on a stepped basis, with 25% of each tranche vesting if EPS growth over the relevant period is at least RPI plus 4% per annum, increasing through 50%, 75% and with 100% vesting if EPS growth exceeds RPI plus 13%, as shown in the table below. Options awarded subject to EPS performance conditions are valued using a Black-Scholes model. Record’s average EPS growth >RPI growth + 13% >RPI growth + 10%, =RPI growth + 7%, =RPI growth + 4%, = 3 months Cash and cash equivalents 2018 £’000 5,279 582 56 266 10,198 12,498 28,879 2017 £’000 5,937 85 29 53 18,102 19,120 43,326 103 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 21. Financial risk management continued Credit risk continued The debtors’ age analysis is also evaluated on a regular basis for potential doubtful debts. It is management’s opinion that no provision for doubtful debts is required. The table below is an analysis of trade receivables and accrued income by due date: At 31 March 2018 Trade receivables Accrued income At 31 March 2017 Trade receivables Accrued income Carrying amount £’000 Neither impaired nor past due £’000 0‑3 months past due £’000 More than 3 months past due £’000 5,279 582 5,861 4,551 582 5,133 88% 726 — 726 12% 2 — 2 0% Carrying amount £’000 Neither impaired nor past due £’000 5,937 5,790 85 6,022 85 5,875 98% 0-3 months past due £’000 More than 3 months past due £’000 147 — 147 2% — — — 0% The Group offers standard credit terms of 30 days from invoice date. It is the Group’s policy to assess debtors for recoverability on an individual basis and to make a provision where it is considered necessary. In assessing recoverability the Group takes into account any indicators of impairment up to the reporting date. The application of this policy generally results in debts that are 0-3 months overdue not being provided for unless individual circumstances indicate that a debt is impaired. Trade receivables are made up of 52 debtors’ balances (2017: 54). The largest individual debtor corresponds to 18% of the total balance (2017: 16%). Debtor days, based on the generally accepted calculation of debtor days, is 81 days (2017 (restated): 94 days). This reflects the quarterly billing cycle used by the Group for the vast majority of its fees. As at 31 March 2018 12.4% of debt was overdue (2017: 2.4%). No debtors’ balances have been renegotiated during the year or in the prior year. Liquidity risk The Group is exposed to liquidity risk, namely that it may be unable to meet its payment obligations as they fall due. The Group maintains sufficient cash and marketable securities to be able to meet all such obligations. Management review cash flow forecasts on a regular basis to determine whether the Group has sufficient cash reserves to meet the future working capital requirements and to take advantage of business opportunities. The average creditor payment period is 22 days (2017: 33 days). Contractual maturity analysis for financial liabilities: Carrying amount £’000 325 2,067 29 Carrying amount £’000 418 2,189 48 Due or due Due between Due between 3 months in less than and 1 year 1 month £’000 £’000 1 and 3 months £’000 325 164 25 — 838 4 — 1,065 — Due or due Due between Due between 3 months in less than and 1 year 1 month £’000 £’000 1 and 3 months £’000 272 90 45 27 1,027 3 119 1,072 — At 31 March 2018 Trade payables Accruals Derivative financial liabilities At 31 March 2017 Trade payables Accruals Derivative financial liabilities 104 Record plc Annual Report 2018Financial statements Interest rate risk Interest rate risk is the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Interest rate risk arises from interest-bearing financial assets and liabilities held by the Group. Interest-bearing assets comprise money market instruments and cash and cash equivalents which are considered to be short-term liquid assets. It is the Group’s policy to settle trade payables within the credit terms allowed and the Group does not therefore incur interest on overdue balances. A sensitivity analysis has not been disclosed for the impact of interest rate changes as any reasonable range of change in interest rate would not directly have a material impact on profit or equity. Interest rate profiles At 31 March 2018 Financial assets Trade receivables Accrued income Other receivables Derivative financial assets at fair value through profit or loss Money market instruments with maturities > 3 months Cash and cash equivalents Total financial assets Financial liabilities Trade payables Accruals Derivative financial liabilities at fair value through profit or loss Financial liabilities Total financial liabilities At 31 March 2017 Financial assets Trade receivables Accrued income Other receivables Derivative financial assets at fair value through profit or loss Money market instruments with maturities > 3 months Cash and cash equivalents Total financial assets Financial liabilities Trade payables Accruals Derivative financial liabilities at fair value through profit or loss Financial liabilities Total financial liabilities Fixed rate £’000 Floating rate £’000 No interest rate £’000 Total £’000 — — — — 10,198 8,087 18,285 — — — — — — — — — — 4,411 4,411 — — — — — 5,279 5,279 582 56 266 — — 6,183 582 56 266 10,198 12,498 28,879 (325) (325) (2,067) (2,067) (29) (2,467) (4,888) (29) (2,467) (4,888) Total £’000 Fixed rate £’000 Floating rate £’000 No interest rate £’000 — — — — 18,102 11,663 29,765 — — — — — — — — — — 7,457 7,457 — — — — — 5,937 5,937 85 29 53 — — 6,104 85 29 53 18,102 19,120 43,326 (418) (418) (2,189) (2,189) (48) (4,779) (7,434) (48) (4,779) (7,434) 105 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 21. Financial risk management continued Foreign currency risk Foreign currency risk refers to the risk that the value of a financial commitment or recognised asset or liability will fluctuate due to changes in foreign currency rates. The Group makes use of forward foreign exchange contracts to manage the risk relating to future transactions in accordance with the Group’s risk management policy. The Group is exposed to foreign currency risk on sales and cash holdings that are denominated in a currency other than sterling, and also on assets and liabilities held by the Record Currency – Strategy Development Fund (formerly Global Alpha Fund). The principal currencies giving rise to this risk are the US dollar, the Swiss franc, the euro and the Canadian dollar. During the year ended 31 March 2018, the Group invoiced the following amounts in currencies other than sterling: Swiss franc (CHF) US dollar (USD) Euro (EUR) Canadian dollar (CAD) Swedish krona (SEK) Singapore dollar (SGD) Local currency value ‘000 Value in reporting currency £’000 13,045 10,053 9,760 2,683 660 784 34 7,230 2,361 385 70 19 20,118 The value of revenues for the year ended 31 March 2018 that were denominated in currencies other than sterling was £20.1 million (31 March 2017: £19.5 million). Record’s policy is to reduce the risk associated with the Group’s sales denominated in foreign currencies by using forward fixed rate currency sales contracts, taking into account any forecast foreign currency cash flows. The settlement of these forward foreign exchange contracts is expected to occur within the following three months. Changes in the fair values of forward foreign exchange contracts are recognised directly in profit or loss. The cash denominated in currencies other than sterling (refer to note 16), is covered by the Group’s hedging process, therefore the Directors consider that the foreign currency risk on cash balances is not material. Foreign currency risk – sensitivity analysis The Group has considered the sensitivity to exchange rate movements by considering the impact on those revenues, costs, assets and liabilities denominated in foreign currencies as experienced in the given period. Sterling weakening by 10% against the dollar Sterling strengthening by 10% against the dollar Sterling weakening by 10% against the Swiss franc Sterling strengthening by 10% against the Swiss franc Impact on profit after tax for the year ended 31 March Impact on total equity as at 31 March 2018 £’000 469 (469) 593 (593) Restated 2017 £’000 469 (469) 621 (621) 2018 £’000 469 (469) 593 (593) Restated 2017 £’000 469 (469) 621 (621) Sterling/US dollar exchange rate The impact of a change of 10% has been selected as this is considered reasonable given the current level of exchange rates and the volatility observed on a historical basis and market expectations for future movement. When applied to the average sterling/USD exchange rate of £/$1.34 this would result in sterling weakening to £/$1.22 and sterling strengthening to £/$1.49. Sterling/Swiss franc exchange rate The impact of a change of 10% has been selected as this is considered reasonable given the current level of exchange rates and the volatility observed on a historical basis and market expectations for future movement. When applied to the average sterling/CHF exchange rate of £/CHF1.29 this would result in sterling weakening to £/CHF1.18 and sterling strengthening to £/CHF1.44. Sensitivity analyses have not been disclosed for other currencies as any reasonable range of change in exchange rate would not have a material impact on profit or equity. 106 Record plc Annual Report 2018Financial statements 22. Fair value measurement The following table presents financial assets and liabilities measured at fair value in the consolidated statement of financial position in accordance with the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level within which the financial asset or liability is classified is determined based on the lowest level of input to the fair value measurement. The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy as follows: Financial assets at fair value through profit or loss Forward foreign exchange contracts used for hedging Forward foreign exchange contracts used for seed funds Financial liabilities at fair value through profit or loss Forward foreign exchange contracts used for hedging Forward foreign exchange contracts used for seed funds Total Financial assets at fair value through profit or loss Forward foreign exchange contracts used for hedging Forward foreign exchange contracts used for seed funds Financial liabilities at fair value through profit or loss Forward foreign exchange contracts used for hedging Forward foreign exchange contracts used for seed funds Total 2018 £’000 Level 1 £’000 Level 2 £’000 Level 3 £’000 199 67 (29) — 237 — — — — — 199 67 (29) — 237 — — — — — 2017 £’000 Level 1 £’000 Level 2 £’000 Level 3 £’000 18 35 (5) (43) 5 — — — — — 18 35 (5) (43) 5 — — — — — There have been no transfers between levels in the reporting period (2017: none). Basis for classification of financial instruments classified as level 2 within the fair value hierarchy Both forward foreign exchange contracts and options are classified as level 2. Both of these instruments are traded on an active market. Options are valued using an industry standard model with inputs based on observable market data whilst the fair value of forward foreign exchange contracts may be established using interpolation of observable market data rather than from a quoted price. Classes and fair value of financial instruments It is the Directors’ opinion that the carrying value of all financial instruments approximates to their fair value. 107 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 22. Fair value measurement continued Categories of financial instrument At 31 March 2018 Trade and other receivables (excludes prepayments) Money market instruments with maturities > 3 months Cash and cash equivalents Derivative financial assets at fair value through profit or loss Trade payables Accruals Derivative financial liabilities at fair value through profit or loss Total At 31 March 2017 Trade and other receivables (excludes prepayments) Money market instruments with maturities > 3 months Cash and cash equivalents Derivative financial assets at fair value through profit or loss Trade payables Accruals Derivative financial liabilities at fair value through profit or loss Note 14 16 16 15 17 17 15 Note 14 16 16 15 17 17 15 Financial liabilities Liabilities at fair value Loans and measured at through profit through profit or loss receivables amortised cost £’000 £’000 Assets at fair value or loss £’000 £’000 5,917 10,198 12,498 — — — — — — — — (325) (2,067) — — — — 266 — — — 28,613 (2,392) 266 — — — — — — (29) (29) Financial liabilities Loans and measured at receivables amortised cost £’000 £’000 Assets at fair value through profit or loss £’000 Liabilities at fair value through profit or loss £’000 6,051 18,102 19,120 — — — — — — — — (418) (2,189) — — — — 53 — — — 53 — — — — — — (48) (48) Total 43,273 (2,607) 23. Operating lease commitments Leases in which substantially all the risks and rewards are retained by the lessor are classified as operating leases. Payments made under these operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Benefits received as an incentive to sign a lease, whatever form they may take, are credited to profit or loss on a straight-line basis over the lease term. On 7 September 2016, the Group signed a new lease on premises at Second and Third Floors, Morgan House, Madeira Walk, Windsor, at an annual commitment of £507,603 per annum, expiring 1 September 2022. On 16 March 2016, the Group signed a three year lease on premises in New York City, at an average annual commitment of $125,840 per annum. On 1 June 2017, the Group signed a five year lease on premises in Zürich, at an annual commitment of CHF 49,680 per annum. The Group has considered the risks and rewards of ownership of the leased properties, and considers that they remain with the lessors. Consequently, all property leases are recognised as operating leases. At 31 March 2018 the Group had commitments under non-cancellable operating leases relating to land and buildings as set out below: 2018 £’000 637 1,866 — 2,503 2017 £’000 608 2,134 211 2,953 Not later than one year Later than one year and not later than five years Later than five years Total 108 Record plc Annual Report 2018Financial statements 24. Cash flow from operating activities Group This note should be read in conjunction with the cash flow statements. It provides a reconciliation to show how operating profit, which is based on  accounting rules, translates to cash flows. Operating profit Adjustments for non-cash movements: Profit on disposal of property, plant and equipment Depreciation of property, plant and equipment Amortisation of intangible assets Net release of shares previously held by EBT Share-based payments Decrease in cash on deconsolidation of Record Currency – Emerging Market Currency Fund (see note 12) Other non-cash movements Changes in working capital Decrease/(increase) in receivables (Decrease)/increase in payables (Increase)/decrease in other financial assets Increase in other financial liabilities Cash inflow from operating activities Interest paid Corporation taxes paid Net cash inflow from operating activities Company Operating (loss)/profit Adjustment for: Loss/(gain) on investments Other Changes in working capital Increase in payables Cash inflow from operating activities Corporation taxes paid Net cash inflow from operating activities 2018 £’000 7,272 1 206 99 845 (93) (4,062) (270) 3,998 172 (371) (204) 734 4,329 (10) (1,573) 2,746 2018 £’000 (123) 7 116 1,082 1,082 (67) 1,015 Restated 2017 £’000 7,744 — 99 243 587 24 — (146) 8,551 (1,268) 641 53 700 8,677 — (1,570) 7,107 Restated 2017 £’000 330 (193) (137) — — — — 109 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 25. Related parties transactions Company Details of transactions between the Company and other Group undertakings, which are related parties of the Company, are shown below: Transactions with subsidiaries The Company’s subsidiary undertakings are listed in note 12, which includes a description of the nature of their business. Amounts due to subsidiaries Net dividends received from subsidiaries 2018 £’000 (1,093) 16,810 2017 £’000 (11) 3,592 Amounts owed to and by related parties will be settled in cash. No guarantees have been given or received. No provisions for doubtful debts have been raised against amounts outstanding (2017: £nil). No expense has been recognised during the year in respect of bad or doubtful debts due from related parties. Group Transactions or balances between Group entities have been eliminated on consolidation and in accordance with IAS 24, are not disclosed in this note. Key management personnel compensation Short-term employee benefits Post-employment benefits Share-based payments Total The dividends paid to key management personnel in the year ended 31 March 2018 totalled £3,651,092 (2017: £1,915,103). Directors’ remuneration Emoluments (excluding pension contribution) Pension contribution (including payments made in lieu of pension contributions) Total 2018 £’000 4,965 185 1,172 6,322 2018 £’000 2,397 166 2,563 2017 £’000 4,651 184 1,387 6,222 2017 £’000 2,571 164 2,735 During the year, one Director of the Company (2017: one) participated in the Group Personal Pension Plan, a defined contribution scheme. Transactions with seeded funds From time to time, the Group injects capital into funds operated by the Group to trial new products (seed capital). If the Group is able to exercise control over such a seeded fund by holding a majority interest (whether the majority interest is held by Record plc alone, or by combining the interests of Record plc and its Directors), then the fund is considered to be a related party. Record Currency – FTSE FRB10 Index Fund , Record Currency – Strategy Development Fund and Record – Currency Multi-Strategy Fund are all related parties on this basis. Similarly, the Record Currency – Emerging Market Currency Fund was a related party until the divestment of two Record plc Directors resulted in Record plc losing control over the entity as its combined holding in the fund when considered in aggregate with its Directors no longer constituted a majority. The only transaction between the Company and these funds during the year was the initial seed investment of £1,000,000 in the Record – Currency Multi-Strategy Fund. During the year, four Record plc Directors adjusted their seed investment in the funds, as set out below: Trade date Type Value Fund 26 Feb 2018 Subscription GBP 500,000 Record – Currency Multi-Strategy Fund 22 Mar 2018 Redemption CHF 1,055,850 Record Currency – Emerging Market Currency Fund 22 Mar 2018 Subscription CHF 1,055,850 Record – Currency Multi-Strategy Fund 22 Mar 2018 Redemption USD 836,199 Record Currency – Emerging Market Currency Fund 22 Mar 2018 Subscription 26 Feb 2018 Subscription USD 836,199 GBP 100,000 Record – Currency Multi-Strategy Fund Record – Currency Multi-Strategy Fund Related party Neil Record Leslie Hill Leslie Hill Bob Noyen Bob Noyen Jane Tufnell 110 Record plc Annual Report 2018Financial statements 26. Capital management The Group’s objectives when managing capital are (i) to safeguard the Group’s ability to continue as a going concern, (ii) to provide an adequate return to shareholders, and (iii) to meet regulatory capital requirements set by the UK Financial Conduct Authority. The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, or issue new shares. The Group had no debt in the current or prior financial year and consequently does not calculate a debt-to-adjusted capital ratio. The Group’s capital is managed within the categories set out below: Regulatory capital Other operating capital Operating capital Seed capital Total capital 2018 £m 9.1 13.3 22.4 4.2 26.6 2017 £m 8.9 24.6 33.5 3.3 36.8 Operating capital is intended to cover the regulatory capital requirement plus capital required for day to day operational purposes and other investment purposes. The Directors consider that the other operating capital significantly exceeds the actual day to day operational requirements. Seed capital is the capital deployed to support the growth of new funds. Seed capital is limited to 25% (2017: 15%) of the Group’s total capital. For regulatory capital purposes Record plc is subject to consolidated financial supervision by the Financial Conduct Authority (“FCA”). Our regulatory capital requirements are in accordance with FCA rules and consistent with the Capital Requirements Directive. Our financial resources have exceeded our financial resource requirements (regulatory capital requirements) at all times during the year. Further information is provided in the Business Review. 27. Ultimate controlling party As at 31 March 2018 the Company had no ultimate controlling party, nor at 31 March 2017. 28. Post reporting date events No adjusting or significant non-adjusting events have occurred between the reporting date and the date of authorisation. 29. Restatement of previously published financial statements The Directors have reviewed the basis of preparation of the Group’s consolidated financial statements, and have implemented the following changes. Classification of the external investment in the seed funds External investment in the seed funds which are consolidated into the Group financial statements has previously been classified as a non- controlling interest as the investment was considered to be an equity instrument. The Directors have reviewed this treatment and now recognise the external investment as a financial liability. This change in approach has a material change to the statement of financial position affecting both current liabilities and equity. The adjustment also affects the statement of comprehensive income as the pro-rata share of the gains or losses derived from the seed funds which are attributable to the external investors in the funds are not included within operating profit as opposed to being included in profit attributable to the non-controlling interest. Presentation of other income Management has reviewed the nature of items included in revenue in accordance with the definitions provided in IAS 1 and IAS 18. Following the review, management has decided that a re-presentation of certain elements would improve the clarity of the financial statements. Consequently, the presentation of gains or losses on hedging, gains or losses on trading within the seed funds and gains or losses on foreign exchange conversion which were previously included within revenue as “other income” are now presented separately on the face of the statement of comprehensive income as “other income or expense”. A reconciliation of primary statements previously reported to restated primary statements is provided on pages 112 to 115. The effect of both changes in future periods is not disclosed as it is not practicable to do so. The changes described above have had no impact on the profit attributable to owners of the parent nor on the earnings per share. The restated operating profit and profit before tax for the comparative period is equivalent to the underlying operating profit and underlying profit before tax disclosed in previous reports. 111 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 29. Restatement of previously published financial statements continued Reconciliation of consolidated statement of comprehensive income under historic interpretation to new interpretation Historic presentation Revenue Gross profit Other income or expense Consisting of: Gains or losses on derivative financial instruments and foreign exchange conversion Adjustment for gain or loss attributable to external investors in the seed fund Operating profit Profit before tax Profit after tax and total comprehensive income for the period Profit and total comprehensive income for the period attributable to: Non-controlling interests New presentation Revenue Gross profit Other income or expense Consisting of: Gains or losses on derivative financial instruments and foreign exchange conversion Adjustment for gain or loss attributable to external investors in the seed fund Operating profit Profit before tax Profit after tax and total comprehensive income for the period Profit and total comprehensive income for the period attributable to: Non-controlling interests Differences Revenue Gross profit Other income or expense Consisting of: Gains or losses on derivative financial instruments and foreign exchange conversion Adjustment for gain or loss attributable to external investors in the seed fund Operating profit Profit before tax Profit after tax and total comprehensive income for the period Profit and total comprehensive income for the period attributable to: Non-controlling interests Year ended 31 March 18 £’000 Year ended 31 March 17 £’000 23,639 23,328 n/a n/a n/a 6,904 6,960 5,778 23,928 23,630 n/a n/a n/a 8,563 8,675 7,135 (368) 819 23,834 23,523 173 22,952 22,654 175 (195) 368 7,272 7,328 6,146 976 (819) 7,744 7,856 6,316 — — 195 195 173 (195) 368 368 368 368 (976) (976) 175 976 (819) (819) (819) (819) 368 (819) The presentation of gains or losses on hedging, gains or losses on trading within the seed funds and gains or losses on foreign exchange conversion have been re-presented from within revenue to other income or expense on the face of the statement of comprehensive income. The pro-rata share of the gains or losses derived from the seed funds which are attributable to the external investors in the funds are not included within operating profit as opposed to previously being included in profit and disclosed as the profit after tax attributable to the non-controlling interest. 112 Record plc Annual Report 2018Financial statements Reconciliation of consolidated statement of financial position under historic interpretation to new interpretation Historic presentation Financial liabilities Total current liabilities Total net assets Non-controlling interests Total equity New presentation Financial liabilities Total current liabilities Total net assets Non-controlling interests Total equity Differences Financial liabilities Total current liabilities Total net assets Non-controlling interests Total equity As at 31 March 18 £’000 As at 31 March 17 £’000 n/a n/a (3,058) (3,865) 29,018 2,467 29,018 41,610 4,779 41,610 (2,467) (5,525) (4,779) (8,644) 26,551 36,831 — — 26,551 36,831 (2,467) (2,467) (2,467) (2,467) (2,467) (4,779) (4,779) (4,779) (4,779) (4,779) The net asset value of the investment of external investors in the seed fund has been reclassified from a non-controlling interest in equity, to a financial liability. There is no other non-controlling interest. 113 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information NOTES TO THE FINANCIAL STATEMENTS CONTINUED For the year ended 31 March 2018 29. Restatement of previously published financial statements continued Reconciliation of consolidated statement of changes in equity under historic interpretation to new interpretation The statement of changes in equity is shown below as it would appear under the historic presentation. In the revised format there is no non-controlling interest, and therefore no changes in non-controlling interest. As a consequence total equity becomes equivalent to the total equity attributable to owners of the parent. As at 1 April 2016 Profit and total comprehensive income for the period Dividends paid Own shares acquired by EBT Release of shares held by EBT Issue of units in funds Share-based payments Transactions with shareholders As at 31 March 2017 Profit and total comprehensive income for the period Dividends paid Share buy-back Own shares acquired by EBT Release of shares held by EBT Issue of units in funds Divestment of non-controlling interest Share-based payments Transactions with shareholders As at 31 March 2018 Called up share capital £’000 55 — — — — — — — 55 — — (5) — — — — — (5) 50 Share premium account £’000 1,899 — — — 72 — — 72 1,971 — — — — 266 — — — 266 2,237 Capital redemption reserve £’000 20 — — — — — — — 20 — — 6 — — — — — 6 26 Total attributable to Retained equity holders Non-controlling interests earnings £’000 £’000 of the parent £’000 Total equity £’000 31,715 33,689 4,019 37,708 6,316 (3,592) (775) 992 — 129 6,316 (3,592) (775) 1,064 — 129 (3,246) (3,174) 819 — — — (59) — (59) 7,135 (3,592) (775) 1,064 (59) 129 (3,233) 34,785 36,831 4,779 41,610 6,146 (6,810) (10,000) (952) 1,241 — — 6,146 (6,810) (9,999) (952) 1,507 — — (368) — — — — 959 5,778 (6,810) (9,999) (952) 1,507 959 (2,903) (2,903) (172) (172) — (172) (16,693) (16,426) (1,944) (18,370) 24,238 26,551 2,467 29,018 114 Record plc Annual Report 2018Financial statements Reconciliation of consolidated statement of cash flows under historic interpretation to new interpretation Historic presentation Operating profit Changes in working capital: Increase/(decrease) in other financial liabilities Cash inflow from operating activities Net cash inflow from operating activities Cash flow from financing activities: Cash inflow/(outflow) from issue/(redemption) of units in funds Cash outflow from financing activities New presentation Operating profit Changes in working capital: Increase in other financial liabilities Cash inflow from operating activities Net cash inflow from operating activities Cash flow from financing activities: Cash flow from issue/redemption of units in funds Cash outflow from financing activities Differences Operating profit Changes in working capital: Movement in other financial liabilities Cash flow from operating activities Net cash flow from operating activities after tax Cash flow from financing activities: Cash flow from issue/redemption of units in funds Cash flow from financing activities Year ended 31 March 18 £’000 Year ended 31 March 17 £’000 6,904 8,563 143 3,370 1,787 (60) 8,736 7,166 959 (59) (16,218) (3,844) 7,272 7,744 734 4,329 2,746 700 8,677 7,107 n/a n/a (17,177) (3,785) 368 (819) 591 959 959 (959) (959) 760 (59) (59) 59 59 As the external investment in the fund is no longer considered to be equity, the cash flow arising on issue or redemption of shares is not included as a financing activity but as a movement in other financial liabilities. The adjustment to operating profit in the revised presentation which relates to the pro-rata share of the gains or losses derived from the seed funds which are attributable to the external investors in the funds has an equal and opposite effect on the movement in other financial liabilities. There is no change to cash or cash equivalents at the period end. 115 Record plc Annual Report 2018Strategic reportGovernanceFinancial statementsAdditional information FIVE YEAR SUMMARY Year ended 31 March Management fees Performance fees Other revenue Revenue Cost of sales Gross profit Operating expenses Other income/(expenditure) Operating profit Net interest Profit before taxation Taxation Profit after taxation Basic EPS (pence) Ordinary dividend (pence) Special dividend (pence) Restated Audited 2014 £’000 2015 £’000 2016 £’000 2017 £’000 2018 £’000 20,271 20,255 20,941 22,718 23,497 — 57 480 70 315 163 — 234 — 337 20,328 20,805 21,419 22,952 23,834 (86) (148) (221) (298) (311) 20,242 20,657 21,198 22,654 23,523 (13,412) (13,373) (14,123) (15,067) (16,424) (42) 6,788 113 6,901 (1,494) 5,407 2.48 1.50 — 60 7,344 146 7,490 (1,708) 5,782 2.66 1.65 — (154) 6,921 143 7,064 (1,523) 5,541 2.55 1.65 — 157 7,744 112 7,856 (1,540) 6,316 2.91 2.00 0.91 173 7,272 56 7,328 (1,182) 6,146 3.03 2.30 0.50 INFORMATION FOR SHAREHOLDERS Record plc Record plc is a public limited company incorporated in the UK. Registered in England and Wales Company No. 1927640 Registered office Morgan House Madeira Walk Windsor Berkshire SL4 1EP United Kingdom Tel: +44 (0)1753 852 222 Fax: +44 (0)1753 852 224 Principal UK trading subsidiaries Record Currency Management Limited Registered in England and Wales Company No. 1710736 Record Group Services Limited Registered in England and Wales Company No. 1927639 Both principal UK trading subsidiaries are based in Windsor. Further information on Record plc can be found on the Group’s website: www.recordcm.com Dates for 2018 dividend Ex-dividend date Record date 28 June 2018 29 June 2018 Annual General Meeting 26 July 2018 Final dividend payment date 1 August 2018 Registrar Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Further information about the Registrar is available on their website www.linkassetservices.com 116 Record plc Annual Report 2018Additional information DEFINITIONS “Admission” “AIFMD” “Articles” “AUME” “Board” “bps” “Companies Act” “Company” “$” or “dollars” “EBT” “EPS” “ETF” “EU” “FRB” Admission to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities Alternative Investment Fund Manager Directive The Articles of Association of the Company Assets under management equivalents Company’s Board of Directors Basis point = 100th of a per cent Every statute (including any orders, regulations or other subordinate legislation made under it) from time to time in force concerning companies in so far as it applies to the Company Record plc All references to dollars or $ symbol are to the currency of the US unless stated otherwise Employee Benefit Trust Earnings per share Exchange traded fund European Union Forward Rate Bias “Group” or “Record” The Company and/or any one of its subsidiary undertakings “IAS” International Accounting Standards “IFRS” or “IFRSs” International Financial Reporting Standards “IPO” “KPI” “KRI” “LGPS” Initial Public Offering Key Performance Indicator Key Risk Indicator Local Government Pension Schemes “London Stock Exchange” London Stock Exchange plc “MiFID” “Official List” “TIPS” “US” Markets in Financial Instruments Directive The official list of the Financial Conduct Authority US government treasury inflation protected securities United States of America AUME definition The basis for measuring AUME differs for each product and is detailed below: • Dynamic Hedging mandates – total amount of clients’ investment portfolios denominated in liquid foreign currencies, and hence capable (under the terms of the relevant mandate) of being hedged; • Passive Hedging mandates – the aggregate nominal amount of passive hedges actually outstanding in respect of each client; • Currency for Return mandates – the maximum aggregate nominal amount of outstanding forward contracts for each client; • Multi‑product mandates – the chargeable mandate size for each client; • Cash – the total set aside by clients and managed and/or “equitised” using futures by Record. The paper used in this report is produced using virgin wood fibre from well‑managed forests with FSC© certification. All pulps used are elemental chlorine free and manufactured at a mill that has been awarded the ISO 14001 and EMAS certificates for environmental management. The use of the FSC© logo identifies products which contain wood from well‑managed forests certified in accordance with the rules of the Forest Stewardship Council. Printed by an FSC© and ISO 14001 accredited company. Designed and produced by www.lyonsbennett.com R e c o r d p l c A n n u a l R e p o r t 2 0 1 8 Record plc Morgan House Madeira Walk Windsor Berkshire SL4 1EP T: +44 (0)1753 852 222 marketing@recordcm.com www.recordcm.com recordcm.com 

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