SHAWBROOK GROUP PLC
ANNUAL REPORT & ACCOUNTS FOR
THE YEAR ENDED 31 DECEMBER 2015
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SHAWBROOK IS A SPECIALIST LENDING AND
SAVINGS BUSINESS WITH A FOCUS ON POORLY-
SERVED CUSTOMER SEGMENTS ACROSS THE SME
AND CONSUMER MARKETS IN THE UK. WE USE OUR
EXPERIENCE AND JUDGEMENT TO MAKE INDIVIDUAL
DECISIONS THAT BALANCE RISK, RETURN AND
CUSTOMER NEEDS.
SHAWBROOK COMPLETED ITS SUCCESSFUL IPO AND LISTED ON THE LONDON STOCK
EXCHANGE IN APRIL 2015 (LSE:SHAW)
A FULL VERSION OF OUR ANNUAL REPORT AND PILLAR 3 REPORT ARE AVAILABLE
ONLINE AT WWW.SHAWBROOK.CO.UK
CONTENTS
STRATEGIC REPORT
01 Highlights
02 At a glance
04 History and Background
08 Chairman’s Statement
10 Q&A with the CEO and Interim CEO/CFO
14 Market Overview
17 Our Strategy
18 KPIs
20 Business Model
24 Business Review
32 Risk Management Report
43 Corporate Social Responsibility
CORPORATE GOVERNANCE
45 Corporate Governance Report
48 Board of Directors
67 Directors’ Remuneration Report
82 Statement of Directors’ Responsibilities
83 Directors’ Report
FINANCIAL STATEMENTS
87 Independent Auditor’s Report
90 Consolidated Statement of Profit or Loss
and Other Comprehensive Income
91 Consolidated and Company Statements of
Financial Position
92 Consolidated Statement of Changes in Equity
93 Company Statement of Changes in Equity
94 Consolidated Statement of Cash Flows
95 Notes to the Financial Statements
131 Glossary
HIGHLIGHTS
A RECORD
YEAR
HIGHLIGHTS
FINANCIAL
HIGHLIGHTS
}} Strong financial performance aligned
PROFIT BEFORE TAX
NET LOANS1 AND ORIGINATIONS
to IPO guidance
– Successful IPO with admission to the LSE
main market in April 2015 and entered the
FTSE 250 in June 2015
– 63% increase in underlying profit before
tax to £80.1m in 2015
– Total Assets have reached £4bn
– Net Promoter Score increased to 34 with
89% customer satisfaction
}} Continuing strong demand in our
carefully selected SME and Consumer
markets has seen:
– 23% growth in organic originations of
£1,685m (2014: £1,366m) enhanced by the
selective acquisition of £0.3bn of assets.
– 32% growth in customer deposits to
£3,186m (2014: £2,421m)
}} Our carefully selected specialist
markets continue to offer strong
risk-adjusted returns
– Net Interest Margin increased to 6.2% from
6.1% in 2014
– Achieved an underlying Return on
Tangible Equity of 27.9%
}} Our prudent approach to risk
management is underpinned by our
conservatively positioned balance sheet
– Total capital ratio enhanced to 17.9% (2014:
13.9%) following successful IPO raising
£90m of primary capital (£82m net of costs)
and our maiden public Tier 2 capital raising
(£75m) in October 2015
}} We have delivered on our 2015
guidance and we are able to reaffirm
our medium term guidance provided at
the IPO
Underlying PBT
£80.1m
£70.1m
Statutory PBT
Originations
£1,685m
£3,361m
Net Loans
2015
2014
2013
16.9
16.1
80.1
70.1
49.1
45.3
2015
2014
2013
1,685
3,361
1,366
1,000
1,399
2,331
¢ Underlying PBT £m
¢
Statutory PBT £m
¢ Originations £m ¢ Net Loans £m
TOTAL CAPITAL RATIO4, CET 15 RATIO AND
LEVERAGE RATIO
NET INTEREST MARGIN2 AND ROTE3
Capital Ratio
18.0%
14.4%
CET1 Ratio
7.0%
T1 Leverage Ratio
NIM
6.2%
27.9%
ROTE
2015
2014
2013
6.2
6.1
5.8
13.6
27.9
26.9
18.0
¢ NIM %
¢ ROTE %
2015
2014
2013
14.4
13.9
11.6
17.3
13.8
7.0
6.3
6.8
¢ Capital Ratio % ¢ CET1 Ratio
¢ T1 Leverage Ratio %
(1) Net loans include loans and advances to customers plus
operating leases.
(2) Net interest margin is calculated as underlying net
operating income divided by average principal employed.
(3) Return on Tangible Equity (‘ROTE’) is calculated as
underlying profit/(loss) for the year attributable to
owners divided by average tangible equity. Average
tangible equity is calculated as total equity less
intangible assets at the beginning of a period plus total
equity less intangible assets at the end of the period
divided by two.
(4) Total Capital Ratio is calculated as total capital for
regulatory purposes divided by risk-weighted assets.
(5) Common Equity Tier 1 ratio is calculated as the total core
equity capital divided by the risk-weighted assets.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 01
STRATEGIC REPORTFINANCIALSGOVERNANCE
AT A GLANCE
OUR SPECIALIST LENDING
AND SAVING DIVISIONS
OUR THREE DISTINC T
MARKE TS ARE PROPERT Y,
BUSINESS FINANCE AND
CONSUMER .
OUR MARKETS
OUR DIVISIONS
PROPERTY
COMMERCIAL MORTGAGES
BUSINESS FINANCE
Providing investment
mortgages, short-term
loans and commercial
property loans.
CUSTOMER
SATISFACTION* 78%
ASSET FINANCE
Providing leasing finance,
block discounting and
wholesale finance
and healthcare finance
to SMEs.
CUSTOMER BALANCES
CONTRIBUTION
£1,596m
Increased by 65% in 2015
(2014 Customer balances £969m)
£40.3m
Contribution to overall
operating profit for the Group
CUSTOMER BALANCES
CONTRIBUTION
£761m
Increased by 35% in 2015
(2014 Customer balances £564m)
£40.9m
Contribution to overall
operating profit for the Group
CONSUMER
CUSTOMER
SATISFACTION* 90%
STRATEGIC REPORT
GOVERNANCE
FINANCIALS
INVESTING IN INNOVATION
B A NG & OLU FSEN
BANG & OLUFSEN HA S A
MARKE T- LE ADING REPUTATION
FOR HIGH - END AUDIO AND
T V TECHNOLOGY.
CONSUMER CASE STUDY
DELIVERING
TECHNOLOGY
Through a relationship first established in 2013, our Consumer Lending
business provides in-store finance to enable Bang & Olufsen to sell its
leading edge products to high net worth customers.
We work with Bang & Olufsen across all of the company-owned stores as well
as the majority of its franchises. Technology is a major competitive advantage
for Shawbrook and one of the key drivers behind this relationship.
Bang & Olufsen use our state-of-the-art ‘eSignature’ technology to provide a
fast and efficient service. ‘eSignature’ enables the frontline sales staff to gain
instant approval of loan applications, thereby closing sales, ensuring a positive
customer experience and supporting the Bang & Olufsen brand.
Shawbrook’s commitment to innovation
has created a bespoke and highly
efficient service for Bang & Olufsen and
its customers. Store owners benefit from
expert support and the promise
of high levels of customer satisfaction.
Visit our Business Model
on page[••]for more information
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Shawbrook Bank provided us
with a simple, elegant and
efficient solution for our
in-store finance needs. It has
proved hugely popular with
our customers and as such has
been a great driver for our
business.
Andrew Macer, Head of Sales
UK & Ireland
CONSUMER LENDING
Providing unsecured
loans for a variety of
purposes, including
home renovation
and refurbishment.
CUSTOMER
SATISFACTION* 87%
06 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 07
02 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
CUSTOMER BALANCES
CONTRIBUTION
£333m
Increased by 47% in 2015
(2014 Customer balances £227m)
£11.8m
Contribution to overall
operating profit for the Group
Provides finance to the specialist residential investment and commercial property mortgage market and to professional property investors and SME owner-occupiers. Second charge mortgages to consumers.We primarily finance business critical assets operated by established UK SME and healthcare businesses. In addition, we provide facilities to smaller UK financial institutions through wholesale and block facilities.Consumer lending operates through relationships with major home improvement firms, in-store and online retailers, carefully selected holiday ownership companies and loan broker partners. Savings products are available directly to personal, business and charity customers.
BY PLACING OUR VALUES AND CULTURE AT THE
HEART OF OUR BUSINESS, WE’VE DEVELOPED
LONG STANDING CUSTOMER RELATIONSHIPS
FOUNDED ON TRUST AND THE EXPERTISE THAT
OUR PEOPLE DELIVER. THIS HAS ENABLED
US TO BUILD A REPUTATION FOR THE
OUTSTANDING SERVICE AND INNOVATION
THAT UNDERPINS OUR SUCCESS.
STEVE PATEMAN, CEO
SECURED LENDING
Providing loans secured
against clients’ homes
through second charge
mortgages.
CUSTOMER
SATISFACTION* 92%
BUSINESS CREDIT
Funding against
invoices, stock, plant,
machinery and property.
CUSTOMER
SATISFACTION* 95%
CUSTOMER BALANCES
CONTRIBUTION
£487m
Increased by 21% in 2015
(2014 Customer balances £401m)
£21.7m
Contribution to overall
operating profit for the Group
CUSTOMER BALANCES
CONTRIBUTION
£183m
Increased by 8% in 2015
(2014 Customer balances £170m)
£5.7m
Contribution to overall
operating profit for the Group
SAVINGS
Providing a range of savings
products, including ISAs,
fixed rate bonds, easy access
accounts and notice
accounts to consumer,
business and charity
customers.
BALANCES
£3.2bn
Increased by 32% in 2015
(2014 balances £2.4bn)
OUR VALUES
PERSONAL
We treat our customers and brokers as
people. We take the time to understand
them, and we listen to what they say.
PRAGMATIC
We look at every situation on its merits,
rather than follow rigid guidelines or the
accepted way of doing things.
EXPERT
Our people are experienced and
professional. We know that it’s our people
and their know-how that make things
happen for our customers.
PROGRESSIVE
We are proactive. We will find ways to
work that are quicker, simpler, and more
efficient than the way we do things today.
WE USE OUR EXPERTISE
AND JUDGEMENT TO MAKE
INDIVIDUAL DECISIONS THAT
BALANCE RISK AND RETURN
WITH CUSTOMER NEEDS.
CUSTOMER
SATISFACTION* 94%
* The overall Satisfaction Scores achieved across our business Divisions from customers interviewed by Charterhouse Research
in December 2015 for our Customer Insight Survey 2015.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 03
STRATEGIC REPORTFINANCIALSGOVERNANCE HISTORY AND BACKGROUND
OUR
JOURNEY
April 2012
£600m of lending assets,
£650m of deposits
May 2013
£1.0bn of personal and SME
deposits
September 2013
£1.0bn of SME and
individual lending
December 2013
£16.9m underlying
pre-tax profit
June 2014
£2.0bn personal and
SME deposits and
£2.0bn of SME and
individual lending
December 2014
£49.1m underlying
pre-tax profit
2011/2014
2015
2011
2012
Acquisition of
Whiteway Laidlaw Bank
Acquisition of Singers
Asset Finance
FEBRUARY 2015
Launch of ISAs
Acquisition of Commercial First
Platform and People
2013
Acquired Money2Improve
sales team
Acquisition of LinkLoans
Rebranded to Shawbrook Bank
2014
Launch of Secured
Lending Broker Platform
(DJ System)
MARCH 2015
Launch of Personal Loans
Acquisition of Centric
Commercial Finance
Commercial Mortgages launches
Broker Hub
04 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
November 2015
£3.0bn of SME and
individual lending
December 2015
£3.0bn personal and
SME deposits
December 2015
£80.1m underlying
pre-tax profit and
balance sheet of £4bn
APRIL 2015
Shawbrook Lists on the
London Stock Exchange
JUNE 2015
Admitted to the FTSE 250
Staff Culture Survey 76%
completion rate
TOP AWARDS 2015
INSIDER DEAL MAKERS
ASSET BASED LENDER OF THE YEAR
(THIRD YEAR IN A ROW)
MONEYFACTS
BEST NOTICE ACCOUNT PROVIDER
MONEYFACTS
BEST FIXED ACCOUNT PROVIDER
NACFB
INNOVATIVE LENDER OF THE YEAR
WHAT MORTGAGE
BEST SECURED LOANS LENDER
PERSONAL FINANCE
BEST ONLINE SAVINGS PROVIDER
BRIDGING AND COMMERCIAL
COMMERCIAL LENDER OF THE YEAR
(THIRD YEAR IN A ROW)
MORTGAGE STRATEGY
BEST SECURED LOANS LENDER
MOST INN OVATIVE
LENDER
2015
JULY 2015
Iain Cornish appointed as
Chairman
Strong 2015 Results
announcement
Launch of Residential
Investment Mortgages
OCTOBER 2015
Additional Tier 2 Capital Raising
Launch of Elements-complete
funding solution for Pharmacies
Launch of Regulated Bridging
Mortgages
Steve Pateman announced as
new CEO from January 2016
DECEMBER 2015
Launch of Open Market Easy
Access Savings accounts
550 permanent staff
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 05
STRATEGIC REPORTFINANCIALSGOVERNANCE
UNDERSTANDING
OUR CLIENTS
We have long-established relationships with both Invest
(NW) Ltd and the associated broker, Watts Commercial
Finance. This has enabled us to build a deep
understanding of the client’s investment strategy and
business model. The constant availability of our people,
including the Senior Lending Manager and the assigned
Lending Officer for the dedicated Shawbrook Portfolio
Team, ensured swift progress and a quality service.
Visit our Business Model
on page 20 for more information
29
Working days
Between making the offer
and securing the funding:
including the Christmas
and New Year period
06 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
I N V E S T (NW ) LTD
PART OF THE FAMILY- RUN HE ATON
GROUP, AN INTEGR ATED PROPERT Y
INVESTMENT SPECIALIST BA SED IN
L ANC A SHIRE.
PROPERTY CASE STUDY
BUILDING LONG-TERM
RELATIONSHIPS
Commercial Mortgages Division has worked with Invest (NW) Ltd’s
Parent Company, the Heaton Group, for five years. We have provided
finance for over 30 different projects.
When Invest (NW) Ltd wished to refinance in order to clear an existing
bridging facility, plus raising further capital for a subsequent development
project, our flexibility, range of products and previous track record meant that
we were the natural choice as finance partners. We provided a loan of almost
£400,000 at 75% Loan to Value, over two times interest cover, secured on a
house converted to six flats and with a 0.25% reduction in the lending rate
through our Existing Customer Discount.
We have a strong relationship with The Heaton Group and
they are one of our larger and longer term clients. We are also
fortunate to have a close working relationship with
Shawbrook Commercial and we were once again delighted
with the service from their dedicated Residential Investment
team. We remained in constant contact with all parties
throughout the transaction to reach a good outcome for the
client, securing the necessary funding to help them build their
portfolio. We value the personal service we receive from
Shawbrook and their case-by-case approach allows us the
flexibility we need to deliver for our clients.
Phil Gray, Managing Director, Watts Commercial Finance Ltd
We are delighted to have a close working
relationship with Shawbrook Bank and they have
been a great supporter of ours with regard to
securing funding packages that match our needs.
They adopt a personal approach that brings
flexibility and transparency to the transaction,
and we have completed on many projects with
their support and the input of our broker partner,
Watts Commercial Finance. We continue to be
impressed by Shawbrook’s service and look
forward to working with them further.
Adam Heaton, Director of Acquisitions and
Finance, The Heaton Group
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 07
STRATEGIC REPORTFINANCIALSGOVERNANCE CHAIRMAN’S STATEMENT
A TRANSFORMATIONAL
YEAR
Shawbrook is a specialist UK lending and
savings bank focused on Property, Business
Finance, Consumer Lending and Savings. We
differentiate ourselves by concentrating on
markets where our specialist knowledge and
personalised approach to underwriting offer
us a competitive advantage. This supports
attractive, stable returns and sustainable
growth, and also benefits businesses and
consumers in parts of the market which
continue to be poorly served by traditional
high street banks. Fundamental to our
success is a relationship focus which puts
the interests of our customers and business
partners at the heart of everything we do,
built on a culture which stresses the use of
our experience and judgement to make
decisions that balance risk, return and
customer needs.
It was my privilege to join the Board as Chairman
last July, and I am delighted to be able to
report on a year of tremendous progress and
achievement for Shawbrook. The highlights of
the year are set out in the CEO / CFO review,
case studies and business reviews, but in short
we delivered a highly successful IPO and joined
the FTSE 250. We delivered on the guidance in
respect of loan originations, net interest margin
and cost-income performance, and as a result
we grew underlying profit by 63%. (statutory
profit by 55%). Supported by a successful
Tier 2 issue we also further strengthened our
capital position, with our key capital ratios at
market leading levels amongst our peers in the
‘challenger’ bank sector. At the same time we
further increased our already high customer ‘net
promoter score’, largely due to the high levels of
colleague skill, engagement and commitment
which are at the heart of Shawbrook’s success,
as well as the continuing investments we have
made in technology and service improvement.
08 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
2015 WAS A YEAR OF SIGNIFICANT ACHIEVEMENT AT
SHAWBROOK, AS WE COMPLETED A SUCCESSFUL IPO,
JOINED THE FTSE 250 AND DELIVERED ON OUR GUIDANCE
TO CUSTOMERS AND SHAREHOLDERS
show no signs of diminishing, and our business is
built on a set of values and an approach to
people and business partners which have
allowed us to build a strong and sustainable
market position. All these things give us
confidence in our ability to continue to deliver
on our ambitious objectives through continued
pursuit of our strategy and as we progress
through 2016, I have every confidence that our
management team will execute our strategic
vision and deliver the plans set out at the IPO.
Finally, I would like to finish by thanking all my
colleagues throughout the business who have
worked tirelessly throughout the year. The
successes set out in this report are ultimately
down to their professionalism, commitment and
sheer hard work and they have every right to be
proud of what they have achieved.
IAIN CORNISH Chairman
Naturally from a governance perspective,
the focus of the Board during the year
was to a large extent on the IPO and on
delivering against stretching business
growth objectives in a sustainable way.
extremely fortunate that our CFO, Tom Wood,
took on the formidable task of also acting as
interim CEO for a large part of the year. He did an
outstanding job under the most demanding of
circumstances, for which I am extremely grateful.
In all our decision making, the safety and
soundness of the Bank, the interest of customers
and the sustainability of the business are of
paramount importance, and the Board also
devoted considerable time and attention
to evolving the Bank’s governance and risk
management processes. We have sought to
ensure not only that they meet the standards
of a Public Company and of the regulators, but
also critically that they will continue to underpin
the safe development of the business, and allow
us to grow in scale and to broaden the range
of our activities in line with our ambitions. As
part of this we undertook a review of Board
effectiveness during the year, facilitated by the
Company Secretary. This confirmed that Board
members are satisfied overall with the progress
we have made and the direction of travel for
the future. It is our intention to undertake
an externally facilitated review in 2016.
There were a number of changes to the
Board during the year. My predecessor,
Sir George Mathewson, left the Board along
with Sir Brian Ivory and I am grateful to them
for their contribution since they joined in 2011.
We were also saddened by the departure for
personal reasons of Richard Pyman who
had been our CEO since April 2014. Richard
personified the values of Shawbrook and we
owe him a debt of gratitude for his contribution
to the success of the Bank and our IPO. We were
We also made a number of new appointments
and first and foremost I am absolutely delighted
that Steve Pateman joined us as Chief Executive
at the start of 2016. Immediately prior to joining
us Steve was Head of UK Banking at Santander
and he brings with him a depth and breadth of
experience, and a track record of success, across
all the markets in which Shawbrook operates.
I am also pleased to report a number of
further Non-Executive Director appointments.
Paul Lawrence, who was formerly Global
Head of Group Internal Audit for HSBC, now
chairs our Risk Committee, Sally-Ann Hibberd
brings significant experience of operations,
IT and change and David Gagie brings
substantial financial services experience and
was until recently a Senior Advisor to the
Financial Conduct Authority. After 9 years’
service, Graham Alcock has indicated that
he will not be standing for re-election at the
forthcoming AGM. Graham’s service to the
Bank has also been outstanding, latterly as
Chair of the Remuneration Committee, and
I would like to record my thanks to him.
Uncertainty, whether it be regulatory, economic
or political, may be a given, but fundamentally,
Shawbrook’s business model is strong and
diverse, the opportunities we have are large and
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 09
STRATEGIC REPORTFINANCIALSGOVERNANCE REVIEW OF 2015 WITH THE CEO AND INTERIM CEO/CFO
2015 – THE SPRINGBOARD
FOR FUTURE DELIVERY
Exceeding our IPO guidance for 2015 has
seen Shawbrook post a strong set of 2015
financial results demonstrating the
successful execution of our strategy during
2015 and positioning the Group for future
profitable growth.
HOW DID THE GROUP PERFORM IN 2015?
Tom Wood (TW)
2015 was an exciting year during which we
made further significant progress in establishing
Shawbrook as a leading Specialist Bank within
the UK market. I am delighted that whilst we
delivered against our tangible metrics; with
underlying Profit before tax (‘PBT’) exceeding
£80m (2014: £49m) and Total Assets reaching
£4bn for the first time, we also improved our
already strong customer and staff advocacy
and delivered a number of strategic initiatives.
Steve Pateman (SP)
This has clearly been an excellent and
extremely significant year for Shawbrook,
and the improvement in performance
is more impressive due to having been
achieved in a more liquid market.
WHAT WERE YOUR HIGHLIGHTS IN 2015?
TW
Delivering a successful IPO in early April was a
tremendous milestone in our development as
a well-capitalised player in our chosen business
finance, property and consumer markets.
To then join FTSE 250 soon after listing in June
2015 was another satisfying milestone. Since the
IPO, investors have understood our strategy and
the benefits that our diversification and strong
balance sheet bring to set us apart from peers.
Our access to capital markets has enabled us
to raise £90m of primary capital during the IPO
(£82m net of costs), and we further diversified
and optimised our capital base with the maiden
public issue of Tier 2 capital of £75m in October.
This has resulted in a well-capitalised position
to support our future growth ambitions,
which is combined with our prudent funding
position and conservative Treasury position
to reinforce our confidence in the future.
Laying these strong foundations has enabled us
to achieve a successful 2015 and reaffirm
confidence in the medium term outlook.
CFO TOM WOOD, WHO TOOK ON THE
ADDITIONAL ROLE OF INTERIM CEO IN M AY 2015
REVIEWS THE YEAR WITH STEVE PATEMAN, WHO
BECAME OUR CEO IN JANUARY 2016.
10 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
SP
The IPO was a great success for Shawbrook. Now,
we need to build on the strong foundation and
continue to generate strong risk adjusted returns
as we grow to become an even more recognised
Specialist Bank, that is acknowledged for its
expertise and delivery.
TW
It was pleasing that our 2015 customer insight
survey reported an improved net promoter
score of 34. This improvement from an
already high score in 2014 underlines the
value of our customer-focused approach that
has been one of our guiding principles.
We also continued to encourage greater
employee engagement during the year. We saw
a pleasing response to our staff survey with a
response rate c20% higher than the industry
norm. We also launched our Sharesave scheme
achieving a high take up in excess of 70%.
Our people are a real competitive advantage
and we invest in attracting and retaining
talented teams. The Sharesave scheme ensures
that they share in our combined success.
HOW DO YOU THINK ABOUT MANAGING THE
DIVERSITY OF THE BUSINESS?
TW
Our diverse business model brings about
many benefits, allowing the whole Group
to thrive and deliver strong returns for our
shareholders. However, not all businesses
within such a diverse balance sheet will grow
and thrive at the same pace and we have seen
some fluctuation within our Business Credit
Division. Nonetheless, we have been able to
grow that Division whilst maintaining good
credit quality and strong risk adjusted returns,
in turn emphasizing our focus on building long
term success rather than originating lower
quality assets to meet short term targets.
2015 was a year of significant investment
across the bank, ensuring our platform and
processes are sufficiently robust and scalable
to accommodate safely and efficiently the next
phase of the bank’s growth. Our continued
reduction in the Cost:Income ratio to 48% is
evidence of our scalable platform, however
as we look forward we are confident the
investments made will deliver further scale
efficiencies, and position us for future growth.
SP
A key source of our advantage is our human
underwriting approach and deep market
knowledge that allows us to understand and
manage risk that standardised, automated
process cannot match. We think of this
as managing idiosyncratic risk as against
managing generic risk pools. The diversity
of our balance sheet across our specialist
and carefully selected markets is critical to
this and our growth ambitions can be met
whilst maintaining this approach as we avoid
the need to be market share orientated.
HOW ARE SHAWBROOK’S AMBITIONS
DELIVERED?
TW
Our strategy is set out in detail on page 16.
Our strategy is underpinned by our
conservatively positioned balance sheet and
focus on building a bank to deliver strong
through the cycle risk-adjusted returns. This
requires us to consistently deliver for our
customers whilst maintaining strong risk
disciplines. Our areas of focus remain the
Property, Business Finance and Consumer
markets, and we will leverage our capabilities
in respect of our people, platform, funding
and liquidity to accelerate growth where
appropriate. We have achieved this with
organic originations ahead of expectations
for the year and the securing of portfolio
acquisitions that will benefit us in the future.
I am delighted that the hard work that all our
colleagues have contributed to in 2015 has seen
us demonstrate the cohesiveness of our strategy
and lay even stronger foundations for the future.
SP
We are disciplined and focus on opportunities
where the market is not crowded, the risks are
manageable, the returns meet our criteria and
we have an effective distribution mechanism.
There are many opportunities in our chosen
markets and our ability to manage idiosyncratic
risk allows us to seize them successfully,
which requires the strong risk and financial
disciplines that lie at the heart of our strategy.
WHAT ROLE DOES RISK MANAGEMENT PLAY
IN THE STRATEGY?
SP
We have a rigorous approach to underwriting,
however lending and business in general is not
entirely risk free. This means that one of our
most important roles is not to avoid risk but to
manage it, and this requires good people with
expert insight supported by sound processes.
TW
We continued to evolve our risk management
processes during 2015. Hugh Fitzpatrick joined
as Chief Risk Officer during Q4 and his arrival
has further reinforced the significant progress
that has arisen from our on-going investment
in our ability to manage risks within the Bank.
Our investment in an Enterprise Wide Risk
Management Framework and Risk Appetite
will help us manage our risk appetite, make
informed decisions, demonstrate to regulators
and other stakeholders that we have a robust
governance and control framework and
ensure we maintain a strong credit risk culture
across Shawbrook. We view this as an on-
going source of competitive advantage.
SP
Our recent internal risk culture survey indicated
that we are strong in many areas, including risk
skills, knowledge and orientation. Furthermore,
we continue to enhance our risk frameworks and
architecture. However, we are not complacent:
we have carried out a staff survey in February
2016 which included aspects of risk culture, and
we will undertake a full risk culture survey later in
the year to measure progress.
WHAT IS THE OUTLOOK FOR THE NEXT
12 MONTHS?
TW
I am confident that we will continue to deliver
strong results and demonstrate that our
differentiated strategy is a source of competitive
advantage. We have further strengthened our
team as along with Hugh Fitzpatrick joining
as Chief Risk Officer, Evelyn Hamilton joined
to lead Consumer and Simon Featherstone
joined to lead Business Finance. I believe that
our leadership team will enable us to achieve
our medium term objectives as we aspire to
profitably grow the Bank in the coming years
with a strong focus on maintaining good cost
discipline to generate optimal operational
leverage. Our hunger and ambition remains
to build the UK’s leading specialist Bank.
SP
We aim to achieve that objective by
diversifying in our three distinct markets of
Property, Business Finance and Consumer.
In Business Finance, we will bring together
our Asset Finance and Business Credit
Divisions as two central parts of a holistic
SME working capital solutions provider.
Our objective is to become established as a
market-leading specialist provider for SMEs.
In the Consumer market, which is worth
around £200 billion, we will continue to
create relationships with partners who
have the appropriate customer base. At the
same time, we will explore opportunities
to use technology to improve the way in
which we compete online and in-store.
In Property, there is speculation that there may
be regulatory change which could create a
slow down in buy-to-let or change the shape
of the market. Our differentiation is that we
operate to a more conservative risk appetite
than many in the market, for example LTV,
interest rate stress and in addition we have the
advantage of being less exposed to buy-to-let
than our peers and we are strongly capitalised.
Our focus will be on diversification into areas
such as ‘interest only in retirement’ solutions.
From a personal perspective, I have always been
attracted to entrepreneurial opportunities and
the prospects at Shawbrook are very exciting.
The fact that the foundations are already in
place speaks volumes for the expertise and
dedication of the management team. Tom has
done a tremendous job in taking the business
forward over the past year. The future is rich with
promise and we remain confident that we will
deliver our short- and medium-term targets.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 11
STRATEGIC REPORTFINANCIALSGOVERNANCE M U S TO
MUSTO IS THE WORLD’ S LE ADING
OFFSHORE SAILING BR AND AND
SUPPLIER OF PERFORMANCE
COUNTRY APPAREL .
BUSINESS FINANCE CASE STUDY
SUCCESSFUL
PARTNERSHIP
Profile:
Shawbrook’s Business Credit Division provides asset based lending
facilities to support the ambitions of MUSTO. The leading offshore sailing
brand with two Royal Warrants and the sponsor of many top global events,
MUSTO depends on Shawbrook to support their growth through invoice
discounting, together with inventory, property and cash flow loans.
The ability to build and maintain close working relationships is a core
differentiator for Business Credit. Our team takes the time to understand the
requirements of the business in detail, tailoring our services to meet specific
needs throughout the year and providing informed and prompt responses to
client requests. As MUSTO continues to position itself for the future, with a
strengthened management team, enhanced product offering and improved
systems, we are proud to be the Company’s finance partner of choice.
We’ve worked with Shawbrook for
several years and over that time
they’ve built up an intimate
knowledge of our business. It’s
clear to us that they care deeply
about meeting our needs. The
Shawbrook team displays patience
and understanding at every level
and our relationship is defined by
implicit trust and loyalty.
Peter Smith, CEO MUSTO
12 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
HELPING CLIENTS SEIZE
OPPORTUNITIES
Speed can often be of the essence for a
fast-moving Company like MUSTO. In
2015, we provided a fast response to a
funding request to support the ongoing
improvement strategy for the business,
which led to additional seasonal funding.
Visit our Business Model
on page 20 for more information
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 13
STRATEGIC REPORTFINANCIALSGOVERNANCE
MARKET OVERVIEW
ADDRESSING AN
UNMET NEED
The Group has delivered exceptional growth
and risk-adjusted returns over the five years
since its formation through building a strong
franchise and carefully assembling a balance
sheet of £4 billion against a backdrop of
uncertain, ambiguous and challenging
economic circumstances.
The Group regards its target market as the UK
and is therefore exposed to the impact of key
drivers to and influences on the UK economy.
Overall we believe that whilst there remain a
number of economic headwinds in the UK, we
are confident we can adapt and manage
through these and that overall the outlook for
Shawbrook is positive.
MACRO-ECONOMIC PERSPECTIVE
The UK continues to benefit from low interest
rates, the maintenance of the Quantitative Easing
Programme (QE) and the Funding for Lending
Scheme (FLS) which encourages investment by
businesses and underpinning positive consumer
sentiment; these factors contributed to resilient
GDP growth of 2.2% in 2015, notwithstanding
a softer outlook for the global economy as
evidenced by a series of downward revisions to
short and medium term growth from the IMF.
The Group has benefited from the continued
recovery in the UK economy with our 2015
cost of risk at 0.24%, below the anticipated
through the cycle loss rates. Originations have
benefited from continued business investment
whilst consumer demand for credit has also
been resilient and we organically originated
£1.7bn of new loans in 2015 (2014: £1.4bn). The
improvements in the UK economy have seen
greater liquidity enter the market and in certain
market segments this has impacted margins.
The Group recognises the potential for the
UK economy to be impacted by second
level effects from the weaker global outlook
– these could manifest themselves in lower
demand from the supply chain, impacting
future investment, corporate activity and
employment with the resultant adverse
impact on sentiment and demand for credit.
Longer-term this could impact borrower
performance as well as asset values.
14 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
POLITICAL
The EU Referendum in June 2016 creates
additional uncertainty that may negatively
impact investment and sentiment and we are
planning for a range of economic outcomes,
which may impact the core economic forecasts
the Group has used in its planning process.
MONETARY POLICY
The Group recognises that the economic
environment appears benign with the
Consumer Price Inflation levels significantly
below the Bank of England target of 2%,
with the most recently available data in
January 2016 showing the CPI rate at 0.2%,
underpinned by significant shifts in commodity
pricing and the positive impact that this has
on discretionary spending. Wage growth,
whilst muted, has outpaced CPI reversing the
previous shortfalls between these metrics.
It is the Group’s view that the level of CPI will
increase over the medium term and will be
a key driver in the timing of the first and any
subsequent changes in the Bank of England
Base Rate by the Monetary Policy Committee
(MPC). The timing of the first increase in
interest rates by the MPC has been subject
to debate and conflicting views during 2015,
impacting to a degree the levels of business
activity and consumer confidence.
The Group’s Balance Sheet remains positioned
for a rising rate environment, however we have
planned on the basis of a slow and gradual
increase in the Bank of England Base Rate
commencing in the second half of 2016 and
rising gradually thereafter. The impact of lower
rates for longer will provide some insulation
to the Group’s customers, but equally can be
distortive in impact. As a result we continue to
take a conservative approach to risk across our
core businesses so that we are not exposed
to a significant shift in sentiment and thus
valuations. The Group has an interest rate
swap portfolio in place to manage further
downside risk in the interest rate outlook.
imbalance whilst commercial valuations are
supported by increased underlying cash flows
reflecting broader economic growth; whilst
clearly property values will not be immune from
the trajectory of future economic growth or
sentiment, the UK residential market should
remain resilient over the cycle given the
structural imbalances in the market and we have
planned on the basis of the current (slower)
direction of house price growth, albeit with
levels of regional variations.
There has been a significant amount of
regulatory and political intervention in the BTL
sector during 2015 and we are supportive of the
underlying sentiment of ensuring a sustainable
UK residential property market over the long
term. We have built a diversified and
conservative Balance Sheet that is only c.25%
weighted towards the UK BTL sector. Our
exposure is to professional, long-term investors
and we have operated with a prudent risk
appetite over the past five years. We remain
cognisant of the measures being put in place
(removal of higher rate tax relief, SDLT reforms,
potential changes to macro-prudential
regulation by the FPC and potential changes to
risk weightings for BTL exposures) and we
caution against a series of measures that in
aggregate adversely impact a market that is
structurally supply constrained.
LIABILITY MANAGEMENT
Consumer savings balances, which represent
the supply of savings held by depositors and
available for banks as a source of funding, and
which are the Group’s primary source of funding,
have also grown recently, reflective of both
the level of discretionary cash flow available to
consumers and the increased liquidity in the
market that has arisen as a consequence of
the changes in the way that pensions can be
accessed. In 2015 the Group launched ISA and
Easy Access Savings products to widen its access
to larger segments of the UK Savings Market and
increase the diversity of its funding sources.
REGULATORY
Valuations in the UK residential property market
continue to benefit from a supply/demand
The Funding for Lending Scheme (FLS),
alongside the UK Government’s Help to Buy
scheme have, in part, helped to support UK
property prices, particularly since the middle
of 2013. The Group continues to utilise the
Funding for Lending Scheme (‘FLS’) which was
extended in November 2015 for a further two
years and the scheme is scheduled to remain
open until 31 January 2018, with the funding
having a four year duration. As a participant
in the FLS the Group borrows highly liquid
UK Treasury Bills at a fee of 25 basis points
(provided the Group maintains or expands its
lending over the reference period), in exchange
for eligible collateral, which has been pre-
positioned with the Bank of England. The Group
pledges collateral supported by assets from
both the Commercial Mortgages and Asset
Finance Divisions. As at 31 December 2015
approximately 33% (£270m) of the Group’s
liquid assets totalling £821m comprised UK
Treasury Bills borrowed under the FLS.
OUTLOOK
Whilst the UK economy is forecast to continue
its growth trajectory and this remains our
core assumption, we acknowledge the risk
created by conflicting signals in the global
and UK economies. Whilst there are a number
of positive factors that should create stability
and confidence; low levels of inflation and
unemployment, low interest rates and
reduced commodity prices, there is evidence
on a global perspective that confidence
is reduced as uncertainty on many levels
impacts confidence. In light of these factors
our underwriting approach remains disciplined
and risk appetite has not been extended.
The Group expects the UK economy to post
modest and more normalised growth with the
withdrawal of monetary support dependent
on external factors such as the EU Referendum
and the broader slowdown in the global
economy which has and will continue to create
more challenging trading conditions. Whilst
more challenging times could see the run rate
cost of risk closer to the normalised view, we
remain confident that our diversified portfolio
of businesses and conservative approach to risk
management will support our future growth
trajectory and strong risk adjusted returns.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 15
STRATEGIC REPORTFINANCIALSGOVERNANCE OUR STRATEGY
THINKING
AHEAD
LONG-TERM OBJECTIVES
NEAR TERM INITIATIVES
PROGRESS & OUTLOOK
ADJUSTED RETURNS
PROGRESSIVELY INCREASE
ORIGINATIONS ACROSS ALL
LENDING DIVISIONS
1
2 ACHIEVE STRONG RISK
3 MAINTAINING THE CREDIT
4 GENERATE OUR STRONG
5 MAINTAINING AND ENHANCING
RETURNS WHILST MAINTAINING
A CONSERVATIVE FOUNDATION
QUALITY OF THE LENDING
BOOK
OUR CUSTOMER FOCUS
Increase organic originations whilst identifying and
Our operating divisions have delivered strong
– In Consumer, focus on building relationships
carefully entering adjacent specialist markets.
organic originations of £1.7bn in 2015. To achieve
with strategic partners in a market worth
Diversification is at the heart of this initiative and
our end 2019 objective of doubling customer
£200bn and leverage our technology platform;
we will not be reliant on single markets that can be
balances from £3.4bn we will:
and
subject to influences outside our control.
The originations target of £2bn in 2017 will
– In Property, focus on further diversification into
new areas such as retirement lending solutions;
maintain focus on good quality assets generating
– Bring together our Asset Finance and Business
strong risk adjusted returns.
Credit divisions as one Business Finance working
capital solutions provider;
– Our Savings franchise and central functions will
evolve to underpin this profitable growth.
Continue to identify specialist lending sectors to
We see opportunities arising from our core and
The Group’s underlying profit before tax has
ensure we can maintain strong risk-adjusted
adjacent markets. We use our knowledge and
improved significantly from £49.1m in 2014 to
returns whilst maintaining our high quality
capabilities to identify opportunities which meet
£80.1m in 2015 due to both the growth in the
underwriting standards.
our risk appetite profile, offering strong risk
Bank’s lending portfolios and increased efficiencies
adjusted returns. In addition to organic
of scale.
originations of £1.7bn in 2015, we successfully
acquired £0.3bn of assets from loan portfolios that
match our high risk adjusted returns thresholds in
late 2015.
We have improved our net interest margin to 6.2%
and remain focused on managing the returns
profile against the backdrop of a prudent
approach to risk.
Ensure that the Bank’s lending in the current
We have maintained robust asset quality with low
As we observe the external environment today we
benign environment is sustainable over the long
levels of arrears and impairment and a high level of
do not see changes in lead indicators that would
term.
collateralisation.
suggest an imminent reversion to a more
normalised position.
Our 2015 cost of risk of 0.2% is benefitting from the
current benign environment and remains below
our view of through the cycle loss rates.
Our conservative approach to risk management
Our maiden public Tier 2 issuance of £75m
We continue to be funded through a stable base
ensures we are able to position our risk appetite
enhanced and optimised the Bank’s regulatory
of retail deposits and access to the FLS, which
appropriately against our lending assets. We will
capital position, however we will always consider
maintains a prudent term structure, thereby
ensure the Bank’s balance sheet remains prudently
how to manage the balance sheet appropriately.
reducing maturity transformation risk.
positioned in terms of capital, funding and
liquidity.
With a total capital ratio of 18.0%, we are
well-capitalised and in 2015 demonstrated strong
returns on our lending portfolio.
Shawbrook was established to be the SME
Our 2015 customer insight survey reported a net
It is important that we maintain our key
Champion and we meet the needs of underserved
promoter score of 34, up from an already high
differentiators including the ability to attract and
markets, particularly in the SME sector. We also
score in 2014 and underlined the value of the
retain talented, customer-focused people. In
serve specialist consumer sectors where our
customer-focused approach that has always been
addition, we will focus on digital technology to
products and high degree of choice can
the hallmark of Shawbrook.
build on our online and in-store offering.
differentiate our offer.
We exploit leading edge technology to drive
efficiencies and market penetration in all our
markets.
16 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
ww LONG-TERM OBJECTIVES
NEAR TERM INITIATIVES
PROGRESS & OUTLOOK
1
PROGRESSIVELY INCREASE
ORIGINATIONS ACROSS ALL
LENDING DIVISIONS
2 ACHIEVE STRONG RISK
ADJUSTED RETURNS
BOOK
3 MAINTAINING THE CREDIT
QUALITY OF THE LENDING
4 GENERATE OUR STRONG
A CONSERVATIVE FOUNDATION
RETURNS WHILST MAINTAINING
5 MAINTAINING AND ENHANCING
OUR CUSTOMER FOCUS
Increase organic originations whilst identifying and
carefully entering adjacent specialist markets.
Diversification is at the heart of this initiative and
we will not be reliant on single markets that can be
subject to influences outside our control.
The originations target of £2bn in 2017 will
maintain focus on good quality assets generating
strong risk adjusted returns.
Our operating divisions have delivered strong
organic originations of £1.7bn in 2015. To achieve
our end 2019 objective of doubling customer
balances from £3.4bn we will:
– In Property, focus on further diversification into
new areas such as retirement lending solutions;
– Bring together our Asset Finance and Business
Credit divisions as one Business Finance working
capital solutions provider;
– In Consumer, focus on building relationships
with strategic partners in a market worth
£200bn and leverage our technology platform;
and
– Our Savings franchise and central functions will
evolve to underpin this profitable growth.
Continue to identify specialist lending sectors to
ensure we can maintain strong risk-adjusted
returns whilst maintaining our high quality
underwriting standards.
We see opportunities arising from our core and
adjacent markets. We use our knowledge and
capabilities to identify opportunities which meet
our risk appetite profile, offering strong risk
adjusted returns. In addition to organic
originations of £1.7bn in 2015, we successfully
acquired £0.3bn of assets from loan portfolios that
match our high risk adjusted returns thresholds in
late 2015.
The Group’s underlying profit before tax has
improved significantly from £49.1m in 2014 to
£80.1m in 2015 due to both the growth in the
Bank’s lending portfolios and increased efficiencies
of scale.
We have improved our net interest margin to 6.2%
and remain focused on managing the returns
profile against the backdrop of a prudent
approach to risk.
Ensure that the Bank’s lending in the current
benign environment is sustainable over the long
term.
We have maintained robust asset quality with low
levels of arrears and impairment and a high level of
collateralisation.
Our 2015 cost of risk of 0.2% is benefitting from the
current benign environment and remains below
our view of through the cycle loss rates.
As we observe the external environment today we
do not see changes in lead indicators that would
suggest an imminent reversion to a more
normalised position.
Our conservative approach to risk management
ensures we are able to position our risk appetite
appropriately against our lending assets. We will
ensure the Bank’s balance sheet remains prudently
positioned in terms of capital, funding and
liquidity.
Shawbrook was established to be the SME
Champion and we meet the needs of underserved
markets, particularly in the SME sector. We also
serve specialist consumer sectors where our
products and high degree of choice can
differentiate our offer.
We exploit leading edge technology to drive
efficiencies and market penetration in all our
markets.
Our maiden public Tier 2 issuance of £75m
enhanced and optimised the Bank’s regulatory
capital position, however we will always consider
how to manage the balance sheet appropriately.
We continue to be funded through a stable base
of retail deposits and access to the FLS, which
maintains a prudent term structure, thereby
reducing maturity transformation risk.
With a total capital ratio of 18.0%, we are
well-capitalised and in 2015 demonstrated strong
returns on our lending portfolio.
Our 2015 customer insight survey reported a net
promoter score of 34, up from an already high
score in 2014 and underlined the value of the
customer-focused approach that has always been
the hallmark of Shawbrook.
It is important that we maintain our key
differentiators including the ability to attract and
retain talented, customer-focused people. In
addition, we will focus on digital technology to
build on our online and in-store offering.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 17
wwSTRATEGIC REPORTFINANCIALSGOVERNANCE KPIs
MONITORING
OUR PROGRESS
FINANCIAL KPIs
PROFIT BEFORE TAX
NET LOANS1 AND ORIGINATIONS
NET INTEREST MARGIN2 AND ROTE3
Underlying PBT
£80.1m
£70.1m
Statutory PBT
£1,685m
£3,361m
Originations
Net Loans
NIM
6.2%
27.9%
ROTE
2015
2014
2013
16.9
16.1
80.1
70.1
49.1
45.3
2015
2014
2013
1,685
3,361
1,366
1,000
1,399
2,331
2015
2014
2013
6.2
6.1
5.8
13.6
27.9
26.9
¢ Underlying PBT £m
¢
Statutory PBT £m
¢ Originations £m ¢ Net Loans £m
¢ NIM %
¢ ROTE %
Net interest margin (‘NIM’) increased to 6.2% (2014: 6.1%),
benefitting from continued reduction in the cost of funds. ISA
product launch in H1 2015 and full market Easy Access product
launch in H2 2015 are expected to further reduce cost of funds.
Track record of strong returns maintained with ROTE of 27.9%
(2014: 26.9%) underpinned by increased customer activity.
ROTE benefitted by c.1.3% from revaluation of deferred tax
assets following the introduction of the Bank corporation
tax surcharge.
(2) Net interest margin is calculated as underlying net
operating income divided by average principal employed.
(3) Return on Tangible Equity (‘ROTE’) is calculated as
underlying profit/(loss) for the year attributable to owners
divided by average tangible equity. Average tangible equity
is calculated as total equity less intangible assets at the
beginning of a period plus total equity less intangible
assets at the end of the period divided by two
Underlying PBT increased by 63% to £80.1m (2014: 49.1m) and
statutory profit increased by 55% to £70.1m (2014: £45.3m). This
increased profitability has been driven by a 44% increase in the
loan book to £3,361m (2014: £2,331m), underpinned by a 23%
increase in gross organic originations to £1,685m (2014: £1,366m),
as 2014 momentum continued throughout 2015.
(1) Net loans include loans and advances to customers plus
operating leases.
COST: INCOME RATIO
PRE-TAX ROLA6
Underlying
48.3%
54.1%
Statutory
2015
2014
2013
54.1
48.3
53.7
50.5
3.0%
2015
2014
2013
¢ ROLA
3.0
2.6
1.6
The pre-tax ROLA increased by 0.4% to 3.0% (2014: 2.6%) and
underpins the Group’s focus remaining on originating quality
business and maintaining high-quality underwriting standards.
67.4
66.1
(6) Return on lending assets before tax is calculated as
underlying profit/(loss) before taxation divided by average
principal employed.
¢ Underlying
¢ Statutory
The Cost: Income Ratio reduced to 48.3% (2014: 50.5%) as the
Group continues to proactively manage its cost base despite
significant investment in people, technology and
infrastructure to build solid foundations to support future
growth and we remain confident that the investment made
will deliver further scale efficiencies.
18 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
TOTAL CAPITAL RATIO4, CET1 RATIO5
AND LEVERAGE RATIO
CUSTOMER SATISFACTION ANALYSIS:
DEMONSTRATIVE OF SUCCESS OF MODEL
NON-FINANCIAL KPIs
Capital Ratio
18.0%
14.4%
7.0%
CET1 Ratio
Leverage Ratio
2015
2014
2013
18.0
14.4
13.9
11.6
17.3
13.8
7.0
6.3
6.8
¢ Capital Ratio % ¢ CET1 Ratio
¢ T1 Leverage Ratio %
Capital ratios strengthened by the IPO, with £90m of new
capital (£82m net of costs) resulting in a CET1 ratio of 14.4%
(2014: 11.6%). Total capital was further strengthened by a £75m
Tier 2 issuance in October, resulting in a total capital ratio of
18.0% (2014: 13.9%).
(4) Total Capital Ratio is calculated as total capital for regulatory
purposes divided by risk-weighted assets.
(5) Common Equity Tier 1 ratio is calculated as the total core
equity capital divided by the risk-weighted assets.
QUALITY
SERVICE
PARTNER SHIP
SPEED AND
CERTAINTY
SOLUTIONS DRIVE
REPE AT BUSINESS
SATISFIED
WITH LE VEL
OF SERVICE
WE
RECOMMEND
SHAWBROOK
SATISFIED
WITH
EFFICIEN CY
OF SERVICE
WOULD USE
SHAWBROOK
AGAIN
89%
83%
90%
78%
Source: Charterhouse customer survey on behalf of the Company (January 2016)
NPS ANALYSIS
INCREASED NPS REFLECTS CUSTOMER SATISFACTION
2015
2014
34.0
33.0
+3%
S HAWBROOK’ S REL ATIONSHIPS
DRIVING STRO NG ADVOC ACY
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 19
STRATEGIC REPORTFINANCIALSGOVERNANCE
BUSINESS MODEL
SHAWBROOK’S
CONSERVATIVE
FOUNDATIONS
SHAWBROOK’S
CONSERVATIVE
FOUNDATIONS
GOOD GOVERNANCE
We believe that a strong, capable and
diverse management team and Board
ensures the Bank is managed effectively, in
the best interests of stakeholders
including shareholders, customers,
employees and regulators, and in line with
the UK Corporate Governance Code.
STRONG BALANCE SHEET
The Group’s balance sheet is prudently
positioned and sufficiently diversified to
ensure we are able to execute our risk
appetite against our lending portfolios
whilst protecting our depositors.
PROPERTY
Property includes our Commercial Mortgages
and Secured Lending propositions.
The diversified product range includes:
– Mortgages to property professionals
in both residential and commercial
investment markets, across short term and
more traditional mortgage terms
– Secured loans predominantly to super
prime and prime owner occupier
borrowers. The majority of loans are
secured by a second charge against
primary residential property.
BUSINESS FINANCE
Business Finance is a proven leader in the
provision of funding to UK SMEs across many
different sectors, competing on quality of
services, range of financing solutions and
speed of delivery.
This diversified product range includes:
– Leasing Finance: lending principally
against business critical assets
– Block Discounting and Wholesale Finance:
lending to SME finance companies
secured against receivables within their
portfolios, with the security given by the
ultimate borrower taking the form of a
hard asset or residential property and
lending to other small specialist lenders
secured against a pool of loan receivables
– Healthcare: operating leases for healthcare
equipment to NHS trusts and finance
leases to private healthcare partners
– Invoice discounting is at the core of our
asset based lending facility, in addition
to plant, machinery, stock and cash flow
loans. These facilities are mainly secured
against accounts receivables.
20 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
ROBUST RISK MANAGEMENT
FRAMEWORK
We continue to invest in our risk management
framework to ensure it is robust and embedded
within our culture. Our individual business units
and functions tailor risk management policies,
procedures and controls to their specific needs.
These are reviewed and approved through the
Risk Committee structure.
STRONG RISK
ADJUSTED RETURNS
We deliver a strong and stable net
interest margin alongside stable and
sustainable credit quality metrics,
together with low levels of arrears and
high levels of collateralisation.
VALUE CREATION
High earnings visibility is driven
by significant repeat business,
retention and long-standing
customer relationships.
CONSUMER
Consumer provides unsecured loans to good
quality UK borrowers.
The diversified product range includes:
– Home Improvement: working with
selected leading national and regional
home improvement companies
– Holiday Ownership: working with carefully
chosen holiday ownership companies to
offer customers holiday ownership finance
in the UK and Europe
SAVINGS
Savings provides simple and straight
forward savings products to personal
retail depositors, businesses, trusts and
charity customers.
The diversified product range includes:
– Fixed rate bonds for terms of up to five
years
– ISAs
– Easy access savings
– Retail: working with in-store and online
– Notice accounts
retailers.
– Consumer Personal Loans
Whilst the business attracts deposits
from all customer demographics,
nearly two thirds of the deposit base
continues to be sourced from affluent
customers with a wide range of savings
needs and high average balances.
CENTRE
The central function provides the lending
and savings franchises with the
conservative spine against which we can
meaningfully operate in our carefully
chosen markets.
Capital strength
Our maiden public Tier 2 debt issuance
enhanced our regulatory capital base to
deliver a 18.0% Total Capital Ratio, one of
the strongest in the sector.
Funding base
We are funded predominantly through
stable, fixed rate retail deposits (with an
average contractual deposit duration of
12 months).
Liquidity
We have limited risk appetite in respect of
liquidity risk. The vast majority of liquidity
is held in cash at the Bank of England
Reserve Account or as UK Treasury Bills.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 21
STRATEGIC REPORTFINANCIALSGOVERNANCE INVESTING IN INNOVATION
Shawbrook’s commitment to innovation
has created a bespoke and highly
efficient service for Bang & Olufsen and
its customers. Store owners benefit from
expert support and the promise
of high levels of customer satisfaction.
Visit our Business Model
on page 20 for more information
Shawbrook Bank provided us
with a simple, elegant and
efficient solution for our
in-store finance needs. It has
proved hugely popular with
our customers and as such has
been a great driver for our
business.
Andrew Macer, Head of Sales
UK & Ireland
22 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
B A NG & OLU FSEN
BANG & OLUFSEN HA S A
MARKE T- LE ADING REPUTATION
FOR HIGH - END AUDIO AND
T V TECHNOLOGY.
CONSUMER CASE STUDY
DELIVERING
TECHNOLOGY
Through a relationship first established in 2013, our Consumer Lending
business provides in-store finance to enable Bang & Olufsen to sell its
leading edge products to high net worth customers.
We work with Bang & Olufsen across all of the Company-owned stores as well
as the majority of its franchises. Technology is a major competitive advantage
for Shawbrook and one of the key drivers behind this relationship.
Bang & Olufsen use our state-of-the-art ‘eSignature’ technology to provide a
fast and efficient service. ‘eSignature’ enables the frontline sales staff to gain
instant approval of loan applications, thereby closing sales, ensuring a positive
customer experience and supporting the Bang & Olufsen brand.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 23
STRATEGIC REPORTFINANCIALSGOVERNANCE BUSINESS REVIEW
DOING WHAT WE
DO WELL, BETTER
costs include both external costs incurred
in acquiring businesses and internal costs,
such as surplus funding costs, incurred
whilst building up the liquidity required to
complete a deal. The majority (£2.5m) of
costs related to the acquisition of Centric
Commercial Finance in June 2014. Within
this adjustment, £2.1m is disallowable for tax
purposes.
– IPO costs: These include expenses incurred
in 2015 in relation to the successful listing
of Shawbrook Group plc on the LSE main
market and recognised in the Income
Statement. A further £3.7m was recognised in
equity. In addition, the adjustment includes
IFRS 2 charges in relation to share-based
awards crystallising on listing.
GROUP PERFORMANCE
The Group’s underlying profit before tax has
improved significantly from £49.1m in 2014 to
£80.1m in 2015 due to both the growth in the
Bank’s asset base, lower cost of funds and the
benefits that increased efficiencies of scale in the
Group’s infrastructure create. This improvement
is against the background of a competitive
market where margins have seen some
compression in some of the Group’s Divisions.
For a reconciliation of underlying profit before
tax to statutory profit before tax, see page 25.
The statutory results for the Group improved
over the previous year, from a profit before
taxation of £45.3m in 2014, to a profit
before taxation of £70.1m in 2015.
In addition the Statement of Financial Position
reflects the results of the strong year the Group
has had, with total assets increasing from
£2,754m to £4,000m, an increase of 45.2% in
the year.
BASIS OF PREPARATION
The statutory results have been prepared
in accordance with International Financial
Reporting Standards (IFRS). Where appropriate,
certain aspects of the results are presented to
reflect the Board’s view of the Group’s underlying
performance without distortions caused by
non-recurring items that are not reflective
of the Group’s ongoing business activities.
Underlying results should be considered in
addition to, and not as a substitute for, the
Group’s statutory accounts, and the Group’s
presentation of underlying results should
not be construed as an indication that future
results will be unaffected by exceptional items.
Underlying results have limitations as analytical
tools, and you should not consider them in
isolation or as substitutes for analysis of the
Group’s results as reported on a statutory
basis. Some of these limitations can be:
– they may not reflect every cash expenditure,
future requirements for capital expenditures
or contractual commitments; and
– they may not reflect the impact of earnings
or charges resulting from matters the
Directors consider not to be indicative of our
ongoing operations.
Because of these limitations, underlying results
are not intended as an alternative to the Group’s
statutory accounts as an indicator of the Group’s
operating performance. The Group compensates
for these limitations by using underlying results,
along with other comparative tools, together
with statutory accounts, to assist in the
evaluation of operating performance.
The following items have been excluded from
underlying results:
– Corporate activity costs: These include a
final £0.6m of costs incurred in connection
with the acquisition of Money2Improve in
November 2012. In addition, costs incurred
in relation to the acquisition of three asset
portfolios (including the incremental costs of
raising additional deposits to fund inorganic
growth) have been excluded from the
underlying results. 2014 corporate activity
24 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
ON 11 MARCH 2015, THE COMPANY CHANGED ITS NAME FROM
LAIDLAW ACQUISITIONS LIMITED TO SHAWBROOK GROUP
LIMITED AND ON 24 MARCH 2015, THE COMPANY WAS RE-
REGISTERED AS A PUBLIC COMPANY, SHAWBROOK GROUP PLC.
KEY PERFORMANCE INDICATORS (ON AN UNDERLYING BASIS)
Certain of the key performance indicators (‘KPIs’) presented below are measures that are not defined under IFRS. Some of these measures
are defined by, and calculated in compliance with, applicable banking regulations, but such regulations often provide for certain discretion
in defining and calculating the measures. Because of the discretion that the Group and other banks have in defining and calculating these
measures, care should be taken in comparing the Group’s KPIs with those of other banks, and such KPIs may not be directly comparable.
2015
£m
2014
£m
2013
£m
Net interest, fee and operating lease
income
Interest expense and similar charges
Net operating income
Impairment losses
on financial assets
Costs and provisions
Statutory profit before taxation
Corporate activity
IPO costs
Underlying profit before taxation
230.7
(63.8)
166.9
(6.5)
(90.3)
70.1
1.1
8.9
80.1
166.2
(54.0)
112.2
(6.7)
(60.2)
45.3
3.2
0.6
49.1
98.5
(38.4)
60.1
(3.5)
(40.5)
16.1
0.8
–
16.9
Net loans (£m)1
Net originations (£m)
Net interest margin (%)
Return on Tangible Equity (ROTE) (%)
Total capital ratio (%)
Cost to income ratio (%)
CET1 Ratio (%)
Leverage ratio (%)
Cost of risk (%)
Pre-Tax Return on Lending Assets
(ROLA) (%)
2015
3,361
1,685
6.2
27.9
18.0
48.3
14.4
7.0
0.24
2014
2,331
1,366
6.1
26.9
13.9
50.5
11.6
6.3
0.36
2013
1,399
1,000
5.8
13.6
17.3
66.1
13.8
6.8
0.34
3.0
2.6
1.6
DIVISIONAL PERFORMANCE (ON AN UNDERLYING BASIS)
Refer to note 2, Operating segments for further information (page 96).
2015
Interest income, and net fee and operating lease income
Interest expense and similar charges
Net operating income
Impairment losses on financial assets
Costs and provisions
Statutory profit/(loss) before taxation
Corporate activity
IPO costs
Underlying profit
2014
Interest income, and net fee and operating lease income
Interest expense and similar charges
Net operating income
Impairment losses on financial assets
Costs and provisions
Statutory profit/(loss) before taxation
Corporate activity
IPO costs
Underlying profit
Commercial
Mortgages
£m
73.7
(24.6)
49.1
(0.3)
(8.5)
40.3
–
–
40.3
Commercial
Mortgages
£m
47.2
(16.6)
30.6
(1.0)
(6.3)
23.3
–
–
23.3
Asset
Finance
£m
64.4
(14.6)
49.8
(1.5)
(7.4)
40.9
–
–
40.9
Asset
Finance
£m
51.2
(12.6)
38.6
(1.5)
(7.3)
29.8
–
–
29.8
Business
Credit2
£m
Secured
Lending
£m
Consumer
Lending
£m
Retail Savings/
Central
£m
18.7
(4.3)
14.4
(2.3)
(6.4)
5.7
–
–
5.7
41.2
(13.3)
27.9
(0.6)
(5.6)
21.7
–
–
21.7
28.6
(6.9)
21.7
(1.8)
(8.7)
11.2
0.6
–
11.8
4.1
(0.1)
4.0
–
(53.7)
(49.7)
0.5
8.9
(40.3)
Business
Credit3
£m
Secured
Lending
£m
Consumer
Lending
£m
Retail Savings/
Central
£m
10.7
(2.6)
8.1
(0.3)
(3.3)
4.5
–
–
4.5
34.3
(11.2)
23.1
0.1
(4.2)
19.0
–
–
19.0
20.1
(5.1)
15.0
(4.0)
(5.5)
5.5
–
–
5.5
2.7
(5.9)
(3.2)
–
(33.6)
(36.8)
3.2
0.6
(33.0)
Total
business
£m
230.7
(63.8)
166.9
(6.5)
(90.3)
70.1
1.1
8.9
80.1
Total
business
£m
166.2
(54.0)
112.2
(6.7)
(60.2)
45.3
3.2
0.6
49.1
1
2
Includes net loans and advances to customers and operating leases held within Property, Plant and Equipment.
Since acquisition on 9 June 2014.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 25
STRATEGIC REPORTFINANCIALSGOVERNANCE
BUSINESS REVIEW CONTINUED
COMMERCIAL MORTGAGES OUR SPECIALIST SERVICES, FOCUSED ON THE NEEDS OF THE
ACTIVITY
The Commercial Mortgages Division has
a well-diversified product range serving
property professionals in both residential and
commercial investment markets, across short
term and more traditional mortgage terms.
Whilst the majority of the division’s loans
are to established landlords and property
professionals, it also lends to well-established
SME owner-occupiers.
In 2015 the business achieved steady growth
in the loan book to £1,596m (2014: £969m);
continued its excellent loan performance
with a 2015 gross asset yield of 6.5% (2014:
6.5%) and retained strong credit discipline in
terms of loan to value and income coverage
ratios. It also maintained healthy diversification
across a number of residential and commercial
property segments as well as between short-
term and more traditional mortgage finance.
PROFESSIONAL LANDLORD, DELIVERED WITH EXPERTISE AND
INSIGHT, CONTINUE TO EARN INDUSTRY ACCOLADES AND
ENSURE WE CAN CONTINUE TO GROW IN A SUSTAINABLE
AND CONSIDERED WAY.
STEPHEN JOHNSON, MD & DEPUTY CEO
DIFFERENTIATION
Commercial Mortgage Division has a well-
diversified product range delivered through
expert teams using experience and judgement
to make individual decisions, supported by
the use of credit scoring tools as part of our
rigorous underwriting process. Our specialised
knowledge, personalised approach and product
diversification continues to earn industry
accolades and ensures that the business
can continue to grow in a sustainable and
considered way. Maintaining our conservative
risk appetite will position us well should there
be changes to the regulatory environment.
SECTOR TRENDS
The market remained buoyant throughout
2015 with capital values and rents appreciating
together with a continuing shift towards
greater private rented tenure of UK housing.
2015 saw some initial market disruption around
the general election and Stamp Duty Land
Tax (‘SDLT’) reforms in the first half of the year,
but the markets accelerated in the second
half with traditional year-end seasonality. This
market buoyancy has taken place against a
backdrop of multiple political and regulatory
developments that have combined to create a
more challenging outlook for property investors.
OUTLOOK
As we move into 2016, the cumulative impact of
the budget measures and the likely introduction
of Financial Policy Committee (‘FPC’) powers
will impact the market. However, the business is
well positioned for this changing environment
with a conservative risk appetite on both loan
to value and income coverage - the areas
most likely to be the focus of any potential
FPC market intervention. Moreover the recent
budget changes favour the professional and
sophisticated landlord market, the segment
most suited to the personal and expert
approach upon which our proposition is based.
Market fundamentals remain attractive to
long-term professional investors despite some
of the short-term headwinds. The business
is well positioned for further growth with a
strategy focused on a specialist and personal
lending model. The business will concentrate
on strategic opportunities to target new
segments in the shorter dated lending markets
and to leverage its operational capability
as well as its growing brand recognition.
The business will also focus on leveraging
enterprise systems and platforms provide
essential customer insight that complements
the deep seated market understanding
underpinning our customer proposition.
COMMERCIAL MORTGAGES KPIS
Since its acquisition by the Group in February 2011,
the division has originated over 6,000 loans with
a total value of over £1.7bn. The loan book for the
Commercial Mortgages division stood at £1,596m
at 31 December 2015.
The gross asset yield for 2015 was 6.5% (2014:
6.5%); cost of risk was 0.03% for 2015 (2014:
0.14%); and its contribution to the Group’s overall
operating profit for the year ended 31 December
2015 was £40.3m, an increase of £17.0m from 2014.
LOAN BOOK £m
£1,596m
2015
2014
2013
627
551
401
544
969
1,596
4.3
4.2
3.0
COST OF RISK
0.0%
2015
0.0
2014
2013
0.1
0.1
¢ NIM %
¢
Cost of Risk %
GROSS ASSET YIELD %
6.5%
40.3
23.3
2015
2014
2013
6.5
6.5
6.8
6.5
¢ Originations £m ¢ Balance Sheet £m
¢ Profit Contribution £m
¢
Gross Yield %
26 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
SECURED LENDING
WE HAVE REINFORCED OUR MARKET LEADING SERVICE
PROPOSITION, LEVERAGING OUR EXCELLENT PARTNER
RELATIONSHIPS AND THE BENEFITS OF OUR PROPRIETARY
BROKER PLATFORM.
PHILIP GEORGE, MD
DIFFERENTIATION
The Division focuses activity where our
strong relationships, specialist knowledge
and commitment to service can be clearly
evidenced, and where opportunities to
generate strong risk adjusted returns have
been identified. This model, combined with a
pragmatic and personal approach generates
strong, positive feedback from customers and
has received widespread industry recognition.
TRENDS
The Division has led the industry supporting
broker partners to prepare for the MCD, and has
extended its reach to those networks that it
believes will play a leading part post-MCD. The
business has focused on reinforcing its market
leading service proposition, building on existing
relationships and leveraging the benefits of its
proprietary broker platform.
OUTLOOK
With the introduction of MCD the Division will
be able to introduce new products and open up
new channels to widen the opportunity for
customers to source the mortgage they need. As
it develops new channels, the Division plans to
build specialisms in the first mortgage market
which are currently not met by mainstream
lenders, build on its strong reputation as a lender
of choice and strengthen its market leading
position.
The second mortgage market is poised to
open up considerably as mortgage advisers
become required to make customers aware
of the benefits of second mortgages, which
we believe will be seen later in 2016 after the
transitionary period. With its strong relationships
and service proposition Shawbrook is well
positioned to capitalise on these opportunities
and strengthen its market leading position.
ACTIVITY
Secured Lending provides a wide range
of secured loans predominantly to super
prime and prime borrowers with a very small
percentage of near prime borrowers (the total
% for Near Prime borrowers is 4.8% of the
portfolio value).
Loans are secured by a second charge against
residential property and are provided for a
wide variety of purposes, including home
improvements, loan consolidation and large
consumer purchases.
In 2015 Secured Lending grew its loan book
to £487m (2014: 401m) and remained market
leading despite intense competition. The
Division is well advanced on preparations for
the Mortgage Credit Directive (‘MCD’) which
comes into force in Q1 2016. It held a series of
learning academies for its broker partners in
2015, providing an introduction to the MCD
and the regulatory changes that will widely
impact the first and second charge mortgage
market when advisers will become required to
advise customers of the potential suitability of
second charge mortgages.
FINANCIAL KPIS
The loan book for the Secured Lending division
was £487m as at 31 December 2015 (2014: £401m).
The gross asset yield for 2015 was 9.1%, a reduction
from 9.7% in 2014 mainly driven by a combination
of lower cost of funds being passed on, more
business written on lower loan-to-value’s (‘LTV’s’),
higher quality prime products and an overall
increase in liquidity in the market. Cost of risk was
0.1% for 2015 (2014: 0.0%).
COST OF RISK
0.1%
2015
2014
2013
0.1
0.0
0.4
6.2
6.5
6.5
LOAN BOOK £m
£487m
2015
2014
2013
205
191
181
295
487
401
¢ NIM %
¢
Cost of Risk %
GROSS ASSET YIELD %
9.1%
2015
2014
2013
9.1
9.7
10.4
10.2
21.7
19.0
¢ Originations £m ¢ Balance Sheet £m
¢ Profit Contribution £m
¢
Gross Yield %
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 27
STRATEGIC REPORTFINANCIALSGOVERNANCE
BUSINESS REVIEW CONTINUED
ASSET FINANCE
OUR EXPERT TEAMS AND DISCIPLINED, YET BESPOKE APPROACH
TO CREDIT RISK MANAGEMENT, COMBINE WITH OUR
ENTREPRENEURIAL EDGE, TO SET US APART.
JIM CANNON, MD
ACTIVITY
The Asset Finance division is a proven lender
to established businesses in the UK SME and
healthcare markets providing financing
secured against a range of business critical
assets.
Asset Finance operates against four main
product categories:
– Leasing Finance: principally against
business critical assets
– Block Discounting and Wholesale Finance:
lending to SME finance companies
secured against receivables within their
portfolios, with the security given by the
ultimate borrower taking the form of a
hard asset or residential property and
lending to other small specialist lenders
secured against a pool of loan receivables
– Healthcare: operating leases for healthcare
equipment to NHS trusts and finance
leases to private healthcare partners
In 2015 the business saw growth across all its
asset disciplines with momentum building in
the second half of the year. We put a number
of key initiatives in place to drive continuing
progress in 2016 and beyond as it continued to
identify new asset classes to complement its
portfolio, including the launch of Professional
Practices funding. Wholesale and Block
Finance were significant drivers of revenue
with market leading teams. In Healthcare, we
completed a notable deal that supported
funding of the first Proton Beam Therapy
clinics in the UK. Its more mature lending
operations continue to perform well despite
increased competition due to increased
liquidity in the market. The business invested
significantly in a new operating platform which
will enhance its service offering to customers
and our introducer base while also driving
efficiencies to shorten cycle times.
The Division will continue to identify
opportunities arising from our core and
adjunct markets, offering strong risk adjusted
returns that meet our risk appetite profile.
Wholesale, Marine and Professional Practices
funding are successful examples of this
strategic approach to Division growth.
OUTLOOK
Division objectives are to maintain high asset
quality, excellent customer service and strong
yields. The Division will focus on activities in
specialist areas where our strong relationships,
specialist knowledge and commitment to
service can be clearly evidenced and where
opportunities for significant growth, offering
strong risk adjusted returns, have been identified.
DIFFERENTIATION
The Division has a well-diversified range of asset
classes. Our ongoing customer relationship
model, with its entrepreneurial edge, is founded
upon a tailored risk management approach
and expert business teams who possess deep
sector understanding. Combining extensive
human skill, with advanced analytics, the
Division focuses on assets where we can
leverage our deep credit expertise and
relationships, exemplified in our notable funding
of the Proton Beam Therapy clinics, which
was achieved down through our in depth
understanding of this market and business area.
SECTOR TRENDS AND OPPORTUNITIES
Increasing levels of liquidity in the market
increased competition; however, our lending
approach based on experience and judgement
to make decisions that balance risk, return and
customer needs, combined with our customer
service and expertise ensured that the Division
continues to see sustained growth.
ASSET FINANCE KPIS
The loan book for the Asset Finance division stood
at £761m at 31 December 2015 (2014: £564m). The
gross asset yield for 2015 was 9.9% (2014: 10.3%).
The reduction of 0.4% in the gross asset yield is
driven by the increased liquidity in the market
(resulting in a more competitive market) and the
overall growth in the wholesale book.
Cost of risk was 0.2% for 2015, 0.1% lower than 2014
(0.3%).
COST OF RISK
0.2%
2015
2014
2013
0.2
0.3
0.3
¢ NIM %
¢
Cost of Risk %
7.6
7.8
7.4
LOAN BOOK £m
£761m
2015
2014
2013
511
761
386
564
305
444
GROSS ASSET YIELD %
9.9%
2015
2014
2013
9.9
10.3
11.0
29.8
20.8
40.9
¢ Originations £m ¢ Balance Sheet £m
¢ Profit Contribution £m
¢
Gross Yield %
28 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
BUSINESS CREDIT
OPERATING THROUGH OUR WELL-ESTABLISHED KEY BUSINESS
INTRODUCER BASE, WE CONTINUE TO DIFFERENTIATE ON
SERVICE, ACCESS TO OUR SENIOR PEOPLE AND CERTAINTY
OF DELIVERY.
TIM HAWKINS, MD
ACTIVITY
Business Credit provides funding to UK SMEs
with revenues of between £2 million and £100
million, across 20 different business sectors,
competing on quality of services, range of
financing solutions and speed of delivery.
Invoice discounting is at the core of our asset
based lending facility: we offer other asset
based lending products (plant, machinery,
stock and cash flow) in tandem only with our
invoice discounting proposition.
These facilities are mainly secured against
working capital assets to support a number
of business operations, including working
capital, growth opportunities, mergers and
acquisitions, refinancing, restructurings,
management buy-outs and buy-ins and
turnarounds.
Notwithstanding a challenging year, Business
Credit made progress in 2015. The highlights
of the year included further success in working
with Private Equity Houses, which accounted
for circa 20% of business originations. The
business provided extensive support to
existing clients while also working to exploit
new opportunities. Business Credit was proud
to be voted Business Money Intermediary
Index Winners for the third successive year.
OUTLOOK
The Division will focus activity in specialist
areas of the market where it has strong
relationships and deep expertise. Our strategy
is to maximise lending through the addition of
new products, including trade finance, which
will generate strong risk adjusted returns.
The Division will continue working with its
loyal base of key business introducers, and
also with the Private Equity community in
supporting portfolio companies. The Division
anticipates increased activity in the event
driven market (MBOs/MBIs), an area where it
has proven expertise and will seek growth
opportunities that meet our risk appetite profile.
COST OF RISK
1.2%
2015
2014
1.2
0.3
¢
NIM %
¢
Cost of Risk %
7.2
7.7
DIFFERENTIATION
Business Credit employs a high touch, high class
approach, focused upon understanding the real
needs of our customers and their businesses.
The experience of the senior management
team in structuring and delivering asset based
lending and invoice discounting sets them apart,
and they are known for high touch delivery,
providing customers with a high level of access
to senior people and certainty of delivery.
TRENDS AND OPPORTUNITIES
Increased liquidity in the market increased
competition in 2015. The Division met this
associated risk by sustaining focus on its
relationship based customer offering: service
and efficiency; access to experienced senior
people, combined with speed and certainty of
delivery and maintaining discipline in pricing.
In addition it extended into adjunct markets,
providing a wider offering to its pharmacy
clients , private equity and trade finance.
FINANCIAL KPIS
The loan book for the Business Credit division stood
at £183m at 31 December 2015 (2014: £170m).
The business had a challenging year, with
increased margin pressure driven by increased
liquidity in the market resulting in a decrease in
the Net Interest Margin from 7.7% in 2014 to 7.2%
in 2015. Furthermore, the Division experienced
increased fraud where legal action remains
ongoing, resulting in the cost of risk increasing by
0.9% from 0.3% in 2014 to 1.2% in 2015.
Liquidity and lending appetite in our market,
particularly from the High Street banks, has
resulted in some yield compression both on the
front book and on the back book when contracts
are up for renewal. This, together with the unwind
of the fair value at acquisition of the business
unit, drove a decrease in the asset yield to 9.4%
(2014: 10.2%).
LOAN BOOK £m
£183m
2015
2014
48
116
183
170
GROSS ASSET YIELD %
9.4%
2015
2014
5.7
4.5
9.4
10.2
¢ Originations £m ¢ Balance Sheet £m
¢ Profit Contribution £m
¢
Gross Yield %
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 29
STRATEGIC REPORTFINANCIALSGOVERNANCE
BUSINESS REVIEW CONTINUED
CONSUMER LENDING
OUR SPECIALIST FOCUS AND DEEP UNDERSTANDING OF THE
MARKETS IN WHICH WE OPERATE, COMBINED WITH OUR
PROFESSIONAL AND INNOVATIVE APPROACH, SUPPORTS THE
DELIVERY OF OUR SUCCESSFUL CUSTOMER PROPOSITIONS.
EVELYN HAMILTON, MD
ACTIVITY
Consumer Lending provides unsecured loans
for:
– Home Improvement: working with
selected leading national and regional
home improvement companies. Sales take
place in clients’ homes to home owners
– Holiday Ownership: the business has an
established reputation in this sub-sector,
working with carefully chosen holiday
ownership companies to offer customers
holiday ownership finance in the UK and
Europe
– Retail: working with in-store and online
retailers, as well as dental clinics and
veterinary practices, to tailor consumer
finance packages
– Consumer Personal Loans: through a
selected network of business partners.
In 2015 Consumer Lending strengthened its
position as one of the key lenders in the home
improvement market and secured some
notable relationships. Consumer Lending saw
significant growth in 2015 across both its retail
finance business and personal loans building
its loan book to £333m (2014: £227m).
DIFFERENTIATION
Consumer Lending delivers specialism and a
deep understanding of the markets in which
it operates through the expertise of our
teams of industry specialists who innovate
and build our specialist propositions to meet
clearly identified customer needs. The Division
benefits from innovative solutions; including
E-signature tablet technology that allows
clients to sign paperless consumer agreements
within their own homes, plus excellent
risk metrics and scoring techniques. These
innovations contribute to Consumer Lending’s
recognition as a leader in its chosen markets as
it streamlines and shortens the cycle time for
consumer credit approvals and completions.
TRENDS AND OPPORTUNITIES
Although the home improvement and holiday
ownership markets benefited from increased
consumer confidence, increased liquidity created
greater competition. The intermediary consumer
markets also faced new regulatory hurdles, with
responsibility for consumer credit moving to the
FCA. The Government’s new Feed in Tariff has
reduced demand for solar installations, but as
the market regroups the business is well placed
to extend its support to key solar suppliers.
FINANCIAL KPIS
The loan book for the Consumer Lending division
stood at £333m at 31 December 2015 (2014:
£227m). The gross asset yield for 2015 was 10.6%
(2014: 11.5%), the decrease of 0.9% was mainly
driven by increased liquidity in the market.
The cost of risk decreased by 1.6% to 0.7% in 2015
(2014: 2.3%), mainly driven by the continuation of
lower arrears and a debt sale during the year.
LOAN BOOK £m
£333m
2015
2014
2013
113
116
227
190
227
333
With its strong relationships, sound service
proposition and personal approach, Consumer
Lending is able to counter price-led competition
with value-added propositions. The Division
has invested significantly to support its
intermediary partners meet new regulatory
requirements and works with partners to
ensure that we can deliver the right product
for the right customer at a fair rate.
OUTLOOK
Evelyn Hamilton has been appointed as
Managing Director, Consumer Lending. Under
her leadership the Division intends to leverage
its reputation to widen distribution, seeking
out new opportunities across its markets.
The Division will invest in further automating
referral criteria to capture and convert more
higher risk adjusted margin business. The
Division will also seek to secure further
volume and work with partners to increase
finance penetration. Consumer Lending
is also seeking to substantially extend its
personal loan business and has held positive
discussions with leading affinity partners.
COST OF RISK
0.7%
2015
2014
2013
0.7
2.3
2.0
¢ NIM %
¢
Cost of Risk %
GROSS ASSET YIELD %
10.6%
2015
2014
2013
0.7
5.5
8.1
8.6
8.2
11.8
10.6
11.5
11.7
30 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
¢ Originations £m ¢ Balance Sheet £m
¢ Profit Contribution £m
¢
Gross Yield %
RETAIL SAVINGS
WE ARE PROUD TO OFFER SIMPLE AND STRAIGHT FORWARD
SAVINGS PRODUCTS WITH TRANSPARENT PRICING FOR BOTH
EXISTING AND NEW CUSTOMERS. OUR PRODUCT FEATURES,
PERSONAL SERVICE AND DEDICATED TEAMS SECURED US A 94%
CUSTOMER SATISFACTION RATING IN 2015 AND A SAVINGS NPS
SCORE OF +47.
SIMON FURNELL, MD
OUTLOOK
The Division will continue to develop new
products and deepen its analytical capability to
acquire funds at the optimum mix of duration
and cost, innovating to establish new sources of
liquidity to support the growth of the Bank.
ACTIVITY
The retail savings business provides fixed
rate deposits for terms of up to five years,
ISAs, easy access savings and notice accounts,
sourced from personal retail depositors as well
as from business, trust and charity customers.
This deposit base provides a stable source of
funding for the Group’s five lending divisions,
and the Retail Savings team works closely
with the Treasury and Finance functions to
manage the on-going funding and liquidity
requirements of the Group.
Whilst the business attracts deposits from all
customer demographics, nearly two thirds
of the deposit base continues to be sourced
from affluent customers with a wide range of
savings needs and high average balances.
In 2015 Savings increased its deposit base to
£3,186m (2014: £2,421m) whilst continuing to
deliver quality service through our dedicated
customer service teams, achieving a 94%
customer satisfaction score. Retail Savings
continued to raise funds at a lower rate
than its historic book, providing a positive
downward trajectory in the overall Savings
book cost of funds. Cost of funds in 2015 was
2.3% (2014: 2.9%).
DIFFERENTIATION
The Division offers transparent pricing for
existing and new customers, and maintains
consistently competitive rates across its suite of
simple and straightforward savings offerings. In
the interest of ensuring fair customer outcomes
the business is proactive in communicating new
interest rates to existing customers and there is
no bond auto-rollover. Its high service standards,
showcased through its UK contact centre, and
non-advised service with no sales incentive,
continue to win praise from customers.
TRENDS
During 2015, savings rates were impacted by the
number of new market entrants in the savings
market, while consumer appetite shifted to
shorter duration products in anticipation of an
interest rate rise.
The Division addressed these challenges by
continuing its investment in infrastructure,
analytical capability and new product
development while also extending its
distribution options.
FINANCIAL KPIS
The deposit book stood at £3,186m at
31 December 2015 (2014: £2,421) an increase of
32%. The cost of funds for 2015 was 2.3% (2014:
2.9%) a reduction of 26%).
DEPOSIT BOOK £m
£3,186m
2015
2014
3,186
2,421
2013
1,463
¢
Deposit Book £m
COST OF FUNDS %
2.3%
2015
2014
2013
2.3
2.9
3.7
¢
Cost of Funds %
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 31
STRATEGIC REPORTFINANCIALSGOVERNANCE
RISK MANAGEMENT REPORT
CLOSE AND DISCIPLINED
RISK MANAGEMENT
– Secure and organise the required level and
capability of risk infrastructure and resources;
– Undertake remedial action where any
weaknesses are identified; and
– Scan the external horizon for emerging risks.
Risk Appetite
The levels of risk that the Group is willing to
tolerate in operating the various elements of its
business are defined in a Risk Appetite
Statement, which is agreed by the Board. This
articulates qualitative and quantitative measures
of risk which are cascaded across various areas of
the Bank’s operations, calibrated by reference to
the Group’s absolute capacity for risk absorption,
limit of appetite and target thresholds.
Risk Management Framework
All of the Group’s business and support service
activities, including those outsourced to third
party providers or originated via brokers and
other business intermediaries are executed
within the parameters of a single comprehensive
Risk Management Framework. This sets out
minimum requirements and ensures consistent
standards and processes are set across the
organisation. Risks are identified, measured,
managed, monitored, reported and controlled
using the Risk Management Framework. The
design and effectiveness of the framework is
overseen and reviewed by the Board Risk
Committee. The key elements of the framework
are set out later in this report..
The Group seeks to embrace the risks inherent
in its business activities and operations through
close and disciplined risk management which
quantifies the risks taken, manages and
mitigates them as far as possible and prices
appropriately for the residual level of risk
carried in order to produce an appropriate
commercial return through the cycle.
The Group’s approach to risk management
will continue to evolve and has benefited from
extensive investment during 2015 to ensure
that it remains comprehensive, consistent and
scalable to accommodate the Bank’s growth
plans. The investment in establishing a revised
Risk Management Framework in 2015 will see
embedding substantially completed in 2016.
This Enterprise Wide Risk Management
Framework is underpinned by the following
key elements:
Risk Strategy
The Risk Strategy sets out the risk management
objectives which support the achievement of
the Group’s commercial goals and the operation
of business activities which seek to deliver those
aims. The Risk Strategy sets out which risks are to
be acquired or incurred and how they will be
managed by the organisation.
The strategic risk management objectives are:
– Identify material risks arising in the day to day
activities and operations of the Group;
– Quantify the risks attaching to the execution
of the Group’s business plans;
– Set an appropriate Risk Appetite with
calibrated measures and tolerance levels;
– Optimise the risk/reward characteristics of
business written;
– Set minimum standards in relation to the
acquisition, incurrence and management of
risk;
Risk Appetite Statement Objectives and Dimensions
BUSI NESS PER FOR MANCE
INFRA STRUC TURE
Profit Volatility
Financial Strength
Growth and Concentration
Funding & Liquidity
Systems
People
Data Quality
Processes
Transformation Projects
Outsourcing
CONDUC T
Product Design
Sales
REPUTATION
Customers
Regulators
Post Sales Service
Shareholders & Market
Culture
Intermediaries
Third Parties
People
32 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Governance
All the Bank’s risk activities are subject to detailed
and comprehensive governance arrangements
which set out how risk based authority
is delegated from the Board to executive
management and the various risk committees
and individuals. These bodies and senior officers
are accountable and responsible for ensuring
that the day to day risks are appropriately
managed within the agreed Risk Appetite
and in accordance with the requirements of
the Risk Management Framework. Escalation
and reporting requirements are set out in risk
policies and by the Risk Appetite thresholds.
Culture
The Group is led by an experienced senior
team with a combination of significant
underwriting expertise and institutional and
regulatory banking experience at various major
financial institutions and specialist lenders.
This heritage provides the platform for a set
of values and behaviours where the client is
at the heart of the decision making process
and business areas are held fully accountable
for risk performance. At the individual level
this process begins with the induction
program and job descriptions; it is carried
into the setting of individual objectives and
performance reviews and ultimately reflected
in the compensation and reward structure.
RISK APPETITE
The Risk Appetite Statement (RAS) is a detailed
and granular expression of the level of risk the
Group is willing to accept in relation to the
pursuit of its business strategy. The RAS is not
static and will evolve to both reflect and support
the Group’s business objectives, the operating
environment and risk outlook.
The RAS is not just a reporting tool providing an
aggregated measure of risk temperature and
performance. Just as importantly it also provides
a framework which is used dynamically to inform
strategic and operational management
decisions, as well as supporting the business
planning process.
The RAS is reviewed periodically by the Board
Risk Committee and agreed with the Board on
an annual basis as a minimum. A dashboard with
the status of each metric is monitored monthly.
Management and the Board exercise their
judgement as to the appropriate action required
in relation to any threshold trigger breach,
dependent on the scenario at the time.
The RAS identifies four groups of risk appetite
objectives which are further subdivided into 20
appetite dimensions as set out diagrammatically
on the previous page. A suite of qualitative
statements and quantitative measures have
been set for each dimension, with hard risk limits
calibrated by reference to absolute capacity,
maximum risk tolerance and a threshold trigger
level.
RISK MANAGEMENT FRAMEWORK
Responsibility for risk management sits at all
levels across the Group from the Board and
Executive Committee down through the Central
Functions, and in turn to each Divisional Head
and their business managers and risk officers.
In 2015 the Group invested heavily in enhancing
the design and build of an integrated risk
management model to support its strategic
and commercial objectives. This activity will
continue into 2016 as the framework is rolled out,
operationalised and embedded across the Bank.
The Group’s Risk Management Framework
describes the various activities, techniques
and tools which are mandated to support
the identification, measurement, control,
management, monitoring, reporting and
challenge of risk across the Group. It is designed
to provide an integrated, comprehensive,
consistent and scalable structure which is
capable of being communicated to and
clearly understood by all our employees
and is shown diagrammatically below.
The Risk Management Framework also
incorporates the organisational arrangements
for managing risk with specific responsibilities
distributed to certain functions. This ensures that
that there is clear accountability, responsibility
and engagement at appropriate levels within
the organisation which can provide robust
review and challenge as well as be challenged.
Operationally, the Risk Management Framework
is organised around the key risk categories.
Group’s Risk Management Framework
RISK S TRATEGY
Risk Management Framework Principles
Risk Appetite
Key Risk Categories
Credit &
Concentration Risk
Market & Liquidity Risk
Operational Risk
Conduct, Legal &
Compliance Risk
Strategy Risk
Systems & Change Risk
Policies
Process & Procedures
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 33
STRATEGIC REPORTFINANCIALSGOVERNANCE RISK MANAGEMENT REPORT CONTINUED
Risk Governance
Risk Governance describes the architecture
through which the Board allocates
and delegates primary accountability,
responsibility and authority for risk
management across the organisation.
Responsibility for risk oversight is delegated
from the Board to the Board Risk Committee
and Board Audit Committee. The ultimate
responsibility for risk remains with the Board.
Accountability, responsibility and authority
for risk management is delegated to the
Chief Executive and CRO, who in turn allocate
responsibility for oversight and certain approvals
across a number of Management Committees.
Authority and responsibility for material
operational risk management, decision making
and risk assurance is vested in the CRO and the
Group Risk function. Lesser levels of authority
are cascaded to the senior management within
the support functions and Business Divisions.
These bodies and senior officers are accountable
and responsible for ensuring that the risks are
appropriately managed within the agreed Risk
Appetite and in accordance with the
requirements of the Risk Management
Framework. Individuals are encouraged to adopt
an open and independent culture of challenge
which is essential to ensuring risk issues are fully
surfaced and debated with views and decisions
recorded. Risk Governance and culture is
reinforced by the provisions of the Senior
Manager Regime.
Formal risk escalation and reporting requirements
are set out in Risk Policies, individual Committee
Terms of Reference and the approved Risk
Appetite thresholds and Limits.
Board/Board Risk Committee
Oversight
Risk Category
First Line
Credit Risk
Credit Management
in Business Areas &
Treasury
Second Line
Credit Risk
Credit
Committee
Liquidity and
Market Risk
Treasury
Market & Liquidity
Risk & Finance
ALCO
Board
Audit
Committee
Third Line
Operational
Risk
All Business Divisions
and functional areas
Operational Risk
Conduct &
Operational
Risk Committee
Conduct &
Operational
Risk Committee
Internal
Audit
All Business Divisions
and functional areas
Compliance
Conduct, Legal
and Compliance
Risk
Strategic Risk
Exec Directors &
Senior Management
Finance
EXCO
Systems and
Change Risk
IT/Change
Management
Operational Risk
Change
Management
Committee
Committee Structure and
Risk Responsibilities
An abbreviated Board and Management
Committee structure and is set out below
highlighting those Committees with primary
risk-related duties.
The monitoring and controlling of risk is
a fundamental part of the management
process within the Bank. The Board
oversees the management of the Key Risk
Categories across the organisation.
The Board delegates specific powers for some
matters to committees, details of which are
set out in the Corporate Governance Report.
GROUP
BOARD
NOMINATION
COMMITTEE
REMUNERATION
COMMITTEE
BOARD AUDIT
COMMITTEE
BOARD RISK
COMMITTEE
DISCLOSURE
COMMITTEE
NomCo
RemCo
BAC
BRC
DISCO
Executive
Committee
Exco
Asset &
Liability
Committee
ALCO
Credit
Committee
CC
Product &
Pricing
Committee
PPC
Conduct &
Operational Risk
Committee
CORC
Change
Management
Committee
CMC
Credit
Approval
Committee
CAC
Provisions
Committee
PC
Key:
Relevant to Risk Management Framework
34 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
THREE LINES OF DEFENCE MODEL
The Group’s approach to risk management is
underpinned by the ‘Three Lines of Defence’
model which is summarised in the diagram below.
1st Line of Defence
Responsibility for risk management resides in the
front line business Divisions and functions, and
line management is directly accountable for
identifying and managing the risks that arise in
their business or functional area. They are
required to establish effective controls in line
with Group Risk Policy and act within the Risk
Appetite parameters set and approved by the
Board. The First Line of Defence comprises each
of the five Lending Divisions and the Retail
Savings business. The First Line of Defence also
includes the Treasury Function. Elements of the
support functions such as Finance, Human
Resources and Information Technology are also
in the First Line of Defence as, although they are
not customer facing themselves, they provide
support and back-up to the customer facing
divisions and have insight into many operational
factors that could ultimately impact on Group’s
exposure to market, liquidity, credit, regulatory,
legal, conduct, compliance and operational risk.
Each business unit and functional area operates
to set Risk Policies to ensure that activities remain
within the Board’s stated Risk Appetite for that
area of the Group. The Risk Policies are approved
by the appropriate Committee in accordance
with their Terms of Reference and reviewed
annually with any material changes requiring
approval at Committee Level.
The First Line of Defence has its own operational
process and procedures manuals to demonstrate
and document how it conforms to the approved
policies and controls. Likewise it develops
Quality Control programmes to monitor and
measure adherence to and effectiveness of
procedures. All employees within a customer
facing unit are considered First Line of Defence.
Each employee is aware of the risks to the Group
of for their particular activity and the business
unit heads are responsible for ensuring there is a
‘risk aware’ culture within the First Line of
Defence. For certain key policies, divisional staff
complete regular online training programmes to
ensure knowledge is refreshed and current.
The Three Lines of Defence
I
E
E
T
T
M
M
O
C
I
T
D
U
A
BOARD AND
E XECUTIVE
B
O
A
R
D
O
R
C
C
E
O
B
R
C
E
V
I
T
U
C
E
X
E
BUSIN ESS UNITS
AND RI SK MANAGEMENT
AC TIVITY
RISK OVER SIGHT
INTERNAL AUDIT
1ST LINE
2ND LINE
3RD LINE
BOARD/B OARD RIS K COMMIT T EE
– Board establishes risk appetite and strategy
– Approves frameworks, methodologies, policies and
roles and responsibilities
1.B USINESS DIV ISIONS – 1S T L INE OF DEF ENCE
– ‘Owner’ of the risk management processes and
regulatory compliance
– Identifies, manages, mitigates and reports on
operational risk
2. GROUP RISK – 2ND LINE OF D EF ENCE
– Design, interpret and develop overall risk management
framework, and monitor BAU adherence
– Overview and monitor key risks
– Compliance – develop compliance policies, lead
delivery of regulatory change and monitor and report
regulatory issues
3. INT ER NAL AUDIT – 3RD LINE OF DEFENCE –
CURENT LY DELOIT T E
– Independent testing and verification of the Bank’s
business model, policies, processes and business line
compliance
– Provides independent assurance to the Board and
Regulator that the risk management process is
functioning as designed
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 35
STRATEGIC REPORTFINANCIALSGOVERNANCE
RISK MANAGEMENT REPORT CONTINUED
2nd Line of Defence
The Second Line of Defence comprises the
Group’s central and independent risk
management and compliance function led by the
Chief Risk Officer, who reports to the Chairman of
the Board Risk Committee and to the CEO. It also
includes General Counsel & Company Secretary
(who is also the MLRO) who reports to the CEO.
– Providing advice and support to the First Line
in relation to risk management activities;
– Credit Approvals between Divisional
Authority and the threshold for Credit
Approval Committee; and
– Undertaking stress testing exercises and
working with Finance and Treasury on the
production of the ICAAP, ILAAP and RRP.
The high level risk structure is shown below:
The Second Line of Defence is necessarily and
deliberately not customer-facing and has no
responsibility for any business targets or
performance. It is primarily responsible for:
– The design and build of the various
components of the Bank’s Risk Management
Framework and embedding these, together
with the Risk Strategy and Risk Appetite,
across the organisation;
– Independent monitoring of the Group’s
activities against the Board’s Risk Appetite
and limits, and provision of monthly analysis
and reporting on the risk portfolio to the
Executive and the Board;
– Issuing and maintaining the suite of Group
Risk Policies;
– Undertaking physical reviews of risk
management, controls and capability in the
First Line units and providing Risk Assurance
reports to the Executive and the Board on all
aspects of risk performance and compliance
with the Risk Management Framework;
3rd Line of Defence
The Third Line of Defence is Deloitte LLP
which has been appointed by the Group
to act as its independent internal audit
function. This provides independent
assurance on the activities of the Group
and the effectiveness of the Group’s Risk
Management Framework and controls directly
to the Board and Board Audit Committee.
Internal Audit reports directly to the non-
executive Chair of the Board Audit Committee
as well as the CEO and is independent of
First and Second Lines of Defence.
The Third Line has access to the activities of both
First and Second Line. It can inspect and review
adherence to policy and controls in the First
Line, the monitoring of activity in the Second
Line and the setting of policy and controls in
the Second Line. The Third Line of Defence
does not independently establish policy or
controls itself, outside of those necessary to
implement its recommendations with respect
to the other two Lines of Defence. The Third
High level risk structure
BOAR D RI SK
COMMIT TE E C HA IR
CHIEF
E XECUTI VE
Line may in some cases use as a starting
point the reports and reviews compiled by
the Second Line but is not restricted to them
or necessarily influenced by their findings.
The Third Line of Defence’s scope of work
is agreed with the Board Audit Committee
to provide an independent assessment
of the governance, risk management and
internal control frameworks operated by the
Group and to note the extent to which the
Group is operating within its Risk Appetite.
It does this by reviewing aspects of the
control environment, key processes and
specific risks and includes review of the
operation of the Second Line of Defence.
The Group’s engagement of Deloitte LLP
to carry out the functions of the Third Line
of Defence provides the Group with access
to specialist capabilities beyond its current
scale and provides insight into best practice.
The performance of Deloitte in this role is
reviewed by the Board Audit Committee.
CHIEF RISK
OFFICER
GENERAL
COUNSEL &
COMPANY
SECRETARY
ENTERPRISE
RISK
CONDUCT &
COMPLIANCE
RISK
OPERATIONAL
RISK
RISK
ANALYTICS
MARKET &
LIQUIDITY RISK
CREDIT
RISK
LEGAL
DEPARTMENT
36 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
RISK POLICIES AND CONTROLS
The Risk Management Framework is enacted
through a comprehensive suite of control
documents and risk policies, setting out the
minimum requirements and standards in relation
to the acquisition and management of risk assets
as well as the control of risks embedded in the
Group’s operations, activities and markets.
The Group’s High Level Control Documents and
Risk Policies are owned and managed by the
Group Risk function, headed by the Chief Risk
Officer (CRO) and approved by the Board or,
where delegated, the appropriate Risk
Committee. The suite of Policies is grouped
according to importance and key risk categories.
procedures are required to be compliant with
Group Policy and dispensations or waivers will
be required where gaps are identified. These
process and procedures manuals provide staff at
all levels with day to day direction and guidance
in the execution of their duties.
The effectiveness of and compliance with the
risk policy framework is evaluated on a
continuous basis through the monthly reporting
requirements (including risk policy exceptions
reporting). Additionally a quarterly Control Self
Certification process supplemented by a
programme of audits, thematic risk assurance
reviews and quality control testing is undertaken
by each of the Three Lines of Defence.
Group-level Risk Policies are supplemented as
required by Divisional Risk processes and
procedures, where more specific and tailored
criteria are detailed. Divisional processes and
Asset Class Policies
The Group’s Lending Policies are contained in 16
Asset Class Policies. These have been arranged
to operate on a Group-wide basis rather than
based upon Divisional products. This is
considered to provide a more stable, consistent
risk standard and control across the Group’s
portfolio of loan assets. Asset Classes can also be
aligned more readily with Risk Weightings,
Probability of Default, Loss Given Default and
Expected Loss metrics which facilitates risk
reporting, risk adjusted profitability analysis and
modelling for stress testing and capital
adequacy purposes.
Asset Class Policies are structured on the basis of
Policy Rules which must be adhered to and
Guidelines where an element of controlled
discretion is permitted. All planned exceptions to
Policy Rules require approval at the Group Risk
level and both planned and unplanned
exceptions to Policy Rules are reported monthly
to the relevant Risk Committee.
PRINCIPAL RISK CATEGORIES
The principal risk categories faced by the Group are as follows:
Risk Category
Definition
Credit Risk (including concentration
and single name risk)
The risk that a borrowing client or treasury counterparty fails to repay some or all of the capital or
interest advanced to them. This category also includes Credit Concentration risk.
Liquidity and Market Risk
Liquidity risk is the risk that the group is unable to meet its current and future financial obligations as
they fall due, or is only able to do so at excessive cost.
Operational Risk
Conduct, Legal and
Compliance Risk
Strategic Risk
Market Risk is the risk of financial loss through un-hedged or mismatched asset and liability positions
that are sensitive to changes in interest rates or currencies.
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and
systems, or from external events including strategy and reputational risks.
Conduct Risk is the risk that the group’s behaviour will result in poor customer outcomes and that our
people fail to behave with integrity.
Legal and Compliance Risk is the risk of regulatory enforcement and sanction, material financial loss,
or loss to reputation the Bank may suffer as a result of its failure to identify and comply with applicable
laws, regulations, codes of conduct and standards of good practice.
Risk that the Group is unable to meet its objectives through the inappropriate selection or
implementation of strategic plans. This includes the ability to generate volume and inside risk
appetite.
Systems and Change Risk
Systems and change risk is the risk that transition changes in the business will be improperly
implemented.
A more detailed summary of each principal risk is contained in the following sections.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 37
STRATEGIC REPORTFINANCIALSGOVERNANCE RISK MANAGEMENT REPORT CONTINUED
Credit Risk
This risk has two main components:
– Customer risk (from core lending activity);
and
– Treasury credit risk (from treasury activity).
The Bank’s Treasury credit risk exposure is limited
to short term deposits placed with leading UK
Banks.
Credit Risk Approval Process
The Bank operates a hierarchy of Lending
authorities based principally upon the size
of credit risk exposure to counterparties,
group of connected counterparties or, where
applicable, a portfolio of lending assets that
are subject to a single transaction. In addition
to maximum amounts of credit exposure, sole
Lending Mandates may stipulate sub-limits
and / or further conditions and criteria.
Each Division has a maximum credit approval
authority delegated to named individuals
operating within a policy framework. Above
the divisional authority, an independent
second line credit risk officer requires to
approve the proposal. All facilities above the
authority of the second line credit officers are
approved by the Credit Approval Committee.
Lending is advanced subject to Group lending
approval policy and specific credit criteria. When
evaluating the credit quality and covenant of
the borrower significant emphasis is placed
on the nature of the underlying collateral.
This process also includes the review of the
Board’s appetite for concentration risk.
Approval and on-going monitoring control is
exercised both within the businesses and
through oversight by the Group Credit Risk
function. This applies to both individual
transactions as well as at the portfolio level by
way of monthly credit information reporting,
measurement against Risk Appetite limits and
testing via risk quality assurance reviews.
The Divisions operate timely collections and
arrears management processes. It is recognised
that the credit environment is currently benign
and we plan in 2016 to undertake a group level
strategic review of operational arrangements
and capabilities for non-performing loan
management to ensure that the Bank is capable
of operating in a more challenging environment
where interest rates are rising and there is lower
demand and liquidity in property markets.
The Group has, therefore, developed
comprehensive funding and liquidity policies
to ensure that it maintains sufficient liquid
assets to be able to meet all its financial
obligations and maintain public confidence.
The Group’s Treasury function is responsible
for the day to day management of the Group’s
liquidity and wholesale funding. The Board sets
limits over the level, composition, and maturity
of liquidity and deposit funding balances,
reviewing these at least annually. Compliance
with these limits is monitored daily by Finance
and Risk personnel independent of Treasury and
additionally, a series of liquidity stress tests are
performed weekly by Risk and formally reported
to ALCO and the Board to ensure that the
Group maintains adequate liquidity for business
purposes even under stressed conditions.
Liquidity and Market Risk
Liquidity risk is the risk that the Group
is unable to meet its current and future
financial obligations as they fall due, or is
only able to do so at excessive cost.
Market risk is the risk associated with adverse
changes in the fair value of positions held
by the Group as a result of movement
in market factors such as interest rates,
currencies, volatility and credit spreads.
The Group reports its liquidity position
against its Liquidity Coverage Ratio,
Net Stable Funding Ratio and other key
regulatory ratios for regulatory purposes.
A liquid asset buffer of government Treasury
Bills acquired under the FLS, and reserves
with the Bank of England, are maintained as
a source of high quality liquid assets that can
be called upon to create sufficient liquidity
in order to meet liabilities on demand.
Operational Risk
The Board Risk Committee received regular
reports across the spectrum of operational
risks and information security. These reports
covered incidents that have arisen to allow
the Committee to assess management’s
response and proposed remedial actions.
Although a number of incidents were raised
during the course of 2015, the Committee
was satisfied that the action taken was
appropriate and that the control of operational
incidents continued to improve. In response
to the growing threat posed by Information
Security, a full Cyber Crime risk assessment
was undertaken to assess the adequacy of the
Group’s internal control framework to respond
to this threat and our planned investment
to deal with increasing levels of cyber risk.
The operational risk reports were developed
throughout 2015 to include a focus on forward
looking risks which permits a more strategic
discussion at the Board Risk Committee level.
38 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Conduct, Legal and Compliance Risk
The Group continually reviews its risk
management approach to reflect the
regulatory and legal environment
in which the Bank operates.
The Group has no appetite for knowingly
behaving inappropriately, resulting in unfair
outcomes for its customers. During 2015 the
Group reviewed its Risk Appetite for Conduct
Risk to introduce measures across the conduct
risk lifecycle, which includes product design,
sales or after sales processes and culture. These
measures are reported to the Board monthly
and provide the basis for demonstrating
that the Group is operating within its risk
appetite. Where the Group identifies potential
unintended outcomes for customers the
Group uses its risk management process to
proactively escalate, agreeing appropriate
actions and communicating clearly with its
customers to ensure a fair outcome is achieved.
Strategic Risk
Strategic risk focusses on large, long term risks
that could become a material issue for the
delivery of the Group’s goals and objectives.
Management of strategic risk is primarily the
responsibility of the Executive. The management
of strategic risk is intrinsically linked to the
corporate planning and stress testing processes
and is further supported by the regular provision
of consolidated business performance and risk
reporting to the Executive and Board. The Board
has received and approved a number of reports
during 2015 including the five year plan, the
Bank’s Risk Appetite and active engagement in
the formation of the Group’s ICAAP and ILAAP
that are critical tools to managing strategic risk.
Systems and Change Risk
Customer expectations for service availability are
rising with the rapid pace of new technologies
leading to a significantly lower tolerance for
service disruption. The Group recognises that in
order to continue to be recognised for very high
levels of customer satisfaction it needs to
continually monitor systems risk and ensure that
change is delivered with minimum disruption to
customers. During 2015 the Group has reviewed
its Risk Appetite for Systems and Change Risk
and plans in 2016 to review and further enhance
its business continuity and disaster recovery
capability.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 39
STRATEGIC REPORTFINANCIALSGOVERNANCE RISK MANAGEMENT REPORT CONTINUED
TOP AND EMERGING RISKS
The Group’s top risks are identified
through the process outlined in the ‘Risk
Management’ section and are considered
regularly by management and subsequently
by the Board Risk Committee.
The Group sees six themes as its top and
emerging risks:
– Economic Environment;
– Pace of Regulatory Change;
– Business Performance and Scale;
– Intermediary and Outsourcing;
– Pace, Scale of Change and Management
Stretch; and
– Information Security.
These themes, together with the Group’s
strategy to mitigate the risk and the
direction of each theme, are considered
further in the following sections.
Risk Type
Economic Environment
Risk
Mitigation
The Group’s financial position continues to
improve with increasing profitability and stronger
capital ratios. However, changing economic
conditions in the UK, particularly in England
where the majority of the Group’s operations are
based, could affect the Group’s performance in a
number of ways including:
– Increased funding costs resulting from ongoing
political uncertainty accompanied by a loss of
confidence;
– The referendum on EU membership could
fundamentally alter the UK financial services
landscape; and
– A reversal in the UK economy could drive higher
impairments through increased defaults and/or
reductions in collateral values.
The Group operates in specialist areas where
management and staff have significant
expertise and a deep understanding of
customer needs that delivers superior service.
As a result all loans are written only after
thorough, bespoke underwriting to SMEs and
consumers with a proven ability to repay and,
in the main, sufficient security.
The Group undertakes a comprehensive
assessment of its Risk Appetite to ensure that it
can meet its objectives in severe but plausible
economic conditions.
The Group completes a comprehensive stress-
testing of its lending and deposit portfolios to
test resilience to severe but plausible economic
conditions.
The Group also establishes a prudent balance
sheet strategy with robust levels of capital,
liquidity and a prudent funding structure.
Pace of Regulatory Change
The prudential and conduct regulatory regimes
are subject to change and could lead to increases
in the level and quality of capital that the Group
needs to hold to meet regulatory requirements.
The regulatory environment continues to
evolve and change. The Group actively
engages with regulators, industry bodies and
advisors to actively engage in consultation
processes.
Business Performance and Scale
Rising competition could compress Group
margins below sustainable levels.
The Group uses its expertise and deep
understanding of its customer needs to drive
customer service and a long term relationship
with its customers through the cycle.
The Group monitors its chosen markets on a
regular basis and regularly reviews adjacent
markets where it has expertise and reviews
opportunities for inorganic growth.
40 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Risk Type
Intermediary and Outsourcing
Risk
Mitigation
The Group is a specialist lending and savings bank
for SMEs and consumers. The specialist nature
of some of its lending through Intermediaries
and Brokers may mean that some customers
find themselves with an increased risk of an
unfavourable outcome. For the Group this may
also lead to increased conduct related redress,
additional fraud or credit risk impairments.
Pace, Scale of Change and
Management Stretch
The scale and pace of change could create
delivery challenges and may lead to a disruption
of the Group’s plans and the delivery of its
objectives.
Information Security
The pace of technological development is
changing the way in which SMEs and consumers
want to engage with the Group leading to a
number of risks:
– Increasing customer demand may exceed the
Group’s ability to provide highly reliable and
widely available systems and services;
– The ever evolving nature and scale of criminal
activity increases the likelihood and severity of
attacks on the Group’s systems; and
– Franchise value and customer trust could be
significantly eroded by a sustained hack of the
Group’s systems leading to a diversion of funds
or the theft of customer data.
The Group works with carefully selected
Intermediary and Broker partners who take
on the role of advising SME and consumers.
The Group recognises the importance of
taking ownership for the lending it originates
and continually undertakes a review of
their performance. In addition, experienced
underwriters perform thorough checks on
each application. The Group continually
reviews its risk management approach to
intermediaries, brokers and outsource partners
to reflect the regulatory environment that the
Bank operates in.
The Group understands the need to manage
change without disrupting the Group’s
operating environment and impacting
customer service. These operational risks are
managed through a strong focus on change
governance and programme management
disciplines and led by a dedicated Executive
member. The risks are further mitigated by the
Group’s significant strengthening of the senior
management team.
The Group has a formal Change Management
Committee that is set-up to prioritise change
and provide effective oversight of the change
portfolio to ensure that requirements are
delivered within budget and on time.
The Group continually reviews its control
environment for Information Security to reflect
the evolving nature of the threats that the Bank
is exposed to.
The Group’s strategy for mitigating Information
Security risk is comprehensive including: a
documented cyber-strategy, ongoing threat
assessments, regular penetration testing, the
wide deployment of detective controls and a
programme of education and training.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 41
STRATEGIC REPORTFINANCIALSGOVERNANCE The Board considers that the Group’s public
status, business model and the diversified
nature of its business markets provides it with
substantial flexibility to consider selective
business or portfolio disposals, loan book run
off, equity raising or a combination of these
actions. The Group has a Recovery Plan and
a Resolution Plan in place which it would
invoke in the event they would be required.
RISK MANAGEMENT REPORT CONTINUED
ICAAP, ILAA AND STRESS TESTING
The ICAAP, ILAAP and associated stress testing
exercises represent important elements of the
Group’s ongoing risk management processes.
This ensures that sufficient capital and liquidity
are available to support the Group’s growth
plans as well as cover its regulatory requirements
at all times and under varying circumstances.
The ICAAP and ILAAP are reviewed at least
annually, and more often in the event of a material
change in capital or liquidity. Ongoing stress
testing and scenario analysis outputs are used to
inform the formal assessments and determination
of required buffers, the strategy and planning
for capital and liquidity management as
well as the setting of Risk Appetite limits.
The Board and senior management have
engaged in a number of exercises which have
considered and developed stress test scenarios.
The output analysis enables management
to evaluate the Group’s capital and funding
resilience in the face of severe but plausible
risk shocks. In addition to the UK variant test
on capital prescribed by the Regulator, the
stress tests have included a range of Group-
wide, multi-risk category stress tests, generic
and idiosyncratic financial shocks as well
as operational risk scenario analyses. Stress
testing is an integral part of the adequacy
assessment processes for liquidity and
capital, and the setting of tolerances under
the annual review of Group Risk appetite.
The Group also performed reverse stress tests
to help management understand the full
continuum of adverse impact and therefore
the level of stress at which the Group would
breach its individual capital and liquidity
guidance requirements as set by the Regulator
under the ICAAP and ILAAP processes.
RECOVERY AND RESOLUTION PLAN
The Group has prepared and submitted a Recovery
and Resolution Plan (RRP) in accordance with
Supervisory Statements SS18/13 and SS19/13 as
updated on 16 January 2015, which was refreshed
to take account of the Bank’s IPO in April 2015.
The plan represents the Bank’s ‘Living Will’ and
examines in detail:
– The consequences of severe levels of stress
(i.e. beyond those in the ICAAP) impacting
the Bank at a future date;
– The state of preparedness and contingency
plan to respond to and manage through such
a set of circumstances; and
– The options available to management
to withstand and recover from such an
environment.
This plan is prepared annually, or more
frequently in the event of a material change
in the Group’s status, capital or liquidity
position. The Board of Directors and Senior
Management are fully engaged in considering
the scenarios and options available for
remedial actions to be undertaken.
GROUP VIABILITY STATEMENT
The Directors have assessed the outlook
for the Group over a longer period than
the twelve months required by the ‘Going
Concern’ statement in accordance with the
2014 UK Corporate Governance Code.
The assessment relied on:
– The Board approved budget that outlines
the business plans and financial projections
from 31 December 2015 to 31 December
2020;
– The Internal Capital Adequacy Assessment
Process (‘ICAAP’);
– The Internal Liquidity Adequacy
Assessment Process (‘ILAAP’); and
– A review and evaluation of its Top and
Emerging Risks (as reported upon earlier in
this section).
The Group has a well-established three year
planning cycle and during 2015 the Group
extended the time horizon for the firs time
as part of its corporate planning process.
The Group is not large enough to participate
in the annual Bank of England concurrent
stress testing programme but has, as part
of its ICAAP, performed a variety of stress
tests and reverse stress tests of its business.
These include two market wide stress tests
and two Group specific (idiosyncratic) stress
tests. The stress tests were derived through
discussions with Senior Management and
the Board, after considering the Group’s
principal risks. The Bank also considered
its funding and liquidity adequacy in the
context of the reverse stress testing. The risk
of the UK leaving the EU was not specifically
addressed but the Board believe this risk was
captured within the UK variant parameters,
and will keep this risk under review.
ensuring the development of early warning
indicators and potential mitigating actions.
The Board aims to build a sustainable lending
and savings bank for SMEs and consumers
over the medium to long. The assessment
above concluded that the Viability Statement
should cover a period of three years in line
with the established three year planning cycle.
Taking account of the Group’s current
position, consideration of its Top and
Emerging Risks and the outputs from the
ICAAP and ILAAP work, the Directors have
a reasonable expectation that the Group
will be able to continue in operation
and meet its liabilities as they fall due
over a period of at least three years.
The stress tests enable the Group to assess the
impact of a number of severe but plausible
scenarios on its business model. In the case
of reverse stress testing, the Board is able to
assess scenarios and circumstances that would
render its business model unviable, thereby
identifying business vulnerabilities and
42 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
CORPORATE SOCIAL RESPONSBILITY
OUR VISION:
PERSONAL, PRAGMATIC,
EXPERT AND PROGRESSIVE
Shawbrook was established to be the
SME Champion and meet the needs of
underserved markets, particularly in the SME
sector. We also serve specialist consumer
markets where our products and high degree
of choice can differentiate our offer.
Our traditional values and culture of respect,
care, good sense and thoughtful judgement
underpin our approach to the way in
which we demonstrate our commitment
to stakeholders: employees; customers;
business partners; shareholders and local
communities. We also engage with a wider
group of stakeholders including our regulators,
government, trade associations and the
media who provide insight and guidance
on key business and customer issues as we
continue to develop and grow the Bank.
As a newly listed FTSE 250 organisation
in 2015, with a proud heritage, we are
building the foundations of a distinctive CSR
programme, closely aligned to our business
strategy, which will remain true to our
values-based culture and in so doing deliver
benefits for all of our stakeholder groups.
COMMITMENT TO EMPLOYEES
We invest in attracting and retaining
talented teams:
– We work hard to create a business where we
can attract and retain talented, customer-
focused people who can do their best work
and grow fulfilling careers. In June 2015
we carried out a staff survey to gather the
opinions of our teams. The survey achieved
a 76% response rate, a 20% higher response
to the levels of similar surveys in other
organisations and an indication of staff
‘buy-in’ to our culture. We listened carefully
to feedback about what we could do better
and have since introduced a new one day
induction programme for all new starters,
both permanent and contract staff.
– We have also invested in improving
engagement and communication around the
business with our ‘all staff’ Summer Business
Update event; through quarterly offsites
bringing together our Top 50 Leadership
Team; regular communications to all staff
sharing success stories and new initiatives;
and our commitment to launching an
enterprise wide intranet in the early part
of 2016.
– We want our people to share in Shawbrook’s
success: upon our successful IPO, a Share
Award was made to all eligible staff and our
ShareSave scheme, launched in September
2015, achieved a 70% take up rate.
THANKS TO SUPPORT FROM SHAWBROOK, WE HAVE BEEN
ABLE TO ENSURE THAT STUDENTS FROM LESS ADVANTAGED
BACKGROUNDS HAVE ACCESS TO RELATABLE ROLE MODELS TO
INSPIRE AND GUIDE THEM AS THEY CONSIDER THEIR FUTURES.
SHAWBROOK HAVE SUPPORTED US NOT ONLY FINANCIALLY,
BUT ALSO IN ENCOURAGING THEIR STAFF TO SIGN UP TO
VOLUNTEER AT THEIR OLD SCHOOLS TOO.
ALEX SHAPLAND-HOWES, MANAGING DIRECTOR, FUTURE FIRST
COMMITMENT TO CUSTOMERS
Relationships and customer focus are in the
fabric of everything we do:
– We employ a high touch, high quality
approach to our customer relationship
management model with teams of experts
who possess deep insight and understanding
in place across our specialist Property, SME
and Consumer markets. We engage with our
Property and SME customers on a one to one
basis to truly understand their requirements
and participate in UK RFI research to gain
insight about issues that matter to our
Savings customers.
– In December 2015, Charterhouse Research
carried out our 2nd Annual Customer Insight
Survey, interviewing over 1,500 customers
from across our savings Division and five
lending Divisions. We attained an overall
customer satisfaction rating of 89% for
efficiency of service, 82.8% likelihood to
recommend Shawbrook and a very strong
NPS of 34; these scores underline the value
of the customer-focused approach that is our
hallmark. We will use further insight gathered
from our customers to look at what we could
differently to improve products and services
as we move through 2016.
– In 2015 the FCA published its guide to
‘Smarter Consumer Communications’ setting
standards for firms to ensure clear pricing
and clear information. Since this guide was
published Shawbrook has joined The Plain
English Campaign to support clear use of
English in customer facing communications
that will help consumers make informed
decisions; meeting our commitment to being
transparent and clear in our customer facing
communications and helping to ensure fair
customer outcomes.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 43
STRATEGIC REPORTFINANCIALSGOVERNANCE
CORPORATE SOCIAL RESPONSBILITY CONTINUED
WE ARE HUGELY GRATEFUL TO SHAWBROOK FOR ITS INVALUABLE
SUPPORT, WHICH HAS ENABLED CONTACT THE ELDERLY TO
LAUNCH FOUR NEW TEA PARTY GROUPS IN LOCAL COMMUNITIES.
THESE REGULAR MONTHLY OUTINGS ARE A VITAL LIFELINE FOR
ISOLATED OLDER PEOPLE, WHO ARE LIVING ALONE AND WOULD
OTHERWISE BE COMPLETELY CUT OFF FROM SOCIETY.
DEBRA BOLLAN, FUNDRAISING MANAGER, CONTACT THE ELDERLY
– Our commitment to our customers is
demonstrated by a number of the 15 awards
Shawbrook received in 2015 including: Insider
Deal Makers, Asset Based Lender of the Year
(third year in a row); Moneyfacts, Best Notice
Account Provider; Moneyfacts, Best Fixed
Account Provider; NACFB, Innovative Lender
of the Year; What Mortgage, Best Secured
Loans Lender and Personal Finance, Best
Online Savings Provider.
– Following the successful innovation and
introduction of E-Signature technology
within Consumer Lending in 2014; Secured
Lending became the first secured loan
lender in 2015 to launch E-signature tablet
technology that facilitates brokers enabling
customers to sign paperless consumer
agreements, streamlining and shortening the
cycle time for consumer credit approvals and
completions.
COMMITMENT TO PARTNERS
Relationships based on mutual respect,
commitment to quality and efficiency:
– We regard our brokers and key business
introducers as partners and invest in
establishing long term relationships with
them that both supports our flexible
distribution model and delivers benefits for
our customers.
– The Commercial Mortgages Division hosted
its fourth annual north and south Partner
Days in September 2015, welcoming a record
number of brokers in Derby and London
respectively. With well over 200 attendees
across the two events, the Partner Day
series delivered practical information and
interaction between the Bank and its trusted
panel of Broker Partners, demonstrating the
Division’s commitment to engagement and
provision of an expert standard of service for
its Broker Partners.
– In 2015, Secured Lending hosted 21
successful nationwide learning academies for
its Broker Partners, providing an introduction
to the Mortgage Credit Directive and the
regulatory changes that will widely impact
the first and second charge mortgage market
when advisers will become required to advise
customers of the potential suitability of
second charge mortgages.
COMMUNITY AND CHARITY COMMITMENT
Our charitable and community engagement
reflects the wishes and concerns of our people:
– We believe in working with our communities
at all times, playing our part as a positive
influence by supporting local charities and
initiatives. In 2015 we continued to develop
our charity programme, working towards
making a positive difference and focusing
on charity and community engagement.
In addition to staff-nominated causes and
fundraising activity, we support two national
charities at a local level, Contact the Elderly
and Future First.
– We invite our people to nominate charities
and causes that would benefit from our
support, ensuring that our charitable
activities reflect their wishes and concerns.
These nominations are reviewed every
quarter by our charity committee and in
2015 we supported 15 UK charities through
financial donations, with a further 14 charities
and good causes supported through staff
fund raising and our popular monthly ‘dress
down Fridays’. We are extremely proud of our
motivated staff who give significantly of their
own time to raise funds for such a wide range
of charitable endeavours.
Some of the charities and causes supported
including:
Little Havens Hospice
Erb’s Palsy Group
SAM Funds
Helen Rollason Cancer
Kingsway Pre-School
Macmillan
Havens Hospice
The Doxa Project
Romford Drum & Trumpet Corp
Cystic Fibrosis
Scope
National Deaf Children’s Society
the Mayhew Animal Home
Ali’s Dream
CATS foundation
DEC Nepal
Dogs for the Disabled
the Hospice of St Francis
Wear it Pink
Save the Children
– During 2015, our financial contribution
to Contact the Elderly supported the
establishment and continuity of four support
groups providing a vital life line for elderly,
isolated people living alone in areas close
to our business locations. We also provided
a financial contribution to enable seven
schools to join the Future First programme
to help their students develop life skills and
prepare for the world of work, supported by
a thriving, engaged alumni community. We
were pleased to sponsor the launch of the
Future First online UK e-mentoring platform.
COMMUNITY TO GENDER EQUALITY
Our gender demographics are set out in the
table below:
Board
Senior
management
All colleagues
Gender
Male
Female
Male
Female
Male
Female
2015
Number
9
2
28
8
316
243
2015
%
82%
18%
78%
22%
57%
43%
44 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
In addition to my appointment to the Board and following the resignation
of Richard Pyman as Chief Executive Officer we also appointed a new Chief
Executive Officer, Steve Pateman, who brings a wealth of experience with
him from both Santander and RBS. Stephen Johnson, having served as a
member of the Company’s Executive Committee for a number of years was
also promoted to the position of Deputy Chief Executive on 21 May 2015. In
addition we have appointed three new Non-Executive Directors, Paul
Lawrence, Sally-Ann Hibberd and David Gagie all of whom bring a wealth
of experience, skill and knowledge to the Board.
The Board has spent considerable time since the IPO in enhancing its Risk
Management Framework, its Corporate Governance arrangements,
strengthening the senior management team to oversee the management
plan and its people as well as dealing with the challenges facing the
business such as changes in regulation, technology and the competitive
landscape.
The Board has also continued to foster good relations with its new and
existing shareholders. A newly established investor relations function has
assisted the Board in developing a programme of meetings and
presentations to institutional shareholders and we look forward to
welcoming shareholders to our first Annual General Meeting on
9 June 2016.
IAIN CORNISH
Chairman
2 March 2016
CORPORATE GOVERNANCE REPORT
IAIN CORNISH
Chairman
CHAIRMAN’S INTRODUCTION
Dear Shareholders
I am pleased to present our corporate governance statement for 2015
which explains how the Company has applied the principles of corporate
governance as set out in the 2014 edition of the UK Corporate Governance
Code (‘the Code’) as published by the Financial Reporting Council (‘FRC’)
and available on its website www.frc.org.uk.
The Company listed its ordinary shares on the main market of the London
Stock Exchange on 1 April 2015 (‘the IPO‘). Prior to the IPO covering the
period from 1 January 2015 to 31 March 2015, the Group’s main asset for
reporting purposes was Shawbrook Bank Limited, a Company that was not
required to comply, being a private limited company, with the Code. The
Group did, in that period, have regard to the Code in a way that was
appropriate to its size and unlisted status and was in the process of
establishing more extensive corporate governance arrangements
conditional upon admission of its shares to the Official List of the London
Stock Exchange (‘Admission‘). From the date of Admission on 1 April 2015
the Board has sought to move towards full compliance throughout the
remainder of the accounting period (the ‘relevant period‘) to 31 December
2015 with its relevant obligations under the Code. Details of non-
compliance are provided on page 55.
The Board is responsible to shareholders for strategic direction,
management and control of the Company’s activities and is committed to
the highest standards of corporate governance in delivering in these areas.
The Board considers that appropriate governance standards were in place
prior to the IPO.
I was appointed Chairman of the Board on 6 July 2015 following the
announcement by Sir George Mathewson of his intention to step down
following the IPO.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 45
STRATEGIC REPORTFINANCIALSGOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
BOARD OF DIRECTORS
Tom Wood
Chief Financial Officer
Steve Pateman
Chief Executive Officer
David Gagie
Non-Executive Director
Sally-Ann Hibberd
Independent Non-
Executive Director
Robin Ashton
Senior Independent
Non-Executive Director
46 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Iain Cornish
Chairman
Paul Lawrence
Independent
Non-Executive Director
Lindsey McMurray
Non-Executive Director
Graham Alcock
Independent
Non-Executive Director
Stephen Johnson
Deputy Chief
Executive Officer
Roger Lovering
Independent
Non-Executive Director
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 47
STRATEGIC REPORTFINANCIALSGOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
BOARD OF DIRECTORS
Iain Cornish
Steve Pateman
Tom Wood
Stephen Johnson
Robin Ashton
Graham Alcock
David Gagie
Sally-Ann Hibberd
Paul Lawrence
Roger Lovering
Lindsey McMurray
Appointed to the Board
in July 2015
Appointed to the Board
in January 2016
Appointed to the Board
in March 2015
Appointed to the Board
in May 2015
Appointed to the Board
in March 2015
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
in March 2015
in January 2016
in November 2015
in August 2015
in March 2015
in April 2010
Appointed to the Board
of Shawbrook Bank
Limited in July 2015
Appointed to the Board
of Shawbrook Bank
Limited in January 2016
Appointed to the Board
of Shawbrook Bank
Limited in October 2012
Appointed to the Board
of Shawbrook Bank
Limited in May 2015
Appointed to the Board
of Shawbrook Bank
Limited in December 2011
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
of Shawbrook Bank
Limited in April 2007
of Shawbrook Bank
of Shawbrook Bank
of Shawbrook Bank
of Shawbrook Bank
of Shawbrook Bank
Limited in January 2016
Limited in November 2015
Limited in August 2015
Limited in January 2013
Limited in January 2011
Role
Chairman and Non-Executive
Director
Chairman of the Nomination
Committee
Member of the Remuneration
Committee
Chief Executive Officer
Chief Financial Officer
Deputy Chief Executive
Officer and Managing
Director of Commercial
Mortgages
Senior Independent Director
Independent Non-Executive
Independent
Independent Non-Executive
Independent Non-Executive
Independent Non-Executive
Non-Executive Director
Director
Non-Executive Director
Director
Director
Director
Member of the
Audit Committee
Member of the
Nomination Committee
Member of the Remuneration
Committee
Member of the
Risk Committee
Chairman of the
Remuneration Committee
Member of the
Audit Committee
Member of the Nomination
Committee
Member of the
Risk Committee
Chairman of the
Risk Committee
Member of the
Audit Committee
Chairman of the
Audit Committee
Member of the
Risk Committee
Skills & Experience
Iain was a founding
member of the PRA Board
at its formation in 2013. He
holds a degree in Business,
Economics and Statistics from
Southampton University.
Tom has significant
experience of banking and
financial management. He
is ACA qualified and holds a
LLB (Hons) in International
Law from Glasgow University.
From May 2015 to December
2015, Tom acted as Interim
Chief Executive Officer as well
as Chief Financial Officer.
Stephen has 14 years’
experience in building
specialist lending businesses,
across commercial and
consumer lending markets
in the UK. He is qualified as a
Chartered Accountant.
Robin has extensive
experience of retail financial
services in both the U.K.
and internationally. He is a
Chartered Accountant and
holds a Bachelor of Arts
(Hons) in Economics and Law
from Durham University.
Steve joined Shawbrook
from Santander UK, where
he was Executive Director
and Head of UK Banking,
running the bank’s Corporate,
Commercial, Business and
Retail Banking operations as
well as Wealth Management.
He joined Santander in
2008 with responsibility for
building an SME franchise. He
is a Fellow of the Chartered
Institute of Bankers in
Scotland.
Other External
Directorships
Iain is currently Senior
Independent Director of both
Arrow Global Group PLC and
St James’s Place plc.
None
None
None
Robin has been a Non-
Executive Director of Leeds
Building Society since
April 2011 and Chairman
since March 2013. He is also
currently a Non-Executive
Director of Non-Standard
Finance plc.
None
Graham has been with the
David has global
Group for nine years, having
experience in consumer
Sally-Ann brings a wealth
of experience in financial
Paul was formerly Global
Roger has over 25 years of
Lindsey has over 20 years of
Head of Group Internal Audit
experience in the Consumer
experience as a private equity
been a Non-Executive
Director of Whiteaway
Laidlaw Bank.
lending, banking, credit
card, payments and risk
management. Whilst
a Senior Advisor at the
services having held senior
for HSBC.
roles at Prudential, LloydsTSB
and Willis Group. Prior to
becoming a Non-Executive
Financial Conduct Authority
Director she worked for
and member of the
Willis where she served in
Payments Systems Regulator
two separate roles over a six
Executive he focused on
regulatory conduct issues
relating to retail banking,
consumer credit and
payments.
year period, firstly as Chief
Operating Officer of the
International Division and
latterly as Group Operations
and Technology Director.
David Gagie is a Non-
Executive Director of Prize
Ventures Ltd and of MWS
Technologies Ltd. He is
Sally-Ann is currently a
Non-Executive Director
of NFU Mutual and sits on
the Governing Body of
also a Director of Populus
Loughborough University.
Consulting Ltd.
None
Finance industry, focussing
investor with a particular
on lending to individuals.
Extensive knowledge of
secure and unsecured
focus on the financial
services sector. She holds a
first class honours degree in
lending, both on fixed and
Accounting and Finance from
Strathclyde University.
revolving term nature via
Credit Cards. Roger is a
member of ICAEW and has
a degree in Accountancy
and Financial Analysis from
Warwick University.
Roger is also a Non-
Lindsey is managing
Executive Director of Caswell
partner of private equity
Consultancy Limited, Logic
fund manager Pollen Street
Glue Limited and Amigo
Capital, an affiliate of the SOF
Loans Limited.
Former Appointments
Iain spent 19 years (between
1992 and 2011) at Yorkshire
Building Society, including
eight as Chief Executive
Officer (between 2003 and
2011).
Before joining Santander
UK, Steve spent eight years
at RBS, where he was Chief
Executive Officer of Business
Banking, Retail Markets
and Managing Director of
Commercial Banking and
Corporate Banking, Corporate
Markets.
Prior to joining the Group,
Tom was the Finance Director
of NBNK Investments plc
and Group CFO of Skipton
Group. He began his career in
financial services with Barclays
where he held a number of
senior roles in finance, risk
and corporate development.
Subsequently he was Group
CFO of Derbyshire Building
Society playing a key role in
its merger with Nationwide,
and played a leading role in
the restructure of Northern
Rock in 2009.
Stephen was part of the
founding team of the Group
and was also a founding
member of the management
team at Commercial First.
Prior to this Stephen worked
in corporate finance advisory.
Robin spent 24 years at
Provident Financial plc,
joining the board in 1993
initially as Finance Director,
then Deputy Chief Executive
in 1999 and Chief Executive
in 2001, leaving in early
2007. He was Non-Executive
Chairman of the original
holding Company for what
is now the Group’s secured
lending business, and was
previously a Non-Executive
Director of Albemarle & Bond
Holdings plc.
Graham is an experienced
corporate banker, having
spent 37 years in a variety
of senior posts with Royal
David was a Senior Advisor
Prior to joining Willis, Sally-
During a 31 year career with
Roger was Chief Executive
Prior to her time at Pollen
at the Financial Conduct
Authority and a member
of the Payments Systems
Ann was International Chief
the bank, Paul was CEO of
Officer at Santander
Operating Officer of Guy
HSBC Bank, North America,
Cards UK Limited, Head of
Street Capital Lindsey
was head of RBS Equity
Carpenter for two years and
Head of Global Banking &
European cards at HSBC
Finance where she led the
Bank of Scotland plc prior to
Regulator Executive
held a number of senior
Markets USA, CEO of HSBC
and Chief Operating Officer
management of the RBS
his retirement in 2005, when
Committee. He was also
executive roles at Lloyds TSB
Singapore, and CEO of HSBC
and Director at HFC Bank
Special Opportunities Funds,
he was Senior Director of
an Advisory Board Director
over a ten year period.
Philippines.
Limited.
commercial banking for the
for ING Direct, Managing
Manchester region.
Director of Consumer
Lending for Lloyds TSB,
Chairman of MasterCard UK,
and a Director of Visa UK and
of Link Ltd.
Committees
RI
RI
RI
RI
48 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
General Partner (Guernsey)
LP (the ‘Major Shareholder).
Pollen Street Capital is an
independent private equity
manager that focuses on
investing in high quality
financial services businesses
across Europe. She is also
currently an executive director
of Pollen Street Capital
Limited and a director of
Freedom Acquisitions Limited,
Honeycomb Holdings Limited,
Honeycomb Finance plc and
Capitalflow Holdings Limited.
a £1.1 billion private equity
fund. Prior to this she was
at Cabot Square Capital, Ltd.
for six years where she was a
partner.
Director
Chairman of the Nomination
Committee
Member of the Remuneration
Committee
Deputy Chief Executive
Officer and Managing
Director of Commercial
Mortgages
Member of the
Audit Committee
Member of the
Nomination Committee
Member of the Remuneration
Committee
Member of the
Risk Committee
Skills & Experience
Iain was a founding
member of the PRA Board
at its formation in 2013. He
holds a degree in Business,
Steve joined Shawbrook
from Santander UK, where
he was Executive Director
and Head of UK Banking,
Tom has significant
experience of banking and
financial management. He
Stephen has 14 years’
experience in building
Robin has extensive
experience of retail financial
specialist lending businesses,
services in both the U.K.
is ACA qualified and holds a
across commercial and
Economics and Statistics from
running the bank’s Corporate,
LLB (Hons) in International
consumer lending markets
Southampton University.
Commercial, Business and
Law from Glasgow University.
in the UK. He is qualified as a
holds a Bachelor of Arts
Retail Banking operations as
From May 2015 to December
Chartered Accountant.
and internationally. He is a
Chartered Accountant and
(Hons) in Economics and Law
from Durham University.
well as Wealth Management.
2015, Tom acted as Interim
He joined Santander in
Chief Executive Officer as well
2008 with responsibility for
as Chief Financial Officer.
building an SME franchise. He
is a Fellow of the Chartered
Institute of Bankers in
Scotland.
Iain Cornish
Steve Pateman
Tom Wood
Stephen Johnson
Robin Ashton
Graham Alcock
David Gagie
Sally-Ann Hibberd
Paul Lawrence
Roger Lovering
Lindsey McMurray
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
in July 2015
in January 2016
in March 2015
in May 2015
in March 2015
Appointed to the Board
in March 2015
Appointed to the Board
in January 2016
Appointed to the Board
in November 2015
Appointed to the Board
in August 2015
Appointed to the Board
in March 2015
Appointed to the Board
in April 2010
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
of Shawbrook Bank
Limited in July 2015
of Shawbrook Bank
of Shawbrook Bank
of Shawbrook Bank
of Shawbrook Bank
Limited in January 2016
Limited in October 2012
Limited in May 2015
Limited in December 2011
Appointed to the Board
of Shawbrook Bank
Limited in April 2007
Appointed to the Board
of Shawbrook Bank
Limited in January 2016
Appointed to the Board
of Shawbrook Bank
Limited in November 2015
Appointed to the Board
of Shawbrook Bank
Limited in August 2015
Appointed to the Board
of Shawbrook Bank
Limited in January 2013
Appointed to the Board
of Shawbrook Bank
Limited in January 2011
Role
Chairman and Non-Executive
Chief Executive Officer
Chief Financial Officer
Senior Independent Director
Independent Non-Executive
Director
Independent
Non-Executive Director
Independent Non-Executive
Director
Independent Non-Executive
Director
Independent Non-Executive
Director
Non-Executive Director
Audit Committee
Remuneration Committee
Nomination & Governance Committee
RI
Risk Committee
Chairman of the
Remuneration Committee
Member of the
Audit Committee
Member of the Nomination
Committee
Member of the
Risk Committee
Graham has been with the
Group for nine years, having
been a Non-Executive
Director of Whiteaway
Laidlaw Bank.
Other External
Directorships
Independent Director of both
Arrow Global Group PLC and
St James’s Place plc.
Iain is currently Senior
None
None
None
None
Robin has been a Non-
Executive Director of Leeds
Building Society since
April 2011 and Chairman
since March 2013. He is also
currently a Non-Executive
Director of Non-Standard
Finance plc.
Chairman of the
Risk Committee
Member of the
Audit Committee
Chairman of the
Audit Committee
Member of the
Risk Committee
Paul was formerly Global
Head of Group Internal Audit
for HSBC.
David has global
experience in consumer
lending, banking, credit
card, payments and risk
management. Whilst
a Senior Advisor at the
Financial Conduct Authority
and member of the
Payments Systems Regulator
Executive he focused on
regulatory conduct issues
relating to retail banking,
consumer credit and
payments.
Sally-Ann brings a wealth
of experience in financial
services having held senior
roles at Prudential, LloydsTSB
and Willis Group. Prior to
becoming a Non-Executive
Director she worked for
Willis where she served in
two separate roles over a six
year period, firstly as Chief
Operating Officer of the
International Division and
latterly as Group Operations
and Technology Director.
David Gagie is a Non-
Executive Director of Prize
Ventures Ltd and of MWS
Technologies Ltd. He is
also a Director of Populus
Consulting Ltd.
None
Sally-Ann is currently a
Non-Executive Director
of NFU Mutual and sits on
the Governing Body of
Loughborough University.
Roger has over 25 years of
experience in the Consumer
Finance industry, focussing
on lending to individuals.
Extensive knowledge of
secure and unsecured
lending, both on fixed and
revolving term nature via
Credit Cards. Roger is a
member of ICAEW and has
a degree in Accountancy
and Financial Analysis from
Warwick University.
Roger is also a Non-
Executive Director of Caswell
Consultancy Limited, Logic
Glue Limited and Amigo
Loans Limited.
Former Appointments
Iain spent 19 years (between
Before joining Santander
Prior to joining the Group,
Stephen was part of the
UK, Steve spent eight years
at RBS, where he was Chief
Tom was the Finance Director
founding team of the Group
of NBNK Investments plc
and was also a founding
Robin spent 24 years at
Provident Financial plc,
joining the board in 1993
Officer (between 2003 and
Banking, Retail Markets
Group. He began his career in
team at Commercial First.
then Deputy Chief Executive
Executive Officer of Business
and Group CFO of Skipton
member of the management
initially as Finance Director,
and Managing Director of
Commercial Banking and
financial services with Barclays
Prior to this Stephen worked
in 1999 and Chief Executive
where he held a number of
in corporate finance advisory.
in 2001, leaving in early
1992 and 2011) at Yorkshire
Building Society, including
eight as Chief Executive
2011).
Corporate Banking, Corporate
senior roles in finance, risk
Markets.
and corporate development.
Subsequently he was Group
CFO of Derbyshire Building
Society playing a key role in
its merger with Nationwide,
and played a leading role in
the restructure of Northern
Rock in 2009.
2007. He was Non-Executive
Chairman of the original
holding Company for what
is now the Group’s secured
lending business, and was
previously a Non-Executive
Director of Albemarle & Bond
Holdings plc.
Graham is an experienced
corporate banker, having
spent 37 years in a variety
of senior posts with Royal
Bank of Scotland plc prior to
his retirement in 2005, when
he was Senior Director of
commercial banking for the
Manchester region.
David was a Senior Advisor
at the Financial Conduct
Authority and a member
of the Payments Systems
Regulator Executive
Committee. He was also
an Advisory Board Director
for ING Direct, Managing
Director of Consumer
Lending for Lloyds TSB,
Chairman of MasterCard UK,
and a Director of Visa UK and
of Link Ltd.
Prior to joining Willis, Sally-
Ann was International Chief
Operating Officer of Guy
Carpenter for two years and
held a number of senior
executive roles at Lloyds TSB
over a ten year period.
During a 31 year career with
the bank, Paul was CEO of
HSBC Bank, North America,
Head of Global Banking &
Markets USA, CEO of HSBC
Singapore, and CEO of HSBC
Philippines.
Roger was Chief Executive
Officer at Santander
Cards UK Limited, Head of
European cards at HSBC
and Chief Operating Officer
and Director at HFC Bank
Limited.
Committees
RI
RI
RI
RI
Lindsey has over 20 years of
experience as a private equity
investor with a particular
focus on the financial
services sector. She holds a
first class honours degree in
Accounting and Finance from
Strathclyde University.
Lindsey is managing
partner of private equity
fund manager Pollen Street
Capital, an affiliate of the SOF
General Partner (Guernsey)
LP (the ‘Major Shareholder).
Pollen Street Capital is an
independent private equity
manager that focuses on
investing in high quality
financial services businesses
across Europe. She is also
currently an executive director
of Pollen Street Capital
Limited and a director of
Freedom Acquisitions Limited,
Honeycomb Holdings Limited,
Honeycomb Finance plc and
Capitalflow Holdings Limited.
Prior to her time at Pollen
Street Capital Lindsey
was head of RBS Equity
Finance where she led the
management of the RBS
Special Opportunities Funds,
a £1.1 billion private equity
fund. Prior to this she was
at Cabot Square Capital, Ltd.
for six years where she was a
partner.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 49
STRATEGIC REPORTFINANCIALSGOVERNANCE
CORPORATE GOVERNANCE REPORT CONTINUED
LEADERSHIP
The Board considers that its primary role is to provide leadership to the
Group, to set the Group’s long-term strategic objectives and to develop
robust corporate governance and risk management practices.
identifies the time commitment expected of them. The terms and
conditions of appointment of Non-Executive and service contracts of
Executive Directors are available to shareholders for inspection at the
Group’s registered office during normal business hours.
The Board has the ultimate responsibility for ensuring that the Group is
managed effectively and in the best interests of the shareholders,
customers, employees and other stakeholders (including regulators). The
Board operates within a formal schedule of matters reserved to it. This
schedule is reviewed and updated on a regular basis The Board meets
regularly and provides direction, oversight and detailed review/challenge
of the Group’s business.
A summary of the key matters reserved for the Board are set out below:
– Strategy and Management
– Financial reporting and controls
– Structure and capital
– Oversight of regulatory compliance and internal controls
– Oversight of risk management
– Corporate Governance
– Remuneration Policy for Directors and senior executives
– Approval of communications to shareholders
– Board membership and other appointments
The Board delegates specific powers for some matters to committees,
details of which are set out below. The outputs from each committee
meeting are reported to the Board, thus ensuring the Board maintains the
necessary oversight. More detail on the committees and their work is
described in the section headed ‘Committees’ below.
Prior to Admission the Board comprised a Non-Executive Chairman, Chief
Executive Officer, Chief Financial Officer and six Non-Executive Directors.
On Admission the Board comprised a Non-Executive Chairman, Chief
Executive Officer, Chief Financial Officer and four Non-Executive Directors.
Following the IPO there has been considerable change to the Board as set
out below:
BOARD CHANGES
– On 20 March 2015 James Scott resigned as Director;
– On 20 March 2015 Robin Ashton was appointed as Senior Independent
to the Board;
– On 21 May 2015 Tom Wood was appointed as Interim Chief Executive. This
appointment was to cover for Richard Pyman who took a leave of absence
due to ill health and who subsequently resigned on 2 October 2015;
– On 21 May 2015 Stephen Johnson was appointed as Deputy Chief
Executive Officer;
– On 6 July 2015 Sir George Mathewson resigned as Chairman;
– On 6 July 2015 following the resignation of Sir George Mathewson, Iain
Cornish was appointed as Chairman;
– On 24 August 2015 Paul Lawrence was appointed as an Independent
Non-Executive Director;
– On 5 November 2015 Sally-Ann Hibberd was appointed as an
Independent Non-Executive Director;
– On 1 January 2016 Tom Wood stepped down as Interim Chief Executive
Officer following the appointment of Steve Pateman as Chief Executive
Officer; and
– On 1 January 2016 David Gagie was appointed as an Independent
Non-Executive Director.
As a result of all of the changes as described above, the Board currently
consists of eleven members, including the Chairman, six Independent
Non-Executive Directors, three Executive Directors and one Non-
Independent Non-Executive Director. Biographical details of all Directors
are given on page 48.
The composition, skills and effectiveness of the Board are reviewed
annually. The Non-Executive Directors have strong and relevant experience
across all aspects of banking and specifically have relevant skills in credit
assessment and pricing, liability management and conduct matters. The
Board ensures a diverse pool of candidates is considered for any vacancy
which arises and any appointments are made based on merit, having
regard to the skills, competencies and experience of the candidate.
All Directors are required to disclose to the Board any outside interests
which may pose a conflict with their duty to act in the best interests of the
Bank. The Board is required to approve any actual or potential conflicts of
interest and they are recorded in a central register. Directors are also
required, on an annual basis, to confirm that they are not aware of any
circumstances which may affect their fitness and propriety and therefore
their ability to continue to serve the on the Board.
MEETINGS AND ATTENDANCE
The Board holds meetings at regular intervals, at which the Group’s
financial and business performance is reviewed, along with risk,
compliance, IT, human resources and strategic matters. There is a
comprehensive Board pack and agenda which is circulated beforehand so
that Directors have the opportunity to consider the issues to be discussed,
and detailed minutes and any actions are documented. The regular
meetings are scheduled up to a year in advance, and if any Director is
unable to attend then they may provide comments on the papers to the
Chairman before the meeting. Meetings are structured so that appropriate
time is devoted to all agenda items. In addition to these regular, scheduled
meetings, ‘ad hoc’ Board meetings are held outside the published cycle
where circumstances require – for example, to approve appointments to
the Board, any material transactions, the signing of the Financial Report
and Accounts or the approval of regulatory submissions. In particular
during 2015, such additional meetings were held in connection with
matters relating to the IPO.
During 2015 the Board has devoted significant time to considering:
– The IPO;
– Business and financial performance including a three year strategic
financial plan;
– Risk management framework and risk policies;
– Capital and liquidity adequacy;
– Target Operating Model;
– Regulatory developments in particular the application of the Senior
Managers Regime and the impact of the Mortgage Credit Directive;
– Corporate development opportunities;
– Information Security;
– NED and senior management recruitment;
– HR strategy;
– The control environment; and
– Project and IT investment.
Appointments to the Board are the responsibility of the full Board, on the
recommendation of the Nomination Committee. On joining the Board,
Non-Executive Directors receive a formal appointment letter, which
Prior to Admission, the governance arrangements were operated by the
trading subsidiary, Shawbrook Bank Limited. This reflects the fact that the
50 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Company’s main asset up to Admission was the Bank. This governance report therefore sets out the governance arrangements of the Bank, rather than
the Company, during the period from 1 January 2015 up to the date of Admission. References to the ‘Board’ are to the Board of the Bank.
As indicated above, this table includes reference to meetings of the Board and delegated committees of the Board held on behalf of Shawbrook Bank
Limited during the period of 1 January 2015 up to the date of Admission. Individual meeting attendance is set out below. The number of meetings held
during the period that the Director held office is shown in brackets.
Director
Iain Cornish
Sir George Mathewson
Graham Alcock
Robin Ashton
Sally-Ann Hibberd
Sir Brian Ivory*
Stephen Johnson
Paul Lawrence
Roger Lovering
Lindsey McMurray
Richard Pyman
Tom Wood
Regular
Board Meetings
Additional
Board Meetings
Audit
Committee
Nomination
Committee
Remuneration
Committee
Risk
Committee
5 (5)
5 (6)
11 (11)
10 (11)
2 (2)
2 (2)
7 (7)
4 (4)
10 (11)
11 (11)
4 (8)
11 (11)
4 (4)
5 (8)
10 (12)
10 (12)
0 (1)
4 (5)
4 (5)
1 (2)
11 (12)
10 (12)
6 (10)
11 (12)
11 (11)
11 (11)
5 (5)
2 (2)
11 (11)
3 (3)
1 (1)
5 (5)
5 (5)
5 (5)
2 (2)
8 (8)
8 (8)
6 (7)
6 (7)
1 (1)
3 (3)
7 (7)
*
Sir Brian Ivory was not a Director of Shawbrook Group plc but of Shawbrook Bank Limited. He resigned from the Board of the Bank on 31 March 2015.
Sir George Mathewson resigned as Chairman of the Bank on 6 July 2015.
CHAIRMAN AND CHIEF EXECUTIVE
The roles of the Chairman and the Chief Executive Officer are separate, clearly defined in writing and have been agreed by the Board.
THE ROLE OF THE CHAIRMAN
The Chairman, Iain Cornish is responsible for leadership of the Board, ensuring its effectiveness on all aspects of its role and setting its agenda. The key
responsibilities of the Chairman are set out below:
– to build and actively maintain an effective and complementary Board;
– to ensure Directors are provided with accurate, timely and clear information;
– to ensure the Directors have sufficient time to consider critical issues and obtain answers to their questions and concerns ahead of decision-making;
– to facilitate and encourage the effective contribution and decision making of all members of the Board;
– to manage the Board in a way which allows enough time for discussion of complex or contentious issues;
– to ensure shareholders and other interested parties are effectively communicated with, in particular major shareholders;
– to ensure that the views of all shareholders are communicated to the Board;
– to ensure there are constructive relations between the executive and Non-Executive Directors;
– to hold meetings with the Non-Executive Directors without Executive Directors or senior management present;
– to ensure there is appropriate delegation of authority from the Board to executive management;
– to chair Board and general meetings of the Company and the Nomination Committee;
– to ensure a clear structure for, and the effective running of, Board Committees;
– to ensure new Directors participate in a full, formal and tailored induction programme and that their subsequent development needs are identified
and met;
– to ensure, with the support of the Company Secretary, that the development and ongoing training needs of individual Directors and the Board as a
whole are reviewed at least annually and agreed;
– to ensure that the performance of the Board, its Committees and the individual Directors are evaluated at least once a year and to act on the results;
– to ensure high standards of corporate governance are adhered to;
– to arrange for all Directors to attend, and for the chairmen of the Audit, Remuneration and Nomination Committees to be available to answer
questions at, the Company’s Annual General Meeting;
– to ensure a robust management succession plan is in place; and
– to handle relationships with governments, authorities, regulators and stakeholders.
Throughout the relevant period the Chairman has held regular meetings with Non-Executive Directors without the Executive Directors being present.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 51
STRATEGIC REPORTFINANCIALSGOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
During the relevant period, the SID met with the Non-Executive Directors,
without the Chairman being present, to appraise the Chairman’s
performance.
COMPANY SECRETARY
Directors have access to the advice and services of the Company Secretary
at all times, as well as independent professional advice where needed in
order to assist them in carrying out their duties.
BOARD AND COMMITTEES
The Board has a number of committees: Audit, Risk, Nomination and
Remuneration. The written terms of reference of the committees, including
their objectives and the authority delegated to them by the Board, are
available upon request from the Company Secretary or via the Group’s
website at www.shawbrook.co.uk. All committees have access to
independent expert advice and the services of the Company Secretary. The
Chairman of each committee reports to the Board. The constitution and
terms of reference of each committee are reviewed annually to ensure that
the committees are operating effectively and any changes considered
necessary are recommended to the Board for approval.
The Board also has a Disclosure Committee which is responsible for
monitoring, evaluating and enhancing disclosure controls and procedures
of the Group. In particular, responsibilities set out in the terms of reference
include the identification of inside information and maintenance of insider
lists, the design, implementation and evaluation of disclosure procedures
and the resolution of any questions concerning the materiality of certain
information. The Disclosure Committee is also required to help the Group
to make timely and accurate disclosure of all information where disclosure
is required to meet legal and regulatory obligations. The Terms of
Reference of the Disclosure Committee cover issues such as membership
and frequency of meetings, together with the requirements for a quorum
and the right to attend meetings.
The Board delegates daily management responsibility for the Group to the
Executive Committee, which meets monthly. The Executive Committee is
responsible for developing the business and delivering against a Board-
approved strategy, putting in place effective monitoring and control
mechanisms and setting out a framework of reporting to the Board.
There are also a number of committees below the main Board committees
and these assist the Executive in executing their responsibilities. A table
showing the governance structure is set out overleaf:
THE ROLE OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer, Steve Pateman is from 1 January 2016 the
executive responsible for the day-to-day running of the business and is
accountable to the Board for its operational and financial performance. The
key responsibilities of the Chief Executive are set out below:
– to recommend the strategic direction of the Group to the Board;
– to implement strategy as approved by the Board;
– to ensure appropriate internal controls are in place, including to manage
the Group’s risk profile in line with the extent and categories of risk
identified as acceptable by the Board;
– to regularly review the performance of the Group and its organisational
structure;
– to report to the Board regularly on the Group’s performance;
– to present to the Board an annual budget and financial plan;
– to approve the appointment and termination of members of the senior
executive team and to formalise the roles and responsibilities of its
members;
– to supervise and develop senior teams within subsidiaries;
– to conduct the affairs of the Company in accordance with the highest
standards of integrity, probity and applicable principles and rules of the
UKLA and the Company’s Articles of Association in effect from time to
time and to also have regard to the UK Corporate Governance Code
together with resolutions of the Board;
– to ensure, with the executive team, that board decisions are
implemented effectively and that significant decisions made by the
Executive Committee are communicated to the board;
– to ensure, with the support of the Company Secretary, that the
Executive team complies with the terms on which matters are
delegated by the Board, and the terms of reference of Board
Committees, and to ensure matters outside the authority of the
executive team are escalated to the Board;
– to lead communications with shareholders and other stakeholders,
ensuring that appropriate, timely and accurate information is disclosed
to the market, with issues escalated promptly to the Disclosure
Committee where appropriate; and
– to provide, together with the Chairman, coherent leadership of the
Company, including representing the Group to customers, suppliers,
shareholders, financial institutions, employees, the media, the
community and the public, and keeping the Chairman informed on all
important matters.
SENIOR INDEPENDENT DIRECTOR
The Senior Independent Director (SID) is Robin Ashton. The SID is available
to shareholders should they wish to discuss concerns regarding the
Company. In addition key responsibilities also include:
– to chair the Nomination Committee when it is considering succession
to the role of Chairman of the Board;
– to provide a sounding Board for the Chairman and serve as an
intermediary for the other Directors when necessary;
– to meet other Non-Executive Directors without the Chairman present at
least once a year to appraise the Chairman’s performance, taking into
account the views of Executive Directors, and on such other occasions
as are deemed appropriate; and
– to provide feedback to the Board on the Independent Non-Executive
Directors’ collective views on the following:
– the perceived quality of the relationship between the Chairman and
the Chief Executive Officer;
– the degree of openness between the Chief Executive Officer and
the Board;
– the visibility of checks and balances within the executive team; and
– whether all questions asked by the Non-Executive Directors in the
Board have been adequately addressed.
52 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
The following committees are sub-committees of the Board or the Executive:
GROUP
BOARD
NOMINATION
COMMITTEE
REMUNERATION
COMMITTEE
BOARD AUDIT
COMMITTEE
BOARD RISK
COMMITTEE
DISCLOSURE
COMMITTEE
NomCo
RemCo
BAC
BRC
DISCO
Executive
Committee
Exco
Asset &
Liability
Committee
ALCO
Credit
Committee
CC
Product &
Pricing
Committee
PPC
Conduct &
Operational Risk
Committee
CORC
Change
Management
Committee
CMC
Credit
Approval
Committee
CAC
Provisions
Committee
PC
BOARD BALANCE, INDEPENDENCE AND TIME COMMITMENT
The Board comprises individuals with wide business skills and experience and considers that the balance of skills and experience is appropriate to the
requirements of the business. The Board considers that the balance between Executive and Non-Executive Directors allows it to exercise objectivity in
decision making and proper control of the Company’s business. Each member of the Board has had access to all information relating to the Group, the
advice and services of the Company Secretary (who is responsible for ensuring that Board procedures are followed) and, as required, external advice at the
expense of the Group.
The Board has reviewed the structure, size and composition of the Board (together with an evaluation of the Board’s balance of skills, knowledge and
experience); the membership of the various Board committees and the expected time commitment; and the policy for Board appointments for Executive
and Non-Executive Directors throughout the year. Following on from this during 2015 and 2016 a number of appointments have been made including
Iain Cornish as Chairman and Steve Pateman as Chief Executive Officer.
The Directors’ aim is to ensure that the balance between Non-Executive Directors and Executive Directors of the Board reflects the changing needs of the
Group’s business. On his appointment as Chairman, Iain Cornish did satisfy the independence criteria as set out in the Code.
The Board has reviewed the independence of each of the Non-Executive Directors who have served on the Board throughout the financial year and the
relevant period and concluded that Robin Ashton, Graham Alcock, Roger Lovering, Paul Lawrence and Sally-Ann Hibberd are independent. David Gagie,
who was appointed on 1 January 2016 is also considered independent. Lindsey McMurray, who represents the Group’s largest shareholder, is not
considered independent. Except for a short period of non-compliance between 21 May 2015 following the appointment of Stephen Johnson as an
Executive Director and the appointment of Paul Lawrence on 24 August 2015, during the relevant period, the Board, together with the other two
Executive Directors, Richard Pyman and Tom Wood has satisfied the Code requirements that at least half the Board, excluding the Chairman, should
comprise Non-Executive Directors determined by the Board to be independent. Richard Pyman, whilst still an Executive Director during this period, took a
leave of absence due to ill health on 21 May 2015 and subsequently resigned on 2 October 2015. The Non-Executive Directors are considered to be of
sufficient calibre and experience to bring significant influence to bear on the decision making process. The Board has satisfied itself that Robin Ashton is
independent notwithstanding his interest in shares in the Group. It has done this by observing the way he has discharged his duties as Chair of the Board
Risk Committee, his contribution to and challenge in Board and Committee meetings and the way he interacts with the Chairman in his role as Senior
Independent Director, including conducting an evaluation of the Chairman’s effectiveness at the end of 2015.
The terms of appointment of the Non-Executive Directors specify the amount of time they are expected to devote to the Company’s business. They are
currently required to commit to a minimum of five days per month (4 days per month for Robin Ashton, David Gagie and Sally-Ann Hibberd) which is
calculated based on the time required to prepare for and attend Board and Committee meetings, meetings with shareholders and training.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 53
STRATEGIC REPORTFINANCIALSGOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
CONFLICTS OF INTEREST
All Directors have a duty to avoid situations that may give rise to a conflict of
interest. Formal procedures are in place to deal with any conflict of interest.
Directors are responsible for notifying the Chairman and the Company
Secretary as soon as they become aware of any actual or potential conflict
of interest for discussion by the members of the Board who will take into
account the circumstances of the conflict when deciding whether or not to
waive the potential conflict or impose conditions on the Director in the
interests of the Company. In addition Directors are required to seek the
Board’s approval of any new appointments or changes in commitments.
INDUCTION AND PROFESSIONAL DEVELOPMENT
On appointment all new Directors receive a comprehensive and tailored
induction, having regard to any previous experience they may have as a
Director of a public company or otherwise. The Company also provides
additional induction materials and training for those Directors who are also
Committee Chairmen. The content of our Director induction programmes is
designed, and the timing planned, with input from the new Director. The
induction information is delivered in a variety of formats; this includes face to
face meetings with the Chairman, Board members and senior management
together with the use of external advisers and training courses as
appropriate. This is supplemented by the provision of our key governance
documents as reading material, including policies, procedures, Board and
committee minutes, Board meeting schedule and plans, Group structure
charts and copies of the Listing Rules, Disclosure and Transparency rules, the
2014 UK Corporate Governance Code and information on Directors’ duties
and responsibilities under the Companies Act 2006.
The Board receives detailed reports from executive management on the
performance of the Group at its meetings and other information as
necessary. Regular updates are provided on relevant legal, corporate
governance and financial reporting developments and Directors are
encouraged to attend external seminars on areas of relevance to their role.
Appropriate training is made available to any newly appointed Director,
having regard to any previous experience they may have as a Director of a
public company or otherwise. An ongoing programme of training is
available to all members of the Board to include professional external
training, internal online training and bespoke Board training on relevant
topics such as regulatory developments, changes in the Companies Act
2006 or accounting requirements. Directors are also encouraged to devote
an element of their time to self-development. This is in addition to any
guidance that may be given from time to time from the Company Secretary.
BOARD EFFECTIVENESS
The Board undertook a self-evaluation of its effectiveness at the end of 2015.
A questionnaire was issued to each member of the Board for completion and
results submitted to the Chairman. In addition the Chairman also held one to
one meetings with each of the Directors to ascertain their views on the
Board. The Chairman has reviewed the responses received from both the
completed questionnaires and the one to one meetings and reported on the
conclusions to the Board which were discussed in early 2016. The process
provided the Board with useful feedback on a number of issues such as the
need to improve on Board Management Information to support the Board
when focusing on the strategic issues facing the business in future. The
Board also intends to carry out an externally facilitated evaluation in 2016.
The SID in discussions with other members of the Board has assessed the
performance of the Chairman. They are satisfied that the Chairman was
devoting a significant amount of time to the Group’s business and that he
had performed effectively since his appointment during 2015. In particular
they were satisfied that the Chairman has ensured that the Board focused
on the key issues facing the Group.
54 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
INTERNAL CONTROL
The Board has overall responsibility for the Group’s system of internal
control and for monitoring its effectiveness. The Audit Committee and Risk
Committee have been in operation throughout the relevant period and
overseen the Group’s system of internal control. Material risk or control
matters, together with the appropriate remedial action, are reported by the
Audit Committee and Risk Committee to the Board. The Board monitors
the ongoing process by which Top Risks to the Group are identified,
measured, managed, monitored, reported and challenged. This process is
consistent with the Risk Management Framework, Internal Control and
related Financial and Business reporting guidance issued by the Financial
Reporting Council in September 2014, and has been in place for the
relevant period under review and up to the date of approval of the Annual
Report and Accounts. The key elements of the Group’s system of internal
control include regular meetings of the Executive and Risk Management
Committees together with annual budgeting, monthly financial and
operational reporting for all businesses within the Group. Conduct and
compliance is monitored by management, the Group’s Risk department,
Internal Audit and, to the extent it considers necessary to support its Audit
Report, the external auditor.
The Board assesses the effectiveness of the Group’s system of internal
controls (including financial, operational and compliance controls and risk
management systems) on the basis of:
– established procedures, including those already described, which are in
place to manage perceived risks;
– reports by management to the Audit Committee and Risk Committee
on the adequacy and effectiveness of the Group’s system of internal
control and any resultant control issues;
– under the direction of the Chief Risk Officer, the continuous Group-wide
process for formally identifying, evaluating and managing the
significant risks to the achievement of the Group’s objectives; and
– reports from the Audit Committee on the results of internal audit
reviews and work undertaken by other departments.
The Group’s system of internal control is designed to manage rather than
eliminate risk of failure to achieve the Group’s objectives and can only
provide reasonable and not absolute assurance against material
misstatement or loss. In assessing what constitutes reasonable assurance,
the Board considers the materiality of financial and non-financial risks and
the relationship between the cost of, and benefit from the system of
internal control. During 2015 the Group continued to invest in its risk
management capability to ensure that it remains relevant, appropriate and
scalable to support the Group’s objectives over the duration of the
strategic plan. This ongoing investment will continue during 2016 with the
embedding of these improvements in the Group’s Risk Management
Framework.
The Board regularly reviews the actual and forecast performance of the
business compared with the annual plan, as well as other key
performance indicators.
Lines of responsibility and delegated authorities are clearly defined. The
Group’s policies and procedures are regularly updated and distributed
throughout the Group. The Audit Committee and Risk Committee receive
reports on a regular basis on compliance with the Group’s policies
and procedures.
Shawbrook Bank Limited (the main operating subsidiary of the Group) is
subject to regulation by the Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA) and as such undertakes an Internal
Capital Adequacy Assessment Process (ICAAP) and an Individual Liquidity
Adequacy Assessment Process (ILAAP) on a regular basis. These processes
benefited from ongoing improvements in risk assessment during 2015
including, in the case of the ICAAP, an update to reflect the latest guidance
from the PRA on approaches to the calculation of Pillar 2. The ICAAP and
ILAAP are approved by the Board and reviewed by the PRA from time to
time. The process involves an assessment of all the risks that the Group
faces in their operating environment, the assessment of the likelihood of
the risks crystallising and their potential materiality and the effectiveness of
the control framework in mitigating each risk. This includes a thorough
evaluation of how the Group would be impacted by severe, but plausible,
periods of stress in its stress testing programme.
The Chairman is responsible for ensuring that appropriate channels of
communication are established between the Chief Executive Officer (and
the other Executive Directors) and shareholders and ensuring that the
views of the shareholders are made known to the Board; this includes
feedback prepared by the Group’s brokers on meetings held with
institutional shareholders.
The Company recognises the importance of ensuring effective
communication with all of its shareholders. An annual financial report is
distributed to all shareholders and to other parties, who may have an
interest in the Group’s performance. This report, together with a wide
range of other information, including the half-yearly financial report,
interim management statements, regulatory announcements and current
details of the Company’s share price, are made available on the
Company’s website.
The purpose of the process is to establish the level and quality of capital
resources that the business should maintain, both under current market
conditions and under a range of stressed scenarios, in order to ensure that
financial resources are sufficient to successfully manage the effects of any
risks that may crystallise.
ELECTION
All new Directors are subject to election at the first Annual General
Meeting following their appointment by the Board. The Company’s Articles
of Association also states that all Directors are subject to election at every
Annual General Meeting.
The Board explains the reasons why it believes each Director should be
elected in the Notice of Meeting for the next Annual General Meeting. None
of the Directors have been subject to election by the shareholders since the
re-registration of Admission. Except for Graham Alcock, who will have been
on the Board of the Bank for nine years, and who will be stepping down at
the forthcoming Annual General Meeting, all other directors will stand for
re-election. The Board believes that its performance continues to be
effective and that Directors’ re-election is also consistent with the Board’s
evaluation of the size, structure and composition of the Board.
DIVERSITY POLICY
The Board is committed to improving diversity in its membership and
whilst new appointments continue to be based on skill, experience and
knowledge, careful consideration is given to diversity. During the year the
Nomination Committee recommended that the Board approve the
introduction of a formal Diversity Policy to be implemented in 2016.
RELATIONS WITH SHAREHOLDERS
The Board remains committed to maintaining good relationships with
shareholders. There is a good dialogue with institutional shareholders,
although care is exercised to ensure that any price-sensitive information is
released at the same time to all shareholders, in accordance with the
requirements of the UKLA. The Chief Executive Officer and the Chief
Financial Officer, under normal circumstances, would meet with
institutional shareholders on a regular basis. Tom Wood, in a dual capacity
has attended a number of investor road shows and has been available for
additional meetings where requested. Institutional shareholders will in
future be given the opportunity to meet with the Chairman and/or other
Non-Executive Directors if they have concerns that have not, or cannot, be
addressed through the Chief Executive Officer or the Chief Financial Officer.
COMPLIANCE WITH THE UK CORPORATE GOVERNANCE CODE
The Directors consider that the Company has been in compliance with the
provisions set out in the Code throughout the period from Admission on
1 April 2015 to the year ended 31 December 2015 with the exception of
Principle B.1.2 and Principle B.2.4. There was a short period between 21 May
2015 following the appointment of Stephen Johnson as Deputy Chief
Executive Officer and 24 August 2015 when Paul Lawrence was appointed
as a Non-Executive Director when a majority of the Board, excluding the
Chairman were not independent. Richard Pyman, whilst still an Executive
Director during this period, took a leave of absence due to ill health on
21 May 2015 and subsequently resigned on 2 October 2015.
The Group did not have a formal Diversity Policy in place. Post IPO the
Nomination Committee recommended that the Board approve the
introduction of a formal Diversity Policy to be implemented in 2016
Prior to the IPO in April 2015, the Bank was not required to follow the Code
although it did take account of a number of its principles. Prior to listing
on 01 April 2015 the Bank did not comply with the following provisions of
the Code:
– Historically, no disclosures regarding the status of independence were
made in the Bank’s Annual Report and Accounts. Whilst independent
Non-Executive Directors are identified in the 2014 Annual Report and
Accounts, the reasons for these judgements are not stated. The Group
has subsequently complied with this requirement of the Code (see
page 53).
– No re-elections of Directors have historically taken place. A policy was
developed by the Group to ensure Directors submit themselves for
re-election annually.
– Prior to the IPO, no formal whistleblowing policy was in place. A
formalised policy and procedure for staff to raise issues regarding
possible improprieties in matters of financial reporting or other matters
has been established since (see page 61).
– No formal Nomination Committee and Remuneration Committee were
in place prior to the IPO. These committees have become effective post
IPO (see pages 56 and 65).
– Historically the Board did not have a Senior Independent Director. On
20 March 2015 Robin Ashton was appointed as Senior Independent
Director of the Board.
INFORMATION ON SHARE CAPITAL AND OTHER MATTERS
The information about share capital required to be included in this
Corporate Governance Report can be found on pages 83 and 84 in the
Directors’ Report.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 55
STRATEGIC REPORTFINANCIALSGOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
IAIN CORNISH
Chairman of the
Nomination Committee
Nomination Committee Membership
The Board Nomination Committee was formed at Admission and
comprises the following members:
– the Chairman of the Board ; and
– two Independent Non-Executive Directors
REPORT OF THE NOMINATION COMMITTEE
Dear Shareholder
Having assumed the role of Chairman of the Board and the Committee on
6 July 2015, I am pleased to present the report of the Nomination
Committee. First I would like to thank my predecessor, Sir George
Mathewson for his leadership and his support following my recruitment.
The Committee’s main activity since the IPO has been to focus on
achieving the right balance of skills, knowledge and experience on the
Board in the interests of taking the business forward in a listed
environment. The Board considers that having the appropriate range of
high calibre Directors is key to achieving the Group’s strategic objectives
and to providing appropriate oversight of regulatory matters and other
risks facing the Group.
Having identified the need to broaden the skills of the Board, the
Committee has been engaged in the recruitment and appointment of new
Board members. This activity led to my own appointment as Chairman and
the appointment of a new Chief Executive Officer, Steve Pateman and three
new Independent Non-Executive Directors, Paul Lawrence, Sally-Ann
Hibberd and David Gagie.
The Committee has also reviewed the leadership needs of the business
and succession planning for Directors and other senior executives as well
as reviewing the results of an internal Board performance
evaluation process.
Further information on the activities of the Committee is provided in the
following report.
IAIN CORNISH
Chairman of the Nomination Committee
Meetings are held at least four times per year. Individual meeting
attendance during 2015 is set out below. The number of meetings held
during the period that the Director held office is shown in brackets.
Member
Iain Cornish
Sir George Mathewson
Robin Ashton
Graham Alcock
Position
Attendance
Chairman
Chairman
NED
NED
3 (3)
1 (1)
5 (5)
5 (5)
Iain Cornish was appointed as Chairman of the Board on 6 July 2015,
following the resignation of Sir George Mathewson. He was immediately
appointed as a member and Chairman of the Nomination Committee.
Sir George Mathewson was a member and Chairman of the Nomination
Committee from Admission until his resignation from the Board on
6 July 2015.
Prior to Admission, the Bank’s governance in relation to nomination matters
was carried out by a jointly formed Remuneration and Nomination
Committee. This Committee met once between 1 January 2015 and the
date of Admission.
Role of the Nomination Committee
A full copy of the terms of reference for the Nomination Committee can be
obtained by request to the Company Secretary or via the Group’s website
at www.shawbrook.co.uk.
The Nomination Committee’s principal function is to review the structure,
size and composition of the Board. The Committee is responsible for
identifying and nominating for the approval of the Board suitable
candidates to fill Board vacancies. The Committee carries out a formal
selection process for Executive and Non-Executive Directors and
subsequently proposes to the Board any new appointments. Ultimate
responsibility for the appointment of Directors resides with the Board.
The Nomination Committee also oversees succession planning for
Directors and Senior Managers below Board level.
The Chairman of the Nomination Committee reports to the Board on the
outcome of meetings.
Since Admission the Nomination Committee has met five times. The
Committee engaged in a comprehensive process to recruit new Directors
to the Board in the period following Admission. The Nomination
Committee engaged the services of a professional adviser, Promontory,
particularly in relation to the appointment of Iain Cornish, the Chairman,
and Steve Pateman, the Chief Executive and three new Non-Executive
Directors. The Nomination Committee also engaged an external search
consultancy firm, Lomond Consulting. Neither of these firms has any other
connection with the Company.
56 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
During the relevant period the Nomination Committee considered the
following principal items:
– A review of the current structure, size and composition of the Board;
– The time commitment expected of Non-Executive Directors;
– Leadership and succession planning;
– The proposed election of Directors at the forthcoming Annual
General Meeting;
– The appointment of the Chairman;
– The appointment of the Chief Executive;
– The appointment of three new Non-Executive Directors;
– Responsibilities under the forthcoming Senior Managers Regime; and
– The introduction of a Diversity Policy.
ROGER LOVERING
Chairman of the
Audit Committe
REPORT OF THE AUDIT COMMITTEE
Dear Shareholder
I am pleased to present my first report as Chairman of the Audit
Committee, having assumed the role on 20 March 2015.
It was a busy year for the Committee in 2015, as we saw a combination of
both the normal business agenda plus the IPO of the Company.
The Committee was heavily involved in the reviewing and commenting on
the documents involved in the IPO, including the Financial Position and
Prospects report, Working Capital Report and the financial statements.
In relation to the financial reporting of the company the Committee
reviewed the 2015 annual accounts and the interim results for the
six month period to 30 June 2015, plus the associated press releases and
results presentations. The key accounting judgments were reviewed to
ensure that they were still appropriate and reflected the performance of
the business. These included loan loss impairments, effective interest rate
calculations, hedge accounting, share based payments, accounting for
goodwill and accounting treatment of the IPO costs.
The Committee worked closely with Internal Audit to support their work in
reviewing the effectiveness of the Internal Control and Risk Management
Framework.
Looking ahead to 2016 in addition to the routine audit schedule, the Audit
Committee will focus on development of the Group’s external reporting,
oversight of the Group’s control environment, effective monitoring and
reviewing the internal and external audits, and the roll-out of the IFRS9
implementation programme.
I would like to take this opportunity to thank all my colleagues for their
help and contributions during the last year.
ROGER LOVERING
Chairman of the Audit Committee
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 57
STRATEGIC REPORTFINANCIALSGOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
Audit Committee Membership
The Board Audit Committee comprises four members. All members of the
Committee are Independent Non-Executive Directors of the Company.
Meetings are held at least bi-monthly. Individual meeting attendance
during 2015 is set out below. The number of meetings held during the
period that the Director held office is shown in brackets.
Member
Position
Attendance
Roger Lovering
Chairman of the Committee
Sir Brian Ivory
Graham Alcock
Robin Ashton
Paul Lawrence
Chairman of the Committee
NED
NED
NED
11 (11)
5 (5)
11 (11)
11 (11)
2 (2)
Role of the Audit Committee
A full copy of the terms of reference for the Audit Committee can be
obtained by request to the Company Secretary or via the Group’s website
at www.shawbrook.co.uk.
The role of the Audit Committee is to assist the Board in discharging its
duties and responsibilities for financial reporting, corporate governance
and internal control. The Audit Committee is also primarily responsible for
making recommendations to the Board in relation to the appointment,
re-appointment and removal of the external auditor and to approve the
auditor’s remuneration and terms of engagement. The Audit Committee’s
duties include keeping under review the scope and results of the audit
work, its cost effectiveness and the independence and objectivity of the
auditor. The Audit Committee also monitors the volume and nature of
non-audit services provided by the auditor.
Prior to Admission, the governance arrangements were operated by the
trading subsidiary, Shawbrook Bank Limited. The above table includes
reference to meetings of the Audit Committee of Shawbrook Bank Limited
between the period of 1 January 2015 and the date of Admission. During
this time, Sir Brian Ivory was Audit Committee Chairman. He resigned as
Audit Committee Chairman on 20 March 2015 and from the Board of the
Bank on 31 March 2015.
Roger Lovering was appointed as Chairman of the Audit Committee on
20 March 2015, following the resignation of Sir Brian Ivory as Audit
Committee Chairman.
From the date of Admission, the members of the Audit Committee were
Roger Lovering (Audit Committee Chairman), Robin Ashton and Graham
Alcock, who each served on the Audit Committee throughout the
reporting period. Paul Lawrence was appointed as a member of the Audit
Committee on 24 August 2015.
The Company Secretary acts as secretary to the Audit Committee. Other
individuals attend at the request of the Audit Committee Chairman and
during the year the external auditor, Chairman of the Board, Chief Executive
Officer, Chief Financial Officer, Chief Risk Officer, Internal Audit and other
senior managers as appropriate would usually attend meetings to report to
the Audit Committee and provide clarification and explanations where
appropriate. The Audit Committee also meets with the external and
internal auditors without executive management at least once a year. Since
Admission, the Audit Committee has met on five occasions.
The Board is satisfied that Roger Lovering has recent and relevant financial
experience, as referred to in the Code.
58 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Audit Committee Key Responsibilities
Financial reporting
Internal Controls
External Audit
Internal Audit
Whistleblowing
Monitor the integrity of the
Group financial statements and
review of the accounting policies
Review the adequacy and
effectiveness of internal controls
Approve the appointment of
or termination of the external
auditor
Approve the appointment
or termination of the Internal
Auditor
Review the adequacy and
security of the Whistleblowing
arrangements
Review and report to the Board
on significant financial issues and
judgements
Review responsiveness of
management when addressing
any identified control
weaknesses
Review and approve internal
control statements in the Annual
Report & Accounts
Review and challenge where
necessary the estimates and
judgements by management
in relation to all financial
statements
Review the Annual Report and
Accounts and other financial
reporting, advising the Board
on whether, taken as a
whole it is fair, balanced and
understandable and provides
the information necessary
for the shareholders to assess
the Group’s position and
performance, business model
and strategy
Assess and challenge the going
concern and long term viability
assessment undertaken by
management
Oversee the relationship
with the external auditor
including, term of engagement,
remuneration, effectiveness and
independence and objectivity
Agree the policy for the
provision of non-audit services
and the policy for employment
of former employees of the
external auditor
Monitor and review effectiveness To review any Whistleblowing
incidents that may arise
Approve the annual audit plan
Review the findings of the
external auditor and consider
management’s response
Monitor management’s
responsiveness to the findings
and recommendations
Meets at least once a year with
the external auditor without
management present
Meeting regularly with Internal
Audit without management
present
Monitor the independence of
the external auditor
Monitor the independence of
the Internal Auditor
Report of the Audit Committee
During the relevant period the Audit Committee discharged its responsibilities by performing the following activities:
Financial reporting
During the year, the Audit Committee reviewed and discussed the financial disclosures made in the Annual Report and Financial Statements, Half-yearly
financial report, interim management statement and the other trading statements made by the Group together with any related management letters,
letters of representation and reports from the external auditor. Significant financial reporting issues and judgments were considered together with any
significant accounting policies and changes proposed to them.
Tax
The recoverability of the deferred tax asset requires consideration of the future levels of taxable profit in the Group. The Committee considered the
recognition of deferred tax assets with reference to the Group’s approved strategic plan and agreed with management’s judgement that the deferred tax
assets were appropriately supported by forecast taxable profits. This assessment incorporated the anticipated impacts of the tax measures announced by
the Chancellor of the Exchequer in the 2015 Autumn Budget Statements.
Furthermore, the Senior Accounting Officer provided an unqualified certificate to HMRC certifying that the Group had appropriate tax accounting
arrangements throughout the financial year.
Significant Areas of Judgement
During 2015 the following significant issues and accounting judgements were considered by the Committee in relation to the 2015 Annual Report and
Financial Statements.
Impairment of loans and advances
The Audit Committee reviewed collective and individual loan impairment allowances. Significant judgements and estimates reviewed included the
adequacy of loss emergence periods and risk charges across the collective impairment allowances and the management overlays in the individual
allowances. The Committee considered and challenged the provisioning models and management overlays and concluded that the impairment
provisions were appropriate as at 31 December 2015.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 59
STRATEGIC REPORTFINANCIALSGOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
Effective interest rate
The Audit Committee reviewed the income recognition under the Effective
Interest Rate methodology. Significant judgement areas reviewed include
the technical and practical application of the accounting standards in the
context of the Group’s experience following the identification of changes
in customer behaviour and expected lives of certain products.
Following its review, the Committee is satisfied that the Annual Report is
fair, balanced and understandable, and provides the information necessary
for shareholders and other stakeholders to assess the Group’s position and
performance, business model and strategy and has advised the Board
accordingly.
Internal Control and Risk Management
Together with the Risk Committee, the Audit Committee has performed a
robust assessment of the Group’s internal control, risk management
framework and principal risks and uncertainties. Details of the risk
management systems in place and principal risks and uncertainties are
provided within the Risk Management Report on pages 32 to 42.
The Group’s system of internal control is designed to manage rather than
eliminate risk of failure to achieve the Group’s objectives and can only
provide reasonable and not absolute assurance against material
misstatement or loss.
Lines of responsibility and delegated authorities are clearly defined. The
Group’s policies and procedures are regularly updated and distributed
throughout the Group. The Audit Committee receives reports on a regular
basis on compliance with the Group’s policies and procedures and the
effectiveness of the Group’s systems and controls. The Group’s Internal
Audit function as the third line of defence is outsourced to Deloitte LLP to
provide the Group with assurance that the specialist nature of the Group’s
activities can be fully assessed.
The Group Risk and Internal Audit functions review the extent to which the
system of internal control is effective; is adequate to manage the Group’s
principal risks; safeguard the Group’s assets; and, in conjunction with the
Company Secretary and the Group’s Legal and Compliance Teams, ensure
compliance with legal and regulatory requirements. It provides
independent and objective assurance on risks and controls to the Board
and senior management.
Internal Audit’s work is focused on areas of greatest risk to the Group, as
determined by a structured risk assessment process involving Executive
Directors and senior management. The output from the process is
summarised in an annual audit plan, which is approved by the
Audit Committee.
The role of the Internal Audit department and the scope of its work
continue to evolve to take into account of changes within the business and
emerging best practice.
On behalf of the Board, the Audit Committee confirms that through
discharging its responsibilities under its terms of reference as described on
page 52 and also undertaking regular reviews of the effectiveness of the
Group’s system of internal control as set out on page 54 it is able to confirm
that the Committee was satisfied that the Group’s systems of internal
control were appropriately designed and operated effectively.
The Committee considered and challenged the judgements applied by
management in determining the EIR, including reviewing the
appropriateness of the redemption profiles and the impact of changes to
existing redemption profiles. The Committee agreed that management’s
judgements were appropriate at 31 December 2015.
Impairment assessment of goodwill
During the year management has undertaken a comprehensive review of
the methods used to determine both the CGU’s carrying values and
recoverable amounts. The Committee considered and challenged
management’s conclusions on the indicators of impairment and the
methodology used to determine the carrying values and recoverable
amounts. The Committee concluded and agreed that the recoverable
amounts of all the CGU’s exceeded the carrying values and no impairment
was required at 31 December 2015, having placed emphasis on the
assessment of the goodwill attributed to Business Credit (£24.2m) due to
the financial performance of the business during the year. The Committee
challenged both the discount rate and the forecast cash flows used in
calculating the recoverable amounts and performed sensitivity analysis on
the key assumptions applied.
Based on the work performed by the Committee, it was concluded and
agreed that the recoverable amounts of all the CGUs, including Business
Credit, exceeded the carrying values and no impairment was required at
31 December 2015.
Fair value of share-based payments
The Audit Committee reviewed the accounting treatment of the SAYE and
LTIP schemes and the arrangements for a number of new senior hires.
During the course of 2015 there were a number of modifications to the
existing scheme and new schemes that resulted from the IPO. The
Committee concluded that the accounting treatment and valuation
assumptions were appropriate as at 31 December 2015. Significant
judgements and estimates reviewed include the use of the Black-Scholes
model for valuing share options and the calculation of the IFRS2 charges.
Fair, balanced and understandable
The Committee considered on behalf of the Board whether the 2015
Annual Report and Financial Statements taken as a whole are fair, balanced
and understandable, and whether the disclosures are appropriate. The
Committee is satisfied that the 2015 Annual Report meets this requirement,
and in particular, that appropriate disclosure has been made with respect
to any developments in the year. In justifying this statement the
Committee has considered the robust procedures around the preparation,
review and challenge of the Report and the consistency of the narrative
sections with the financial statements. The Annual Report is drafted by the
Executive with overall governance and co-ordination provided by the
Annual Report and Accounts Disclosure Committee comprising a team of
cross-functional senior management and the Audit Committee Chairman,
and attended by the Group’s external auditor at the invitation of the Audit
Committee Chairman. Assurances are sought by the Audit Committee on
each section of the Annual Report in advance of the final sign off by the
Audit Committee and ultimately the Board.
60 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Report of the Audit Committee
External auditor
The Audit Committee has responsibility for overseeing the relationship
with the external auditor and approves the external auditor’s engagement
letter, audit fee and audit and audit strategy (including the planned levels
of materiality). The external auditor attends the Audit Committee meetings
as appropriate and meets at least annually with the Audit Committee
without executive management. The Chairman of the Audit Committee
also meets privately with the external auditors at least once a year.
During the year, the Audit Committee received regular detailed reports
from the external auditor including a formal written reports dealing with
the audit objectives; the auditor’s qualifications, expertise and resources;
effectiveness of the audit process; procedures and policies for maintaining
independence; and compliance with the ethical standards issued by the
Auditing Practices Board. The external auditor’s management letter is
reviewed, as is management’s response to issues raised and progress is
monitored against actions identified in these reports. The Audit Committee
monitors the latest ethical guidance regarding rotation of audit partners.
Non-audit services provided by the external auditor is regularly monitored
by the Audit Committee. The Group has a formal policy for the
engagement of the external audit firm for non-audit services. The policy
defines and describes permitted and prohibited services, independence
considerations, those services that are pre-approved as a matter of policy
as well as those which require specific Audit Committee approval. The
Audit Committee considers whether the external audit firm is the most
appropriate firm for the specific services required and consider any threats
to independence in the form of self-review or involvement in management
decisions. The value of the fees is also considered with reference to the
pre-approved monetary approval thresholds. The fees paid to KPMG for
audit and non-audit services are set out at page 100 in the ‘notes
to the financial statements’.
The Audit Committee is satisfied with the performance of the external
auditor during the year and the policies and procedures in place to
maintain their objectivity and independence, and has recommended that
they be re-appointed at the forthcoming Annual General Meeting.
In December 2015 the Committee assessed the effectiveness of the
external auditor and the audit process. The review included seeking the
views of Audit Committee members, Executives and Senior Managers. The
review was very positive and concluded that the external audit process
was effective.
Tenure of the external auditor
The Group appointed KPMG Audit plc as the external auditor from 2011 to
2014, and KPMG LLP thereafter. The Group has not carried out a formal
tender process as a result of the IPO. KPMG LLP has continued as external
auditor. However, the Committee has kept under review regulatory and
legislative developments around the tenure of auditors and will in future
undertake a formal competitive tender at the appropriate time. The current
KPMG LLP Audit Director, Simon Clark, will be replaced on the audit team at
the conclusion of the 2015 audit in accordance with the rotation
requirements of the ethical standards of the Accounting practice Board.
Following discussions with KPMG LLP and consideration by the Committee
Chairman and the Chief Financial Officer of possible candidates, approval
has been given to the appointment of John Ellacott as the Group’s new
audit partner from 2016.
The Company has complied with the provisions of the Statutory Audit
Services for Large Companies Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit Committee Responsibilities)
Order 2014.
Auditor’s independence and objectivity
The external auditor provides some non-audit services, primarily in the
provision of taxation and regulatory advice and in relation to corporate
transactions that may arise from time to time. In order to ensure that
auditor objectivity and independence are safeguarded the following
controls have been implemented:
– A formal policy on the use of the auditor for non-audit work has been
agreed by the Audit Committee. In summary, this ensures that work
would usually only be awarded when, by virtue of the auditor’s
knowledge, skills or experience, the auditor is clearly to be preferred
over alternative suppliers;
– The Audit Committee receives and reviews each year an analysis of all
non-audit work awarded to the auditor over the financial period; and
– The Audit Committee receives each year a report from the external
auditor as to any matters that the auditor considers bear on its
independence and which need to be disclosed to the Audit Committee.
Internal Audit
Due to the size and nature of the business, the Group has outsourced the
Internal Audit Function to Deloitte LLP who was appointed on 27 June
2013. The terms of the Internal Audit function are set out in the Internal
Audit Charter. The Audit Committee approves the annual audit plan and
internal audit methodology for Internal Audit and monitors progress
against the plan during the year. The Committee is satisfied that this
continues to be the most appropriate way of managing the delivery of
internal audit services but will review this on at least an annual basis.
Internal Audit carried out a significant number of audits during 2015 of
varying size and complexity. Thematic audits focused on new business
processes, capital and liquidity and the risk management framework. Audit
reports are circulated to the Audit Committee members prior to each
scheduled meeting and the Audit Committee monitors progress against
actions identified in these reports.
The Audit Committee has established a questionnaire based procedure to
monitor and review Internal Audit’s effectiveness using feedback from the
Board and Senior Management. The Audit Committee also assesses
annually the resources the Internal Audit has to complete its remit. Internal
Audit has unrestricted access to all Group documentation, premises,
functions and employees as required to enable it to perform its functions.
The appointment and removal of Internal Audit is the responsibility of the
Audit Committee.
Whistleblowing
A formalised whistleblowing policy and procedure for staff to raise issues
regarding possible improprieties in matters of financial reporting or other
matters has been established and was reviewed during the year. The Audit
Committee is responsible for monitoring the effectiveness of the Group’s
whistle blowing procedures and any notifications made. The Audit
Committee is charged with ensuring that appropriate arrangements are in
place for employees to be able to raise matters of possible impropriety in
confidence and performing suitable subsequent follow-up action. An
alternative reporting channel also exists whereby perceived wrongdoing
may be reported via telephone to an external third party.
The Audit Committee has access to the services of the Company Secretarial
department and is authorised to obtain independent professional advice if
it considers it necessary.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 61
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PAUL LAWRENCE
Chairman of the Risk
Committee
Risk Committee Membership
The Risk Committee comprises four members. All members are
Independent Non-Executive Directors of the Company.
Meetings are held at least bi-monthly. Individual meeting attendance
during 2015 is set out below. The number of meetings held during the
period that the Director held office is shown in brackets.
Member
Paul Lawrence
Robin Ashton
Graham Alcock
Sir Brian Ivory
Roger Lovering
Position
Attendance
Chairman of the Committee
Chairman of the Committee
NED
NED
NED
3 (3)
6 (7)
6 (7)
1 (1)
7 (7)
Prior to Admission, the governance arrangements were operated by the trading
subsidiary, Shawbrook Bank Limited. The above table includes reference to
meetings of the Risk Committee between the period of 1 January 2015 and the
date of Admission. Sir Brian Ivory resigned from the Risk Committee on
20 March 2015 and from the Board of the Bank on 31 March 2015.
At the date of Admission, the members of the Risk Committee were Robin
Ashton, Roger Lovering and Graham Alcock, who each served on the Risk
Committee throughout the reporting period.
Paul Lawrence was appointed by the Board as member and Chairman of
the Risk Committee on 24 August 2015. Robin Ashton remained a member
of the Risk Committee, following Paul Lawrence’s appointment as Risk
Committee Chairman.
The Company Secretary acts as secretary to the Risk Committee. Other
individuals attend at the request of the Risk Committee Chairman and during
the year the external auditor, Chairman of the Board, Chief Executive Officer,
Chief Financial Officer, Chief Risk Officer, Internal Audit and other senior
managers as appropriate would usually attend meetings to report to the Risk
Committee and provide clarification and explanations where appropriate.
Since Admission, the Risk Committee has met on seven occasions.
Role of the Risk Committee
A full copy of the terms of reference for the Risk Committee can be
obtained by request to the Company Secretary or via the Group’s website
at www.shawbrook.co.uk.
The Risk Committee has responsibility for, among other things, advising the
Board on the Group’s overall risk appetite and strategy. The Risk Committee
will review the Group’s risk assessment processes and methodology and its
capability for identifying and managing new risk, alongside advising on
proposed transactions and reviewing reports on any material breaches of
risk limits. The Risk Committee is also responsible for monitoring and
reviewing the effectiveness of the risk function and the capital adequacy
requirements of the Group’s relevant subsidiaries on an ongoing basis.
Other key areas that the Risk Committee oversees are:
– Board Risk appetite;
– Credit Risk;
– Operational Risk;
– Conduct, Legal and Compliance Risk;
– Liquidity & Market Risk;
– Stress testing & capital requirements;
– Recovery and Resolution planning; and
– Inputs into Remuneration decisions.
REPORT OF THE RISK COMMITTEE
Dear Shareholder
I am pleased to present the report of the Risk Committee, our first as a listed
Company and my first as Chairman since taking on the role in August 2015.
Preparation for our new status as a listed Company saw substantially
increased levels of activity across the organisation. This included a detailed
review of our risk environment and the adequacy and effectiveness of our
risk frameworks and infrastructure to ensure we can sustain our growth
and business objectives within our risk appetite without losing our market
competitiveness.
In addition to regularly reviewing key and emerging risks and monitoring
the development of the risk infrastructure, the Committee provided input
and oversight across a wide range of issues with particular focus on the
enhanced risk management framework and regulatory requirements
including conduct risk.
The Committee also reviewed and contributed to documents such as the
ICAAP and ILAA before making recommendations to the Board.
Further information on the activities of the Committee and our governance
structures and processes around risk are provided in the following report
(and page 33 of the Risk Management Report).
PAUL LAWRENCE
Chairman of the Risk Committee
62 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Key matters considered in detail by the Committee in 2015
Board Risk Appetite
The strategic direction of the business flows through the Group’s Risk
Appetite Framework (‘RAF’). It also ensures that the risk appetite articulated
is the level of risk that the Board is willing to take in order to deliver its
strategic objectives. During the year, significant work was undertaken to
enhance the overarching framework for the Board to monitor and manage
the Group’s risk appetite. The Group’s RAF includes the statements and
principles that describe the Group’s appetite, along with quantitative
measures to help the Board monitor the degree to which the Group
realises this appetite.
Credit Risk
The controlled management of credit risk is critical to the Group’s overall
strategy. The Risk Committee provides oversight of the Risk Management
Framework; ensures the Group has effective processes and controls to
monitor, mitigate and manage credit risk; and provides oversight to the
effectiveness of all credit risk management to ensure lending is within the
Board’s approved credit risk appetite.
Operational Risk
The Committee received regular reports across the spectrum of
operational risks and information security. The reports covered incidents
that have arisen to allow the Committee to assess management’s response
and proposed remedial actions. Although a number of incidents were
raised during the course of 2015, the Committee was satisfied that the
action taken was appropriate and that the control of operational incidents
continued to improve. In response to the growing threat posed by cyber
crime, a full risk assessment was undertaken to assess the adequacy of the
Group’s internal control framework to respond to this threat and our
planned investment to deal with increasing levels of cyber risk. The
operational risk reports were developed throughout 2015 to include a
focus on forward looking risks which permits a more strategic discussion at
the Risk Committee level.
Conduct, Legal and Compliance Risk
The Committee receives an update on compliance and conduct risks at
each meeting. The Committee also receives updates from management on
changes to the Group’s regulatory environment to ensure the Board
responds effectively and in a timely manner to changing regulation.
Topics debated during the year included culture, customer journeys,
complaint metrics, intermediary oversight and the forthcoming
introduction of the Senior Managers Regime.
Liquidity & Market Risk
The Group’s Treasury function is responsible for managing Treasury credit
risk in line with the Board’s approved risk appetite and wholesale credit
policies. Wholesale counterparty limits are reviewed monthly through the
Asset & Liability Committee (ALCO). The Risk Committee is responsible for
over-seeing and reviewing the activities of Group Treasury via the ALCO.
Stress Testing & Capital
The Committee has reviewed the Internal Capital Adequacy Assessment
Process ‘ICAAP’ prior to submission to the Board for approval. This ICAAP
contained the results of stress test scenarios both generic and peculiar to
the Group.
Remuneration
The Risk Committee provided input into the Remuneration Committee to
ensure that risk behaviours and the management of risk we appropriately
reflected in the performance appraisal and compensation review
processes.
Primary areas of focus during the year
– Development and oversight of the Risk Framework to support business
development and transformation programmes;
– Considering the Group’s risk profile and risk appetite relative to the
current and future strategy of the Group;
– Assess and monitor regulatory and legislative change;
– Review the design and implementation of risk management and
strategies of the Group and the procedures for monitoring the
adequacy and effectiveness of this process;
– Review of internal controls and risk management systems;
– Regular review of strategic, operational and credit risk events;
– Considering the adequacy and effectiveness of the technology
infrastructure supporting the Risk Management Framework; and
– Monitoring the training and development requirements of the Group to
ensure the requisite skills are in place to control risk and promote an
effective risk culture.
Other matters considered in detail by the Committee in 2015
Review of the cyber incident response plan to ensure the Group has
suitable procedures to respond to an information security incident.
Cyber risk is the risk that the Group is subject to some form of
disruption arising from interruption to its IT and data infrastructure.
The Committee approved the plan, including a costed investment in
cyber risk controls to ensure the Group maintains appropriate levels of
control to identify and counter the threats arising from cyber crime.
During 2015 the Group has enhanced its three lines of defence model, as
outlined on page 35 in the Risk Management report. This model has been
operationalised through the creation of a comprehensive suite of risk
policies, embracing all aspects of the risk management agenda, including
the credit, operational, reputational and conduct risk arenas under the
auspices of Program Horizon, which is the program initiated in March 2015
to upgrade the risk architecture of the Group. As well as the creation and
development of over 110 policy documents, the scope of Program Horizon
includes development of credit grading models and the delivery of the
Group’s latest ICAAP. The ICAAP benefits from ongoing improvements in
risk assessment that is consistent with the PRA’s Statement of Policy on
methodologies for calculating Pillar 2 capital published in July 2015.
A comprehensive and wide ranging review was undertaken of credit risk
approval governance. Although the existing framework had served the
Group well, against a background of growing scale in the divisional lending
operations, increased volume of larger transactions and the development
of portfolios which are less rules driven and require more qualitative
judgements to be exercised, a review was necessary. The proposals
presented sought to deliver under the following key principles:
– Providing the required level of independence, governance and
assurance in relation to both material individual risks and the profile of
the portfolio overall;
– Maintaining service standards by way of prompt turnaround times and
commercial responses to financing proposals; and
– Preserving the 1st Line Division’s culture of accountability for, and focus
Recovery & Resolution Plan
The Committee reviewed and recommended the Recovery & Resolution
Plan to the Board.
on, risk.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 63
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Revised authority levels were proposed based upon a balanced
consideration between risk profile and current practice, namely:
– Those areas where credit approval becomes less ‘Policy Rules’ driven
and requires a greater degree of qualitative judgement. The threshold
broadly equates to maximum Regulatory definitions for Retail
exposures (€1m-€1.5m);
– Independent credit approval for higher levels of risk exposure; and
– Minimising the impact on personnel and operations so that the lower
value/higher volume flows continue to be processed via existing
divisional channels in a mainly rules driven rather than judgement
driven approach.
This revised framework was approved by the Committee and implemented
towards the end of the year.
The Group is a specialist lending and savings bank for SMEs and
consumers. The specialist nature of some of its lending through
intermediaries and brokers may mean that some customers find
themselves with an increased risk of an unfavourable outcome. In addition
the Group is exposed to a risk that third parties do not comply with the
Group’s standards, values and ethics when dealing with the Group’s
customers. This may lead to increased conduct related redress, additional
fraud or credit risk impairments. The Group works with carefully selected
partners who take on the role of advising SMEs and consumers. The Group
recognises the importance of taking ownership for the lending it originates
and continually undertakes a review of their performance. In addition,
experienced underwriters perform thorough checks on each application.
The Group continually reviews its risk management approach to
intermediaries, brokers and outsource partners to reflect the environment
that the Bank operates in.
Priorities for 2016
The priorities for the Risk Committee for 2016 include:
– Continued development and embedding of the Risk Management
Framework;
– Active monitoring and management of the risk profile and performance
against the revised Risk Appetite Framework to ensure alignment to the
risk and corporate strategy;
– Review and approval of the 2016 Risk Assurance Plan;
– Review and recommendation of ICAAP, ILAAP and RRP to the Board;
– To receive and review reports relating to any significant issues that
require, or are subject to remedial action or recommendations arising in
the period under review;
– To ensure rigorous stress and scenario testing of the Group that explains
the financial impact and extend of identified risks and threats, should
these risks and threats come to pass; and
– Input into remuneration recommendations for senior staff.
64 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Board changes
During the year we had a number of changes in our leadership. On
2 October 2015, Richard Pyman stood down as Chief Executive Officer,
following a leave of absence due to ill health. Mr Pyman did not receive any
salary, benefits and pension from the date that he stepped down from the
Board, and no awards were made to him under the annual bonus or
Performance Share Plan in 2015.
From the date of Mr Pyman stepping down from the Board, Tom Wood
acted as interim Chief Executive Officer while continuing his role as Chief
Financial Officer. In order to reflect his increase in his role and responsibility
for this period, Mr Wood received an additional temporary allowance.
On 1 January 2016, Steve Pateman assumed the role of Chief Executive
Officer. His salary level has been set at a level which reflects the wealth of
experience he brings to the Group and his outstanding track record in the
sector. His pension level has been set in line with the contribution offered
by his previous employer, and he will participate in the annual bonus and
PSP in accordance with our standard policy. Mr Pateman has been granted
buyout awards in respect of remuneration forfeited from his previous
employer.
Further information on the activities of the Committee and our governance
structures are provided in the following report.
GRAHAM ALCOCK
Remuneration Committee Chairman
GRAHAM ALCOCK
Chairman of the
Remuneration Committee
STATEMENT BY THE REMUNERATION COMMITTEE CHAIRMAN
Dear Shareholder,
On behalf of the Board, as Chairman of the Remuneration Committee, I am
delighted to present our first Directors’ Remuneration Report as a listed
Company. In accordance with the remuneration reporting regulations, this
report has been split into two parts:
– The Remuneration Policy report, detailing the forward-looking policy
within which all remuneration arrangements for our Executive Directors
will operate, which is subject to a binding shareholder vote at the 2016
AGM; and
– The Annual Remuneration Report, which explains the operation of the
Remuneration Policy for 2015 and a summary of its intended
implementation in 2016, which is subject to an annual advisory
shareholder vote.
The Board Remuneration Committee was formed at Admission. Our listing
has given us a welcome opportunity to consider our executive
remuneration arrangements in light of:
– our continuing need to drive the performance and risk culture of the
business;
– our desire to incentivise and reward individuals to deliver the right
outcomes for customers; and
– a need to attract the right calibre of leadership from a competitive
market place.
Building on the framework included in our IPO Prospectus, we have
therefore further developed our executive remuneration policy, aligned
with the Group’s strategy and generating returns for shareholders, and in
line with regulatory requirements. In addition, we have taken into account
typical market practice within the UK-listed environment, as well as
practice within the financial services sector.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 65
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CORPORATE GOVERNANCE REPORT CONTINUED
Remuneration Committee Membership
The Board Remuneration Committee comprises three members including
the Board Chairman.
Meetings are held at least four times per year. Individual meeting
attendance during 2015 is set out below. The number of meetings held
during the period that the Director held office is shown in brackets.
Member
Position
Attendance
Graham Alcock
Chairman of the Committee
Sir George Mathewson
NED
Iain Cornish
Robin Ashton
Chairman of the Board
NED
8 (8)
2 (2)
5 (5)
8 (8)
Key changes to the remuneration structure for 2016
In order to encourage risk alignment and to further align the interests of
the Executive Directors with the long-term interests of shareholders, we
strengthened the post-vesting holding conditions applicable to PSP
awards from the terms applicable in the IPO Prospectus. Directors are now
required to hold any awards vesting under the PSP for two years following
the date of vesting, in line with best practice.
In addition, we have implemented formal shareholding requirements,
whereby Executive Directors must build, and hold, a shareholding of at
least 200% of salary. This shareholding must be achieved within five years.
The requirement was determined taking into consideration the nature of
our business, a review of typical market practice, and evolving shareholder
expectations.
Iain Cornish was appointed as Chairman of the Board on 6 July 2015,
following the resignation of Sir George Mathewson. He was immediately
appointed as member of the Remuneration Committee.
Sir George Mathewson was a member of the Remuneration Committee
from Admission until his resignation from the Board on 6 July 2015.
A full copy of the terms of reference for the Remuneration Committee can
be obtained by request to the Company Secretary or via the Group’s
website at www.shawbrook.co.uk
2015 bonus outturns
In 2015, bonus outcomes were based on a scorecard of financial, strategic
and personal objectives. 2015 was a strong year for Shawbrook in terms of
financial performance. The Group achieved underlying profit before tax of
£80.1m, which represented 63% growth in the year. Our return on tangible
equity exceeded expectations at 27.9%, and our cost:income ratio was
48.3%, in line with our targets.
We made significant progress in the transformation of the risk culture of
the Bank over the year, which has resulted in real improvement in the
Group’s risk management processes. The Group also performed strongly in
regards to culture and employee engagement.
The Committee assessed the individual performance of the Executive
Directors over the year. Tom Wood performed a pivotal role as CFO during
the successful IPO of the Group, and performed strongly as interim CEO for
the last seven months of the year. Stephen Johnson also performed a
pivotal role during the IPO, providing excellent support to Richard Pyman
and Tom Wood in his role as Deputy CEO.
Based on these outcomes, in addition to the strong financial performance
of the Bank outlined above, the Committee determined an award of 100%
of maximum for Tom Wood and 95% of maximum for Stephen Johnson
given their individual performances during the year.
As a Level 3 firm under the CRD IV regulations, we seek to comply with the
spirit and letter of the requirements set out in the PRA Rulebook and the
related guidance provided by the European Banking Authority (EBA), and
therefore our proposed remuneration policy reflects this. As a result, we
have voluntarily incorporated deferral and malus and clawback provisions
on all incentive plans. We have also made the decision to voluntarily seek
shareholder approval to implement a 2:1 cap on variable remuneration. We
believe that this will allow us to ensure the sound risk management of the
Company whilst retaining the alignment of the interests of our Directors
with those of our shareholders.
Salaries for the Executive Directors, and the fee structure for the Non-
Executive Directors, have been adjusted in light of the change in scope and
nature of the roles, and to reflect the current FTSE-listed environment,
particularly among our financial services peers. The salaries and fees
applicable from 1 January 2016 can be seen in the ‘Implementation of the
Remuneration Policy’ section.
Looking ahead
In forming the remuneration policy, the Committee were mindful of
‘future-proofing’ the policy, especially in the light of the evolving
regulatory landscape. We will keep the policy and its implementation
under review, to ensure that the remuneration arrangements remain in line
with regulatory requirements, shareholder expectations, and best practice.
As our first remuneration policy subject to shareholder approval, we have
sought to create a compliant yet sufficiently flexible remuneration policy
which can form the foundation of our remuneration arrangements for
Directors in the coming years.
Shareholder engagement
We recognise the importance of engaging with shareholders on our
remuneration arrangements. We held discussions with our major
shareholders in early 2016, prior to finalisation of our Remuneration Policy,
to explain our approach to remuneration and gain relevant feedback.
No awards were granted to the Executive Directors under the Performance
Share Plan (PSP) in 2015. The first awards will be granted in 2016, subject to
a scorecard of measures, as detailed on page 80.
I welcome any comments on the remuneration arrangements set out on
the following pages from shareholders, and will be available to answer any
queries regarding our remuneration policy at the forthcoming Annual
General Meeting.
66 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
DIRECTORS’ REMUNERATION REPORT
DIRECTORS’ REMUNERATION POLICY
This section of the Directors’ Remuneration Report sets out the Bank’s
Remuneration Policy, prepared in accordance with the amended Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008.
CONSIDERATION OF RISK
A core principle for the design of Shawbrook’s Remuneration Policy has
been to ensure that risk management is at its core. Key features of the
Remuneration Policy which incorporate risk management include:
– An appropriate balance between fixed and variable remuneration, in
This Remuneration Policy will be submitted to shareholders in a binding
vote at the 2016 AGM, from which date it will take effect. It is intended that
the Remuneration Policy applies for three years following approval, subject
to any changes that would require re-approval.
REMUNERATION PRINCIPLES
Through the Remuneration Policy, Shawbrook seeks to reward employees
for their contribution, and motivate them to deliver the best outcomes for
stakeholders. This Policy is underpinned by the Bank’s over-riding
remuneration principles:
1. Remuneration will be determined within the Bank’s stated risk appetite,
defined as ‘maintaining a balanced strategy to reward our employees
for appropriate conduct and performance’. Safeguarding the right
outcomes for customers is at the heart of this.
2. The remuneration structures will be developed in alignment with the
appropriate regulatory environment.
3. There will be an appropriate mix of long-term and short-term incentive
arrangements in place which will assist in driving the long term security,
soundness and success of the Bank.
4. The long-term and short-term incentive plans will be subject to
appropriate performance measures, ensuring the right balance
between these elements of the reward package.
5. Pay outcomes will be determined with reference to total reward
principles, e.g. when making bonus decisions we will take into account
total aggregate remuneration with reference to the external market.
6. Base pay decisions will primarily be determined by the size and scope
of the role, as well as any market adjustments, including cost of living
wage movement or movement in the market for key roles or skills.
External pay data, when available, will provide the basis for decisions.
7. Variable pay decisions will be determined by the overall business
performance, as well as individual performance evaluation measured
against agreed performance objectives, the culture of the Bank, and
conduct of the individual.
8. The Chief Risk Officer (CRO) will have appropriate input into the setting
of remuneration policies for the Bank and will be consulted by RemCo
in relation to senior management awards.
9. Remuneration policies will be communicated in a clear and transparent
way for all colleagues, and in a timely way.
10. Annual pay and bonus decisions will reflect:
– Contribution to Group results;
– Alignment with the Group’s values;
– Appropriate risk behaviour; and
– Transparency.
The Bank’s approach to remuneration outcomes ensures that employees
are rewarded fairly, encourages a culture where customers are at the core,
whilst protecting shareholder interests and continuing to drive the Bank’s
strong financial performance.
line with the Bank’s strategy and risk appetite levels.
– An appropriate balance between short-term and long-term
performance measures, and significant time horizons applying to
incentive plans due to bonus deferral and Performance Share Plan (PSP)
holding period policies.
– A significant proportion of variable remuneration being paid in equity
at senior levels within the Bank.
– A wide range of performance measures, which take into account the
Bank’s short-term and long-term strategy, as well as key risk
considerations.
– The use of a bonus underpin, ensuring that bonus payouts are only
permitted if the Bank’s overall performance is satisfactory, including
underlying financial performance, sustainability, customer, risk
management and regulatory capital ratio as part of a formal risk
adjustment process at year end.
– The inclusion of malus and clawback provisions on all incentive plans,
and annual consideration of any events as part of the risk adjustment
process.
CONSIDERATION OF SHAREHOLDER VIEWS
As a newly listed Company, we have had limited opportunity to engage
with shareholders on remuneration to date. However, during early 2016, we
approached our major shareholders to gain their views on, and help shape,
our Remuneration Policy.
It is the Committee’s intention that shareholder approval of the
Remuneration Policy will be sought every three years. The Committee will
actively seek dialogue with the Bank’s major shareholders when
appropriate, and any feedback received will be considered during the
Committee’s annual review of the Policy. The Committee will also take into
consideration AGM voting outcomes where appropriate. The Committee
will also consult with shareholders when any significant changes to the
Policy are proposed.
CONSIDERATION OF EMPLOYEE VIEWS AND
REMUNERATION ARRANGEMENTS
In determining the Remuneration Policy for Executive Directors, the
Committee takes into consideration the pay and employment conditions
of the wider employee Group. In particular, when determining Executive
Director salary increases, the Committee will consider the salary increases
being awarded to the wider employee Group.
The Bank does not perform a formal consultation process on the
remuneration of Executive Directors with other employees. However, the
Company has introduced arrangements to facilitate all employees
acquiring shares in the Company and employees will therefore be able to
vote on the Executive Directors’ remuneration in the same way as other
shareholders.
In applying the remuneration principles, we have made the decision to
voluntarily implement the CRD IV cap on variable remuneration. As a result,
the variable remuneration awards made to Executive Directors will not
exceed 200% of fixed pay.
There is no employee representative on the Committee. Instead, the views
of employees are taken into account by HR. One of the duties of the HR
Director is to brief the Board on employee views and, as a regular invitee to
Remuneration Committee meetings, the HR Director ensures that decisions
are made with appropriate insight to colleagues’ views.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 67
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
The remuneration for Executive Directors and the wider employee Group
follow a common set of remuneration principles, as shown on page 67,
which are embodied in the Company’s remuneration policy. Particular
points of note are:
– All employees are eligible to receive an element of variable pay (in the
form of a discretionary bonus, and PSP for some key individuals);
– Share ownership is encouraged through the Company’s Save As You
Earn (SAYE) scheme. Key individuals also participate in the PSP; and
– All employees receive Company benefits, including life assurance,
private medical insurance and eligibility for a Group personal pension
plan. Where an employee does not take up the Group personal pension
plan, they are automatically auto-enrolled into the Group’s stakeholder
pension plan, unless they choose to opt out.
In addition, an additional one-off IPO share award was granted to
employees under the Shawbrook Bank Incentive Plan 2015 to allow them to
share in the success of the Company on Admission:
– Those employees who joined the Bank after 1 January 2014 received a
gross award of £1,500;
– Those who joined between 1 January 2013 and 31 December 2013
received a gross award of £2,000; and
– Those who joined before 1 January 2013 received a gross award
of £2,500.
The IPO Awards vested on Admission. Each participant received ordinary
shares in full or partial satisfaction of the IPO Award, with any balancing
amount settled in cash.
REMUNERATION POLICY FOR DIRECTORS
The policy table below summarises the key components of the Remuneration Policy that will be applied when setting the remuneration packages for
Executive Directors.
Element
Purpose and link to strategy
Operation and performance measures
Opportunity
Salary
Pension
Benefits
To recruit, motivate and retain
Executive Directors of the required
calibre.
Reflect the individual’s experience,
performance and responsibility.
Salaries are normally reviewed annually, with any changes
typically taking effect from 1 March.
Salaries are reviewed taking into consideration a number of
factors, including:
•
•
•
•
•
Size and scope of the role;
Skills and experience of the individual;
Performance of the Bank and the individual;
Salary increases for the wider employee population; and
Pay levels for similar roles at companies of a similar size and
complexity.
Salary levels may also be adjusted to take account of any
significant regulatory changes. This is not expected during the
life of this policy.
There is no maximum salary or fixed
pay allowance level or increase
that may be given in any year, but
any increases will normally not
exceed those awarded to the wider
employee population.
To provide a competitive post-
retirement benefit in order to retain
Executive Directors of the required
calibre.
Executive Directors may participate in the Bank’s Group Personal
Pension Plan. Where an employee does not take up the Group
personal pension plan, they are automatically auto-enrolled
into the Group’s stakeholder pension plan, unless they choose
to opt out.
Executive Directors may receive a cash allowance in lieu of a
pension contribution.
Contribution levels depend on individual circumstances.
Up to 35% of salary for the CEO and
15% for other Executive Directors in
respect of any financial year.
Actual pension levels for the year
under review are listed in the table
in the Annual Remuneration Report
on page 74.
To provide a competitive and
appropriate benefits package
in order to motivate and retain
Executive Directors of the required
calibre.
Executive Directors receive a range of benefits, including private
health cover for the Director and his immediate family, life
insurance, discounted gym membership and permanent health
insurance.
There is no maximum value of
benefits, as the cost of benefits may
vary in accordance with market
conditions.
Additional benefits may be provided as reasonably required, for
example relocation benefits.
Executive Directors are eligible to participate in any HMRC
approved all-employee share plans operated by the Bank on
the same basis as other employees. The Bank currently operates
a SAYE plan and may also provide benefits under a SIP in the
future.
68 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Element
Purpose and link to strategy
Operation and performance measures
Opportunity
Annual Bonus
To incentivise and reward the
achievement of short-term financial
and non-financial objectives which
are closely linked to the Bank’s
strategy.
Deferral into shares reinforces
retention and enhances alignment
with shareholders by encouraging
longer-term focus and risk alignment.
Annual bonuses are based on Bank and individual performance
over one year. At least 50% of the bonus will be based on
financial performance, with the remainder based on strategic/
non-financial and personal objectives.
The measures, and their applicable weightings and targets, are
set at the beginning of each year.
The normal maximum bonus
opportunity in respect of any
financial year is 100% of salary;
however the Committee may make
awards of up to 100% of fixed pay.
0% of maximum will pay out for threshold performance.
Details of the performance targets set will be provided in
the Annual Remuneration Report when deemed no longer
commercially sensitive.
The award level is determined by the Committee based on
actual performance against the targets set. However, the
Committee has discretion to reduce the formulaic outcome
(including to zero) where the outcome is not reflective of
the overall performance of the Bank, or as a result of the risk
adjustment process.
50% of any bonus paid will be deferred into awards under the
Deferred Share Bonus Plan (DSBP). The awards will normally
be released in three equal tranches after one, two and three
years, subject to continued employment. Deferral levels and
any deferral/holding periods may be amended to take account
of any regulatory changes during the life of the Policy or such
other factors the Committee considers appropriate.
Annual bonus awards are subject to the Bank’s malus and
clawback provisions, set out on page 70.
Performance Share Plan
(PSP)
To incentivise and reward the
delivery of the Group’s long-term
strategy and growth in shareholder
value over a sustained period of time.
PSP awards will normally be made annually, based on a
combination of total shareholder return (TSR), internal financial
measures and key strategic/non-financial measures. At least 50%
of a PSP award will be subject to TSR and/or financial measures.
The normal maximum PSP
opportunity in respect of any
financial year is 100% of salary.
The PSP rules allow for awards of
up to 300% of salary to be made in
exceptional circumstances. However,
any PSP award will comply with the
2:1 variable remuneration cap.
Performance measures will normally be tested over a period of
three years (or such other period as the Committee determines
otherwise). Typically, 25% of maximum will pay out for threshold
performance. The Committee has discretion to reduce the
formulaic outcome (including to zero) where the outcome is not
reflective of the overall performance of the Bank or as a result of
the risk adjustment process.
Personal performance in the year prior to award may also be
taken into account when determining award levels.
Any awards that vest, net of tax and NIC liabilities, are subject
to a further holding period. There will be a minimum five year
period between grant and sale.
Performance, vesting and holding periods may be amended to
take account of any regulatory changes during the life of the
Policy.
PSP awards are subject to the Group’s malus and clawback
provisions, set out on page 70.
Shareholding guidelines
To align the interests of Executive
Directors and shareholders.
Executive Directors are expected to build and maintain a
minimum shareholding in the Company within five years of the
later of recruitment or the Bank’s listing.
At least 200% of salary.
Executives must retain at least 50% of shares acquired on
vesting of PSP awards (net of tax) until the guideline is met.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 69
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
PERFORMANCE MEASURES FOR VARIABLE REMUNERATION
The Committee considers that the balance of performance measures,
which includes financial, strategic, and personal objectives, means that
remuneration is aligned to shareholders and regulatory requirements.
Financial and strategic measures have been chosen as the Committee
considers that these will incentivise the Executive Directors to deliver
strong financial performance which results in value creation for
shareholders.
PAYMENTS IN RELATION TO LEGACY AWARDS
Any remuneration payments and payments for loss of office not in line
with the Remuneration Policy detailed out above may nevertheless be
satisfied where (i) the terms of the payment or award were agreed before
the Policy came into effect, as set out in the Listing Prospectus where
relevant (such payments or awards will be set out in the Annual
Remuneration Report for the relevant year), and (ii) the individual was not a
Director of the Company at the time and in the Committee’s opinion was
not in consideration for becoming a Director of the Company.
The Committee also understands that executives should be incentivised to
display the appropriate risk and conduct behaviours, and therefore
performance measures are likely to include specific measures which are
directly linked to executives’ individual performance in these areas.
MALUS AND CLAWBACK
To ensure compliance with the applicable regulatory requirements, and as
a method for sound risk management, all variable remuneration is subject
to malus and clawback provisions. The specific terms are set out in the
incentive plan rules as well as the Executive Directors’ service contracts.
The Committee will review the specific performance measures annually to
ensure that executives are appropriately incentivised to deliver the
Company’s strategic priorities.
In exceptional circumstances, the Committee may vary any performance
condition applicable to a PSP award in accordance with its terms if
anything happens which causes the Committee to consider it appropriate,
provided that it considers the amended condition to be fair, reasonable
and not materially less challenging but for the event in question.
TERMS OF SHARE AWARDS
Share-based awards granted under the DSBP and the PSP:
a) may be made in the form of nil-cost options, conditional share awards
or forfeitable shares;
b) may incorporate the right, subject to any regulatory requirements to
the contrary, to receive the value of dividends which would have been
payable on the shares that vest under an award since the date of grant
of the award. This amount may be paid in cash or shares and may
assume the dividends had been reinvested in shares on a cumulative
basis;
c) may be settled in cash at the Committee’s discretion; and
d) may be adjusted in the event of a variation of share capital, demerger,
special dividend or other transaction that will materially affect the value
of the Company’s shares in the Committee’s opinion.
Malus and clawback may be implemented in exceptional circumstances,
on such basis that the Committee in its discretion considers to be fair,
reasonable and proportionate.
Under the malus provisions, exceptional circumstances may include, but
are not limited, to reputational damage, failure of risk management or poor
underlying performance. Malus adjustments may include:
– Prior to the earlier of the normal vesting date of DSBP awards and the
third anniversary of the date of grant, reducing the number of shares
under the DSBP (including to nil); and
– Prior to the normal vesting date of PSP awards, reducing the amount of
any PSP awards (including to nil).
Under the clawback provisions, exceptional circumstances may include,
but are not limited, to a material misstatement in the published results of
the Bank for the period to which the award related, an error in calculating
the incentive payment, or misconduct of the individual. Clawback
adjustments may include:
– Reducing an individual’s cash bonus outcome for the current year
(including to nil);
– Requiring a cash repayment in respect of any shares delivered under
the DSBP and/or PSP;
– Reducing any other outstanding share awards the individual holds; and
– The individual returning some or all of the shares acquired under his
award to the Company.
DSBP awards may be clawed back within three years of grant and PSP
awards within three years of the normal vesting date of the relevant award.
70 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
NON-EXECUTIVE DIRECTOR FEES
The policy table below summarises the key components of the Remuneration Policy that will be applied when setting the remuneration packages for
Non-Executive Directors.
Element
Purpose and link to strategy
Operation and performance measures
Opportunity
Non-Executive Directors’
fees
To recruit and retain Non-Executive
Directors of the required calibre.
Reflect the time commitment
required and scope of responsibility.
There is no maximum fee increase
that may be given in any year,
but any increases will take into
consideration increases awarded to
Executive Directors and the wider
employee population.
The Chairman and Non-Executive Directors are entitled to
an annual fee, with additional fees payable to the Senior
Independent Director, the Chairman and members of the
Audit, Risk and Remuneration Committees and any Committee
formed following the approval of the policy. Additional fees are
also payable to the members of the Nomination Committee.
The Chairman does not receive any additional fee for his
membership of the Remuneration Committee nor for being
Chairman of the Nomination Committee.
Fees are reviewed annually.
Fees are set at a level that reflects the responsibilities of the role
and the time commitment required, and the fee levels offered at
companies of a similar size and complexity.
The Chairman and Non-Executive Directors are reimbursed for
reasonable expenses incurred while performing their duties to
the Bank.
RECRUITMENT AND APPOINTMENT TO THE BOARD
In the event of appointing a new Executive Director, the remuneration package offered will be determined in line with the following principles:
– The Committee will seek to pay no more than is necessary;
– The Committee will consider all relevant factors, including the calibre and experience of the individual and the scope of the role, as well as the interests
of the Bank and its shareholders;
– Salary will be set taking into account the review principles set out in the policy table on page 68. Where appropriate, the salary may be set at an initially
lower level with the intention to make phased salary increases over a number of years (which may be above those for the wider employee Group) to
achieve the appropriate market positioning;
– The remuneration package will align with the policy table on page 68. The maximum variable pay opportunity will be within the maximum limits set
out in the table, and will be within the 2:1 ratio of variable remuneration to fixed remuneration. This limit excludes any buy-out awards, which are
governed as set out in the paragraph below;
– Where an Executive Director is appointed from within the Bank or following corporate activity or reorganisation (e.g. merger with another Company),
the normal policy would be to honour any legacy arrangements in line with the original terms and conditions;
– Where a new Executive Director has to relocate to take up the appointment, either in the UK or from overseas, practical and/or financial support may
be given in relation to relocation and mobility;
– In order to facilitate recruitment, the Committee may need to ‘buy out’ variable remuneration arrangements forfeited or forgone on leaving a previous
employer. The value of the buy-out awards will broadly be the equivalent of, or less than, the value of the award being bought out. In accordance with
regulatory requirements, these ‘buy-out awards’ will take into consideration relevant factors including, but not limited to:
– The form of the award;
– Any performance conditions attached to those awards;
– The vesting profile of the awards and the likelihood of vesting; and
– Relevant regulatory guidance in place in relation to buy-out awards.
– The Company may rely on the exemption in the Listing Rules (9.4.2) to allow any such buy-out awards to be made in line with this Policy without
requiring separate shareholder approval.
SERVICE CONTRACTS AND LETTERS OF APPOINTMENT
The notice periods and dates of the current Executive Directors’ service contracts are shown below:
Name
Steve Pateman
Chief Executive Officer
Tom Wood
Chief Financial Officer
Stephen Johnson
Deputy Chief Executive Officer
1
Steve Pateman’s appointment was effective from 1 January 2016.
Date of service contract
Notice period by Company
Notice period by Director
1 October 20151
1 April 2015
28 July 2015
6 months
12 months
12 months
6 months
12 months
12 months
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 71
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
The Bank’s policy going forward for new Directors is that service contracts
for an Executive Director may be terminated with six months’ notice by
either the Bank or the individual, unless there is evidence of gross
misconduct or other circumstances where the individual may be summarily
dismissed by written notice. The Committee reserves the right to use a 12
month notice period upon recruitment of a new Executive Director
if necessary.
The Bank may terminate employment by making a payment in lieu of
notice equivalent to salary and the cost of benefits and pension during the
unexpired period of notice.
Under the terms of their service contracts, Executive Directors receiving
salary in lieu of notice are required during that period to take all reasonable
steps to find an alternative remunerated position to mitigate their loss to
the Company.
Non-Executive Directors (including the Chairman) are appointed via letters
of appointment, which are available for inspection at the Company’s
registered office. Non-Executive Directors are initially appointed for a three-
year term, and may serve for a second term, at the Board’s discretion.
The appointment of the Chairman may be terminated with three months’
notice by either the Bank or the individual. The corresponding notice
periods for other Non-Executive Directors are one month by either party.
Non-Executive Directors are not entitled to any compensation for loss of
office other than fees paid for their notice period.
The Executive Directors’ service contracts and the Non-Executive Directors’
letters of appointment are available for inspection by shareholders at the
Company’s registered office.
PAYMENTS FOR LOSS OF OFFICE
The Remuneration Policy relating to payments for loss of office reflects the
service contracts in place as well as the relevant incentive plan rules.
There is no automatic or contractual right to incentive payments. The
Committee will consider the specific circumstances of the cessation of
employment when exercising its discretion, including the rationale for
departure and the performance to the date of cessation, with payments
made on a case-by-case basis.
The Committee reserves the right to make additional termination
payments where such payments are consistent with an existing legal
obligation (or by way of damages for breach of such an obligation), or by
way of settlement or compromise of any claim arising in connection with
the termination of an Executive Director’s office or employment.
Treatment of in year annual bonus and outstanding DSBP awards
In general, outstanding annual bonus awards will lapse on cessation of
employment, unless the Committee determines otherwise.
As a general rule, unvested DSBP awards will not lapse on cessation of
employment, except in the circumstances of dismissal for gross
misconduct, voluntary resignation or a similar ‘bad leaver’ reason
determined by the Committee, in which case the awards will lapse
immediately unless the Committee determines otherwise. Where DSBP
awards do not lapse, the awards will ordinarily vest on the original vesting
date, subject to the operation of malus and/or clawback, unless the
Committee determines that the awards should vest on the individual’s
cessation of employment.
Where an individual is dismissed for cause, any vested nil-cost options held
under the DSBP will also lapse, unless the Committee determines
otherwise. If an individual dies, his unvested DSBP awards will normally vest
immediately.
Treatment of outstanding PSP awards
The Committee will determine whether an Executive Director is a good
leaver in its absolute discretion. However typical good leaver scenarios will
include cessation of employment due to injury, ill-health, disability,
retirement, the sale of the individual’s employing entity out of the Group,
or any other circumstances for which the Committee determines good
leaver status is appropriate. As a general rule, unvested PSP awards will
lapse immediately on cessation of employment, unless determined to be a
good leaver. In this case, the awards will ordinarily vest on the original
vesting date, unless the Committee determines that the awards should
vest on the individual’s cessation of employment.
Where an individual is dismissed for cause, any vested nil-cost options he
holds under the PSP will also lapse, unless the Committee determines
otherwise. If an individual dies, his unvested PSP awards will normally vest
immediately on the good leaver terms set out above.
If the Committee determines the outstanding awards should vest, the
proportion vesting will be subject to:
– The satisfaction of any applicable performance conditions measured
over the original performance period (or, where appropriate the period
to the individual’s cessation of employment);
– The operation of malus and/or clawback; and
– Pro-rating of awards to reflect the reduced period of time between
grant and early vesting as a proportion of the original vesting period
(unless the Committee determines otherwise).
Any holding periods applicable to shares acquired under PSP awards may
continue to apply following cessation of employment at the Committee’s
discretion.
72 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
ILLUSTRATION OF APPLICATION OF REMUNERATION POLICY
The charts below illustrate the potential 2016 remuneration outcomes for the Executive Directors under the new Remuneration Policy, in the following
three scenarios:
Scenario
Description
Assumptions
Minimum performance
Minimum remuneration receivable.
Fixed pay (salary as at 1 January 2016), pension and benefits.
•
• No payouts under incentive plans.
Target performance
Value of remuneration payable for achieving performance in line
with expectations.
Maximum performance
Value of remuneration payable for achieving performance in excess
of the ‘maximum’ targets set.
•
•
•
•
•
•
Fixed pay (as above).
80% of maximum bonus opportunity.
62.5% of PSP awards vesting.
Fixed pay (as above).
100% of maximum bonus opportunity.
100% of PSP awards vesting.
£2,096k
30%
30%
£1,736k
22%
29%
£846k
100%
49%
40%
2,100
1,750
1,400
1,050
700
350
0
£1,309k
32%
32%
£1,064k
25%
32%
£459k
100%
43%
35%
Fixed remuneration
Annual variable remuneration
Long-term variable remuneration
£652k
25%
32%
43%
£801k
32%
32%
35%
£281k
100%
Minimum
Target
Maximum
Minimum
Target
Maximum
Minimum
Target
Maximum
CEO: Steve Pateman
CFO: Tom Wood
Deputy CEO: Stephen Johnson
REMUNERTION PAYMENTS AND PAYMENTS FOR LOSS OF OFFICE
Remuneration payments and payments for loss of office will only be made if consistent with this remuneration policy or otherwise approved by an
Ordinary Resolution by shareholders.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 73
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
ANNUAL REMUNERATION REPORT
This section of the Directors’ Remuneration Report summarises how Shawbrook implemented the Remuneration Policy in 2015, and how it is intended to
be operated in 2016. This Annual Remuneration Report will be submitted to shareholders in an advisory vote at the 2016 AGM. Where required, sections of
the Annual Remuneration Report have been audited by KPMG LLP - this is indicated where appropriate.
Consideration by the Directors of matters relating to Directors’ remuneration
Prior to Admission, the Bank’s governance in relation to remuneration matters was carried out by a jointly formed Remuneration and Nomination
Committee. This Committee met once between 1 January 2015 and the date of Admission.
Material assistance was provided to the Committee by the General Counsel and Company Secretary, the Head of Secretariat, the Interim Chief Executive
Officer & Chief Financial Officer and the Interim Human Resources Director. These individuals attended certain meetings by invitation but were not
present for discussions on their own remuneration.
From 20 October 2015, the Committee received advice on executive remuneration from Deloitte LLP, following a competitive tender process. Prior to that,
advice was provided by New Bridge Street. Both Deloitte LLP and New Bridge Street are founding members of the Remuneration Consultants Group and
adhere to its Code of Conduct.
Following appointment, Deloitte LLP provided advice and information in respect of the development of the Bank’s Remuneration Policy, its reporting
under the Directors’ Remuneration Reporting Regulations, and compliance with other regulatory requirements, and were paid fees totalling £47,650 for
the period. Deloitte has also provided risk advisory, internal audit and real estate advisory services to Shawbrook during 2015.
New Bridge Street provided advice in respect of executive remuneration arrangements in the period leading up to, and immediately following,
Shawbrook’s IPO. Fees paid to New Bridge Street for the period from IPO to October 2015 were £41,000.
The Committee is satisfied that the advice received from all parties was objective and independent.
Single total figure of remuneration (audited)
The tables below set out the single total figure of remuneration for Executive and Non-Executive Directors for the financial year ended 31 December 2015,
reflecting remuneration received from appointment to the Shawbrook Group plc Board in 2015.
Year ended 31 December 2015:
Executive Director
Salary/fee (£000)
Taxable benefits (£000)
Pension5 (£000)
Annual bonus (£000)
SAYE (£000)
Total (£000)
Legacy share plan6 (£000)
Total (£000)
Richard Pyman1,3,6
Tom Wood1,4,6
Stephen Johnson2
251
2
20
–
–
273
3,425
3,698
423
10
23
424
3
883
7,954
8,837
171
1
12
235
3
422
422
Notes:
1. Appointed on 20 March 2015.
2. Appointed on 21 May 2015.
3. Richard Pyman stepped down as CEO on 2 October 2015.
4.
5. Pension contributions or allowances.
6. Richard Pyman and Tom Wood had previously subscribed for B and/or C ordinary shares in the Company, the terms of which provided for their conversion into ordinary shares upon the IPO on a
Inclusive of additional allowance of £110,000 (based on annualised allowance of £175,000) for acting as Interim CEO for the period 21 May to 31 December 2015.
basis determined by reference to the IPO price. As a result of this conversion, Richard Pyman held 1,181,164 ordinary shares and Tom Wood held 2,742,841 ordinary shares.
74 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Non Executive Director
Fees (£000)
Total (£000)
Legacy share plan (£000)14
Total (£000)
Sir George
Mathewson7
Iain
Cornish8
Graham
Alcock9
Robin
Ashton9
Sally-Ann
Hibberd10
Paul
Lawrence11
Roger
Lovering9
Lindsey
McMurray12
James
Scott13
31
31
3,590
3,621
94
94
–
94
56
56
–
56
61
61
2,308
2,369
10
10
–
10
32
32
–
32
64
64
–
64
–
–
–
–
–
–
–
–
Notes:
7. Appointed on 20 March 2015 and stepped down from the Board on 6 July 2015.
8. Appointed on 6 July 2015.
9. Appointed on 20 March 2015.
10. Appointed on 5 November 2015.
11. Appointed on 24 August 2015.
12. Pollen Street Capital was paid £30,000 for the services of Lindsey McMurray for the years ended 31 December 2014.
13. James Scott was a Director of Laidlaw Acquisitions Limited prior to Admission. He resigned on 20 March 2015. He received no fee for this position.
14. Sir George Mathewson and Robin Ashton had previously subscribed for B and/or C ordinary shares in the Company, the terms of which provided for their conversion into ordinary shares upon the
IPO on a basis determined by reference to the IPO price. As a result of this conversion, Sir George Mathewson held 1,237,874 ordinary shares and Robin Ashton held 795,776 ordinary shares.
The tables below set out the single total figure of remuneration for Executive and Non-Executive Directors for the financial year ending 31 December
2014, reflecting remuneration received from appointment to the Shawbrook Bank Limited Board in 2014:
Year ended 31 December 2014:
Director
Salary/fee (£000)
Taxable benefits (£000)
Pension (£000)
Annual bonus (£000)
Other⁴ (£000)
Total
Notes:
1. Appointed on 2 April 2014.
2. Stepped down on 2 April 2014.
3. Richard Pyman stepped down as CEO on 2 October 2015.
4. Termination payment
Director
Fees
Richard Pyman1,3
Tom Wood
Ian Henderson2
225
2
16
125
–
368
275
34
21
150
–
480
264
1
6
–
100
371
Sir George
Mathewson
123
Sir Brian Ivory
Graham Alcock
Robin Ashton
Roger Lovering
119
27
50
60
The Group paid Pollen Street Capital Limited £30,000 for the services of Lindsey McMurray.
Additional disclosures in respect of the single total figure of remuneration table (audited)
Salary/fees
Salaries for the Executive Directors were reviewed on Admission, in light of the change in scope and nature of the roles, and to reflect the current
FTSE-listed environment. The table below sets out the salaries for the Executive Directors from the date of Admission.
Salary
pre-Admission
Salary from
Admission
Richard Pyman1
Tom Wood2
Stephen Johnson
£300,000
£275,000
n/a
£350,000
£325,000
£260,0003
1. Richard Pyman stepped down from the Board on 2 October 2015.
2. Since Richard Pyman stepped down as Chief Executive Officer, Tom Wood has been acting as interim Chief Executive Officer while continuing his role as Chief Financial Officer. In addition to the
salary quoted above, he has received a temporary allowance of £175,000 p.a. for his role as interim Chief Executive Officer.
3. Stephen Johnson was appointed Deputy Chief Executive Officer on 21 May 2015. The £260,000 salary figure shown in the table is his effective salary from appointment to the Board, on an annualised basis.
Salaries for the Executive Directors were increased following Admission to reflect the increased responsibilities associated with Shawbrook’s status as a
listed Company. Salaries were determined following a benchmarking review of similar peers and are now more aligned with the market. Future salary
increases will be made in line with the Directors’ Remuneration Policy.
As shown in the table above, since his appointment as interim Chief Executive Officer, Tom Wood has received an additional allowance of £175,000 p.a. On
the commencement of Steve Pateman’s employment as Chief Executive Officer on 1 January 2016, Tom Wood was no longer eligible for this allowance.
Details of Steve Pateman’s remuneration arrangements on recruitment are shown on page 79.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 75
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Similarly, fees for the Non-Executive Directors were set on Admission, as shown below. The fees remained at these levels throughout 2015, except for the
Chairman fee, as shown in the table below:
Fees from
Admission
Fees from
1 August 2015
NED base fee
Chairman fee
£65,0001
£122,7002
£65,000
£190,000
1. Paul Lawrence received an additional fee of £25,000 p.a. in 2015 in relation to his role as Chairman of the Risk Committee and a fee of £5,000 p.a. in 2015 in relation to his role as a member of the
Audit Committee.
2. Fees received by Sir George Mathewson at the time of Shawbrook’s Admission to the Main Market. Sir George stepped down from the Board on 6 July 2015 and was succeeded as Chairman of the
Board by Iain Cornish. Mr Cornish’s fees are £190,000 per annum. These fees are more in line with FTSE 250 market practice and reflect Mr Cornish’s experience and knowledge of the financial
services industry.
Taxable benefits
Taxable benefits comprise private medical insurance for all Directors and a living allowance for the CFO (ceased from April 2015).
Pension
In 2015, Executive Directors received employer pension contributions of 7.5% of salary.
All-employee share plans
Eligible employees were invited to subscribe for options over ordinary shares of 1 pence (‘Ordinary Shares’) with an exercise price of 259.76 pence per
share, a 20% discount to the average closing middle market quotation of an Ordinary Share for the three dealing days immediately preceding the date on
which the invitation to participate was made on 7 September 2015. The options have a savings contract start date of 1 December 2015 and are exercisable
between 1 December 2018 and 1 June 2019. The options have no performance and all options are outstanding.
On 2 October 2015, some of these options to buy ordinary shares were granted under the terms of the Sharesave Scheme to certain Executive Directors of
the Company.
Name
Tom Wood
Stephen Johnson
Number of options
6,929
6,929
Annual bonus
As detailed in the IPO Prospectus, for 2015 the Executive Directors were eligible to participate in the annual bonus, with a maximum annual bonus
opportunity of 100% of salary.
For each Executive Director, the 2015 annual bonus outcome was based on performance against a scorecard of measures, weighted 65% on financial
measures, and 35% on non-financial measures reflecting the strategic goals of the Bank, and individual objectives. The table below illustrates performance
against the targets set for each measure.
Measure
Underlying PBT
Return on Tangible Equity
Cost:income ratio
Risk management
Customer (NPS)
Culture & employee engagement
Weighting
Threshold
Target
Maximum
Outcome
45%
10%
10%
20%
7.5%
7.5%
£83.5m
£79.5m
£55.5m
27%
23%
15%
44%
48%
56%
Remuneration Committee judgement
34
30
Remuneration Committee judgement
18
£80.1m
26.9%1
48%
See below
34
See below
1. The actual underlying return on equity of 27.9% included a positive uplift of c.1% due to the revaluation of deferred tax assets following the implementation of the 8% bank surcharge. The
Remuneration Committee determined it was appropriate to exclude this uplift for the purposes of determining bonus outcomes.
Following a review of the Bank’s risk management performance over the year, based on input from the Chief Risk Officer, the Committee determined a
payout of 62.5% under the risk management element of the scorecard. This outcome reflects the significant effort that has been put into transforming the
risk culture of the Bank over the year, which has resulted in substantial improvement, especially during the second half of the year.
During the year, the Bank has performed strongly against the culture and employee engagement element of the scorecard, particularly in regards to the
improvement in the risk culture among employees and staff turnover rates. As a result, the Committee determined that a payout of 100% of maximum
was warranted under this element.
The Committee assessed the individual performance of the Executive Directors over the year. During 2015, Tom Wood performed a pivotal role as CFO
during the successful IPO of the Group, and stepped up as interim CEO for seven months of the year, during which he led the Bank following IPO. As a
result of his outstanding commitment and contribution to the Bank over the year, including performing a number of roles, the Committee exercised their
discretion to award him a bonus of 100% of salary.
76 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Stephen Johnson also performed a pivotal role during the IPO, providing excellent support to Richard Pyman and Tom Wood in his role as Deputy CEO. As
a result, the Committee determined an overall bonus level of 95% of salary was warranted for Stephen Johnson.
50% of the annual bonus earned has been paid in cash, with the other 50% deferred into Shawbrook shares under the Deferred Share Bonus Plan, which
will vest in equal tranches after one, two and three years in March of 2017, 2018 and 2019. The bonuses earned by the Executive Directors are summarised
in the table below:
Director
Tom Wood
Stephen Johnson
Performance Share Plan
No PSP awards were granted in 2015.
Bonus outcome
(% of maximum)
Amount
paid in cash
Amount deferred
into shares
100%
95%
£212,000
£118,000
£212,000
£118,000
Scheme interests awarded during the financial year (audited)
No PSP awards were granted to Executive Directors in 2015. It is intended that the first awards under the PSP will be granted in 2016.
Payments to past Directors (audited)
There were no payments made to past Directors relating to 2015.
Payments for loss of office (audited)
Richard Pyman stepped down from the role of Chief Executive Officer on 2 October 2015, following a period of ill health.
Mr Pyman did not receive any salary, benefits and pension from the date that he stepped down from the Board. No awards were made to Mr Pyman
under the 2015 annual bonus and he held no outstanding awards under the Performance Share Plan.
Statement of Directors’ shareholding and share interests (audited)
As set out in the Remuneration Policy table above, Executive Directors are required to achieve and maintain, within five years, a shareholding in the Bank
of at least 200% of salary. Until this is achieved, Executive Directors must retain at least 50% of shares acquired on vesting of PSP awards (net of tax).
Unvested shares, including shares under the Deferred Share Bonus Plan, are not taken into account when assessing achievement against the shareholding
requirement.
Interests in shares
The table below summarises the shareholdings as at 31 December 2015, and achievement against the shareholding requirements, of the Executive
Directors.
Director
Richard Pyman
Tom Wood
Stephen Johnson
Shares owned
outright1
Current shareholding
(% of salary)2
Requirement met?
885,873
2,057,131
3,847,429
892%
2,232%
5,218%
Yes
Yes
Yes
Notes
1. Directors’ beneficial holdings in the ordinary shares of the Bank, including holdings of connected persons.
2. Current shareholding valued using the three-day average share price to 31 December 2015 of 352.6p.
The table below summarises the shareholdings of Sir George Mathewson and Robin Ashton at 31 December 2015. The other Non-Executive Directors
have not been included in the table as they currently hold no shares in the Company.
Director
Sir George Mathewson
Robin Ashton
Shareholding at
31 December 2015
928,406
596,832
There have been no changes in the share interests of the current Directors between 31 December 2015 and to March 2016.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 77
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Change in remuneration of the CEO compared to the wider employee population
The table below sets out the increase in salary, benefits (excluding pension) and bonus of the CEO compared to that of the wider employee population.
Chief Executive Officer1,2
All employees3
% change in salary
(2014 to 2015)
% change
in annual bonus
(2014 to 2015)
% change
in benefits2
(2014 to 2015)
92%
7%
239%
19%
12%
1%
1. Based on the salary of Richard Pyman for the period between January and May 2015 and Tom Wood (jncluding an ‘acting up’ allowance) for the period between June and December 2015.
2. Note that the Chief Executive’s salary increased to reflect the associated additional responsibility and duties of leading a publicly listed Company.
3. Adjusted for movements in colleague numbers and other impacts to ensure a like for like comparison.
Figures for ‘All employees’ have been calculated using data for all relevant colleagues except the CEO, which is considered to be the most appropriate
Group of colleagues for these purposes.
Historical TSR performance and CEO remuneration outcomes
The chart below compares the TSR performance of the Bank to that of the FTSE 250 from the date of Admission (8 April 2015) to the end of the 2015
financial period.
The Remuneration Committee considers the FTSE 250 to provide the most relevant comparison as Shawbrook is currently a constituent of this index.
£140
£130
£120
£110
£100
£90
£80
Mar 15
Apr 15
May 15
Jun 15
Jul 15
Aug 15
Sep 15
Oct 15
Nov 15
Dec 15
Jan 16
¢ Shawbrook
¢ FTSE 250
The table below summarises the single total figure of remuneration and annual bonus payout as a percentage of maximum for the period used above.
Please note that in future years, once the first tranche of PSP awards have vested, the table will also include PSP vesting as a percentage of maximum.
Single total figure of remuneration – Richard Pyman & Tom Wood1
Annual bonus payout – Tom Wood (% of maximum)
Period to
31 December
2015
£6,694,417
100%
1. Based on the total remuneration of Richard Pyman for the period between January and May 2015 and Tom Wood (jncluding an allowance as Interim CEO) for the period between June and December 2015.
78 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Relative importance of spend on pay
The table below illustrates the total staff costs and dividends paid to shareholders over the relevant financial year and immediately preceding financial year.
Total staff costs
Dividends paid
1. No dividends were paid in 2014 or 2015.
Year ended
31 December 2015
Year ended
31 December 2014
£46,611,275
n/a
£31,204,152
n/a
% change
49%
n/a
External appointments for Executive Directors
Executive Directors are permitted to hold external Board appointments. External appointments (and the treatment of any related fees) are also subject to
prior approval of the Board.
Stephen Johnson is a Director of Latchglen Limited, but does not receive any fees in respect of this appointment. At the time of writing, neither Steve
Pateman nor Tom Wood held any external appointments.
Recruitment arrangements for Chief Executive Officer
Following the departure of Richard Pyman on 2 October 2015, it was announced that Steve Pateman would join Shawbrook Group as CEO on 1 January
2016. His base salary has been set at £625,000 to reflect the wealth of experience he brings to the Group and his outstanding track record of building
highly successful SME banking businesses.
Mr Pateman’s benefits, bonus opportunity and PSP opportunity have been set in line with the current policy for all Executive Directors. His pension
allowance is 35% of salary, in line with the pension provision offered by his previous employer.
His bonus opportunity will be 100% of salary, of which 50% will be deferred under the Deferred Share Bonus Plan on the same basis as all other Executive
Directors, and his PSP awards will typically be made in shares to the equivalent value of up to 100% of salary.
In addition to the above, Mr Pateman has also received one-off share awards in relation to his recruitment:
– An award of shares was granted to him over 552,623 shares by Special Opportunities Fund (Guernsey) LP over Shawbrook Group plc shares (or options).
This grant is in respect of awards forfeited from his previous employer, is of equivalent value and will be subject to the same deferral schedule as those
awards, as well as malus and clawback provisions. Other shareholders have not suffered any dilution as a result of this award.
– A further award over 71,408 ordinary shares has been granted by the Company to compensate him for the reduction in fixed remuneration from his
previous employment. This award vested immediately and the resulting net shares will be subject to a three year holding period. This award was
necessary to secure Steve Pateman’s services.
Implementation of the Remuneration Policy for 2016
The Remuneration Policy will be implemented in 2016 in line with the Policy Report above.
Salary
The Committee reviewed the salaries of the Executive Directors during 2015, following a market review of salary levels. The salaries effective from
1 January 2016 are as follows:
2016 salary
2015 salary
Steve Pateman
Tom Wood
Stephen Johnson
£625,000
£425,000
£260,000
n/a
£325,000
£260,000
Following a benchmarking review of peer organisations, the CFO’s salary was adjusted from 1 January 2016, in order to ensure that total compensation is
competitive and aligned to the market in light of our voluntary implementation of a 2:1 cap on variable remuneration.
Pension
As detailed above, with effect from 1 January 2016, the CEO will receive a pension allowance of 35% of salary. A review of pension levels for the other
Executive Directors is currently being undertaken, subject to the maximum pension level set out in our Policy Table above.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 79
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Annual bonus
The maximum annual bonus opportunity remains unchanged at 100% of salary for Executive Directors. As for 2015, 50% of any bonus earned will be
deferred under the DSBP in line with the Policy table on page 68.
For 2016, the annual bonus will be based on:
Measure
Financial measures
PBT
Return on Tangible Equity
Cost:income ratio
Non-financial measures
Risk management
Customer (NPS)
Culture & employee engagement
Individual measures
Individual performance
Weighting
35%
10%
10%
15%
5%
5%
20%
The 2016 bonus structure and weightings have been adjusted to allow for a specific element of the bonus to be awarded for individual performance
against specified short-term business objectives, as agreed at the beginning of the financial year. For each Executive Director, individual performance will
be assessed against a personal scorecard of financial and non-financial metrics (including financial, strategic, risk, customer, and people measures).
The 2016 bonus targets are considered to be commercially sensitive and have therefore not been disclosed upfront. Performance against these targets will
be provided in next year’s Annual Remuneration Report.
Performance Share Plan
PSP grants in 2016 will be equal to 100% of salary for Executive Directors. Any awards that vest will be subject to a two-year holding period following the
end of the three-year performance period.
The PSP awards vest subject to the achievement of a balanced scorecard of measures, as set out in the table below:
Measure
Financial measures
Relative TSR
Earnings per share
Non-financial measures
Customer (NPS)
Risk management
Weighting
Target performance requirement
Maximum performance requirement
20%
40%
20%
20%
Median against peer Group
20% growth p.a.
Upper quartile against peer
Group
35% growth p.a.
34
Judgemental assessment against a number of factors (see
below)
26
We intend to use the following Group of selected peers for assessing TSR performance for the 2016 awards:
– Aldermore Group plc
– Arrow Global
– Barclays
– Close Brothers
– HSBC
– International Personal Finance
– Lloyds Banking Group
– OneSavings Bank
– Paragon Group of Companies
– Provident Financial
– Royal Bank of Scotland
– Secure Trust Bank
– Standard Chartered
– Virgin Money
The risk and compliance factors which will be taken into consideration by the Committee at the time of vesting include: Board risk appetite metrics, material
regulatory breaches, completion of actions of regulatory/audit/control effectiveness reviews, regulatory change programmes and customer complaints.
The Remuneration Committee retains the discretion to adjust the formulaic outcome to reflect the overall performance of the Group, any significant risk
events during the period, or for any other circumstances as deemed appropriate by the Remuneration Committee.
80 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Any vested awards will be subject to a further holding period following the end of the three-year performance period, during which time Executive
Directors will not be able to sell any shares earned.
Non-Executive Director Fees
The Board reviewed the fees for the Non-Executive Directors in early 2016. As a result of additional benchmarking undertaken, and to reflect the typical
fee structure seen in the UK-listed environment, it was decided to introduce additional fees for the Senior Independent Director, the Chairmen and
members of the Audit, Risk and Remuneration Committees, and members of the Nomination Committee. As the role of Nominations Committee
Chairman is performed by the Chairman of the Board, it was determined that there should be no additional fee for this role. The Chairman of the Board
also receives no additional fee for his membership of the Remuneration Committee.
The new fee structure will take effect from 1 January 2016, and is shown in the table below:
NED base fee
Chairman fee
SID fee
Audit and Risk Committee Chairman fee
Remuneration Committee Chairman fee
Audit and Risk Committee membership fee
Remuneration and Nomination Committee membership fee
Fees from
1 January 2016
£65,000
£190,000
£10,000
£20,000
£5,000
£5,000
£2,500
STATEMENT OF VOTING AT AGM
This will be the first year that the Directors’ Remuneration Report is put to shareholders for approval. The results of the vote will be disclosed in the 2016
Annual Remuneration Report.
APPROVAL
This report was reviewed and approved by the Board on 2 March 2016.
GRAHAM ALCOCK
Remuneration Committee Chairman
2 March 2016
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 81
STRATEGIC REPORTFINANCIALSGOVERNANCE STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE
ANNUAL REPORT AND ACCOUNTS
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE
ANNUAL FINANCIAL REPORT
The Directors as at the date of this statement whose names and functions
are set out on pages 48 to 49 confirm that to the best of their knowledge:
– the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
– the Strategic Report and Directors’ Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face.
DANIEL RUSHBROOK
Company Secretary
2 March 2016
The Directors are responsible for preparing the Annual Report and
Accounts and the Group and Parent Financial Statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and Parent Company
financial statements for each financial year. Under that law they are
required to prepare the Group financial statements in accordance with
IFRSs as adopted by the EU and applicable law and have elected to prepare
the Parent Company financial statements on the same basis.
Under Company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and Parent Company and of their profit or
loss for that period. In preparing each of the Group and Parent Company
financial statements, the Directors are required to:
– select suitable accounting policies and then apply them consistently;
– make judgements and estimates that are reasonable and prudent;
– state whether they have been prepared in accordance with IFRSs as
adopted by the EU; and
– prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Group and the Parent Company will
continue in business.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Parent Company’s transactions
and disclose with reasonable accuracy at any time the financial position of
the Parent Company and enable them to ensure that the financial
statements comply with the Companies Act 2006. They have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors’ Report, Directors’ Remuneration
Report and Corporate Governance Statement that complies with that law
and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Group’s website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
82 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
STRATEGIC REPORT
GOVERNANCE
FINANCIALS
DIRECTORS’ REPORT
The Directors’ information on pages 83 to 86 inclusive (together with the
sections of the Annual Report incorporated by reference) constitute the
Directors’ Report that is required by law. This Directors’ Report also includes
additional disclosures required by the UKLA’s Disclosure and Transparency
Rules and Listing Rules. They consider that the Annual Report and Financial
Statements for the year ended 31 December 2015 taken as a whole are they
are fair, balanced and understandable and provide the information
necessary for shareholders and other stakeholders to assess the Group’s
position and performance, business model and strategy.
RESULTS FOR THE YEAR
The Group made a profit before tax for the year of £70.1m (2014: £45.3m)
and a profit after tax of £58.5m (2014: £34.5m). The Company made a loss
before tax for the year of £4.6m (2014: profit £0.3m) and a loss after tax of
£4.5m (2014: profit £0.3m). The reconciliation of statutory results to
underlying results is set out in the Strategic Report.
For the purposes of DTR 4.1.5R(2) and DTR 4.1.8 this Directors’ Report and
the Strategic Report on pages 8 to 44 comprise the management report.
DIVIDENDS
The Directors do not propose to recommend a final dividend in respect of
the year ended 31 December 2015.
DIRECTORS
The Directors who served during the year were:
Lindsey McMurray
James Scott (resigned 20 March 2015)
The following Directors were appointed on 20 March 2015:
Sir George Mathewson (resigned 6 July 2015)
Robin Ashton
Graham Alcock
Roger Lovering
Richard Pyman* (resigned 2 October 2015)
Tom Wood*
The following Directors were appointed after 20 March 2015:
Stephen Johnson was appointed on 21 May 2015*
Iain Cornish was appointed on 6 July 2015
Paul Lawrence was appointed on 24 August 2015
Sally-Ann Hibberd was appointed on 5 November 2015
Steve Pateman was appointed on 1 January 2016*
David Gagie was appointed on 1 January 2016
*
Executive Director
The biographical details of all current Directors are given on pages 48 to 49
of this Annual Report.
In accordance with the recommendations of the UK Corporate Governance
Code, with the exception of Graham Alcock who will be stepping down, all
Directors will offer themselves for appointment at the forthcoming AGM.
DIRECTORS’ INTERESTS
The Directors’ interests (and those of any persons connected with them) in
the share capital of the Company from Admission and as at 31 December
2015 are set out on page 77 of the Directors’ Remuneration Report.
POWERS AND APPOINTMENT OF DIRECTORS
Rules about the appointment and replacement of Directors are set out in
the Company’s Articles of Association. In accordance with the
recommendations of the Code, all Directors shall retire from office and may
offer themselves for re-appointment at the Annual General Meeting. The
Directors’ powers are conferred on them by UK legislation and by the
Company’s Articles of Association. Changes to the Company’s Articles of
Association must be approved by shareholders passing a special resolution
and must comply with the provisions of the Companies Act 2006 and the
FCA’s Disclosure and Transparency Rules.
DIRECTORS’ INDEMNITIES
The Company’s Articles of Association provide that, subject to the
provisions of the Companies Act 2006, the Company may indemnify any
Director or former Director of the Company or any associated Company
against any liability and may purchase and maintain for any Director or
former Director of the Company or any associated company insurance
against any liability.
The Directors of the Company have entered into individual deeds of
indemnity with the Company which constituted ‘qualifying third party
indemnity provisions’ for the purposes of the Companies Act 2006. The
deeds were in force from 1 April 2015 or from the date of appointment for
those Directors appointed after 1 April 2015 and are in force as at the date
of this Directors’ Report. The deeds remain in force for the duration of a
Director’s period of office and thereafter in respect of any claims made in
accordance with the indemnity in respect of the matters arising during the
Director’s period of office.
The Group has maintained appropriate Directors’ and Officers’ liability
insurance in place throughout 2015.
CORPORATE GOVERNANCE REPORT
The Corporate Governance Report can be found on pages 45 to 66 and,
together with this report of which it forms part, fulfils the requirements of
the corporate governance statement for the purpose of the Financial
Conduct Authority’s Disclosure and Transparency Rules (DTR).
SHARE CAPITAL
The Company’s share capital comprises one class of ordinary share with a
nominal value of 0.01p each. At 31 December 2015, 250,500,000 ordinary
shares were in issue.
RESTRICTIONS ON THE TRANSFER OF SHARES
There are no specific restrictions on the transfer of shares of the Company
which are governed by the general provisions of the Articles of Association
and prevailing legislation.
RIGHTS ATTACHING TO SHARES
On a show of hands, each member has the right to one vote at general
meetings of Company. On a poll, each member would be entitled to one
vote for every share held. The shares carry no rights to fixed income. No
person has any special rights of control over the Company’s share capital
and all shares are fully paid.
NEW ISSUES OF SHARE CAPITAL
Under section 551 of the Companies Act 2006, the Directors may allot
equity securities only with the express authorisation of shareholders which
may be given in General Meeting, but which cannot last more than five
years. Under section 561 of the Companies Act, the board may also not
allot shares for cash (otherwise than pursuant to an employee Share
Scheme) without first making an offer to existing shareholders to allot such
shares to them on the same or more favourable terms in proportion to
their respective shareholdings, unless this requirement is waived by a
special resolution of the shareholders.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 83
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REPORT CONTINUED
The Directors were granted the authority to issue and allot shares at a
General Meeting held on 31 March 2015 just prior to the IPO. The Board was
authorised to allot shares (1) in respect of the corporate reorganisation prior
to the IPO up to a nominal amount of £2,000,000; (2) for the purposes of
the IPO up to £400,000; and (3) for any other purposes up to an aggregate
nominal amount of £833,333. The Board considers it would be appropriate
to seek a renewal of the shareholder approval for such authority at the
forthcoming Annual General Meeting. Details of the resolution for such
authority are included in the Notice of the forthcoming Annual
General Meeting.
The Company block listed a total of 500,000 ordinary shares on
11 December 2015 otherwise there have been no other allotments since
the IPO.
PURCHASE OF OWN SHARES
Under section 701 of the Companies Act 2006 a Company may make a
market purchase of its own shares if the purchase has first been authorised
by a resolution of the Company.
The Directors were granted the authority to repurchase shares at a general
meeting held on 31 March 2015 just prior to the IPO to repurchase up to a
maximum of 2,500,000 ordinary shares. No such purchase has been made.
The Board considers it would be appropriate to seek a renewal of the
shareholder approval for the authority to purchase shares of up to 10% of
its issued share capital at the forthcoming Annual General Meeting.
Details of the resolution renewing the authority are included in the Notice
of the forthcoming Annual General Meeting.
SUBSTANTIAL SHAREHOLDINGS
In accordance with the Disclosure and Transparency Rules DTR 5, the
Company as at 12 February 2016 (being the latest practicable date before
publication of this report), has been notified of the following disclosable
interests in its issued ordinary shares:
the Board. The Board confirms that, since the IPO, the Company has
complied with the independence provisions included in the Relationship
Agreement and that, so far as the Company is aware, the Major Shareholder
and its associates have also complied with such provisions.
DISCLOSURE OF INFORMATION UNDER LISTING RULE (LR) 9.8.4R
Additional information, where not already contained in the Directors’
Report, required to be disclosed by Listing Rule 9.8.4R, where applicable to
the Company, can be found in the following sections of the annual report:
Subject matter
A statement of the amount of interest
capitalised by the Group
Details of long term incentive schemes
Page reference
Note 3 of the Financial
Statements
Page 76 of the
Remuneration Report
POST-BALANCE SHEET EVENTS
There have been no significant events between 31 December 2015 and the
date of approval of the Financial Statements which would require a change
to or additional disclosure in the Financial Statements.
CHANGE OF CONTROL
The Company is not party to any significant contracts that are subject to
change of control provisions in the event of a takeover bid.
There are no agreements between the Company and its Directors or
employees providing compensation for loss of office or employment that
occurs because of a takeover bid.
SIGNIFICANT CONTRACTS
Details of related party transactions are set out in note 32 to the Financial
Statements.
There are no contracts of significance in which a Director is interested.
Shareholder
Ordinary shares held
% of voting rights
Special Opportunities Fund (Guernsey) LP1
Fidelity Mgt & Research
Kames Capital plc
111,158,600
21,598,244
13,261,897
44.37%
8.62%
5.29%
BUSINESS ACTIVITIES
The Group’s business activities, together with the factors likely to affect its
future development and performance and its summarised financial
position are set out on pages 18 to 31 of the Strategic Report.
1
This figure has been updated to reflect the transfer of 256,631 shares to Steve Pateman on
19 February 2016.
Interests as at 31 December 2015 were as follows:
Shareholder
Ordinary shares held
% of voting rights
Special Opportunities Fund (Guernsey) LP
Fidelity Mgt & Research
Kames Capital plc
111,479,498
21,237,919
13,411,897
44.50%
8.48%
5.35%
RELATIONSHIP WITH MAJOR SHAREHOLDER
On Admission of its shares following the IPO in April 2015, the Company
entered into a relationship agreement (the ‘Relationship Agreement’) with
its major shareholder SOF General Partner (Guernsey) LP (the ‘Major
Shareholder’). Pursuant to the Relationship Agreement, the Major
Shareholder has been granted the right to appoint up to two Directors to
the Board so long as it holds a substantial interest in 20% of the Company’s
ordinary 0.01 pence shares; one Director if it holds a relevant interest in 10%
of the Company’s ordinary 0.01 pence shares. Despite the Major
Shareholder holding 44.37% in the Company’s shares (as indicated in the
table above), the Major Shareholder currently only has one appointee at
1
This will be the latest data before publication of the accounts.
84 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
EMPLOYEES
The Group is committed to being an equal opportunities employer and
opposes all forms of discrimination. Applications from people with
disabilities will be considered fairly and if existing employees become
disabled, every effort is made to retain them within the workforce
wherever reasonable and practicable. The Group also endeavours to
provide equal opportunities in the training, promotion and general career
development of disabled employees.
The Group regularly provides employees with information of concern to
them, which incorporates the Group’s current performance and its future
aims and strategies. The Group conducts an Annual Employee Survey and
uses the results of this survey to improve performance in areas that are
important to staff. A monthly newsletter providing business updates and
background information on the Group is circulated to all staff.
EMPLOYEE SHARE SCHEMES
All employees may participate in the Company’s Save as You Earn SAYE
Scheme. Full details of the Company’s Employee Share Schemes are set out
on page 102.
STRATEGIC REPORT
GOVERNANCE
FINANCIALS
EMPLOYEE BENEFIT TRUST
Equiniti Trust (Jersey) Limited is the trustee of the Shawbrook Group plc
Employee Benefit Trust, an independent trust, which holds shares for the
benefit of employees and former employees of the Group. Unless
otherwise directed by the Company, the trustee has agreed to waive all
rights to any dividends which may at any time be payable on any shares
held by the trust. The trustee has agreed to satisfy a number of awards
under the employee share plans. As part of these arrangements the Group
funds the trust, from time to time, to enable the trustee to acquire shares to
satisfy these awards, details of which are set out in note 27 on page 113 of
the Financial Statements.
POLITICAL AND CHARITABLE CONTRIBUTIONS
The Group made charitable donations of £87k (2014: £56k) during the
financial year and did not make any political donations or incur any political
expenditure during the financial year.
GOING CONCERN
The financial statements are prepared on a going concern basis, as the
Directors are satisfied that the Group has the resources to continue in business
for the twelve months from the reporting date. In making this assessment, the
Directors have considered a wide range of information relating to present
and future conditions, including the current state of the balance sheet,
future projections of profitability, cash flows and capital resources and the
longer term strategy of the business. The Group’s capital and liquidity
plans, including stress tests, have been reviewed by the Directors.
The Group’s forecasts and projections show that it will be able to operate
at adequate levels of both liquidity and capital for the 12 months from the
reporting date, including a range of stressed scenarios, the availability of
alternative sources of capital if required and appropriate management
actions.
After making due enquiries, the Directors believe that the Group has
sufficient resources to continue its activities for the 12 months from the
reporting date and to continue its expansion, and the Group has sufficient
capital to enable it to continue to meet its regulatory capital requirements
as set out by the Prudential Regulation Authority.
FAIR, BALANCED AND UNDERSTANDABLE
The Directors are satisfied that the Annual Report and Accounts, taken as a
whole, are fair, balanced and understandable, and provide the information
necessary for members and other stakeholders to assess the Group’s
position and performance, strategy and business model.
Details of the governance procedures which have been embedded to
support this can be found in the Audit Committee Report.
Financial risk management objectives and policies in relation to the use of
financial instruments – please refer to the Risk Management Report pages
32 to 39 and Note 30 of the Financial Statements.
DISCLOSURE OF INFORMATION TO THE AUDITOR
The Directors confirm that:
1. so far as each of the Directors is aware, there is no relevant audit
information of which the auditor is unaware; and
2. the Directors have taken all the steps that they ought to have taken as
Directors in order to make themselves aware of any relevant audit
information and to establish that the auditor is aware of that
information.
This confirmation is given and should be interpreted in accordance with
the provisions of the Companies Act 2006.
EMISSIONS REPORTING
Environment Overview
We recognise our responsibility to minimise our environmental impact by
protecting natural resources and operating sustainability. As a financial
services organisation with no industrial processes we require limited
natural resources to carry out our business activities, and therefore have a
limited impact on the local and wider environment. However we
continuously look to improve upon our process of incorporating
environmental considerations into our day to day operations as well as our
wider Group stategy.
2015 Performance
In line with the GHG (‘Greenhouse Gas’) protocol framework, we have
calculated the GHG emissions associated with our Scope 1 and 2
operations using DEFRA conversion factors. Scope 1 includes fuel
emissions from building and Company vehicles and Scope 2 includes our
emissions from purchased electricity. We are not currently reporting our
Scope 3 emissions due to limited data in relation to our leased assets,
employee travel, water usage and waste management. However we will
endeavour to include these in our 2016 Sustainability Report.
In 2015, our Total GHG emissions were 583.1 tCO₂e, equating to 1.14 tCO₂e
per employee, down 1.35% overall and 24.67% per employee since 2014. As
expected, the largest source of GHG emissions in 2015 was our purchased
electricity consumption. This is due to limited on-site fuel emissions and
the use of grey fleet instead of Company vehicles.
Our total GHG emissions are reported as tonnes of carbon dioxide
equivalent (tCO₂e) and are calculated in line with the GHG protocol
framework. In addition to reporting our total emissions, we have also
disclosed the emissions per employee as an intensity ratio.
FUTURE DEVELOPMENTS AND FINANCIAL RISK MANAGEMENT
OBJECTIVES AND POLICIES
Information about future developments, internal control and financial risk
management systems in relation to financial reporting and financial risk
management systems in relation to financial reporting and financial risk
management objectives and policies in relation to the use of financial
instruments can be found in the following sections of the Annual Report
which are incorporated into this report by reference:
SHAWBROOK BANK LTD ENVIRONMENTAL IMPACT TABLE
Baseline Year
Consolidation Approach
Emission factor data source
Assessment Methodology
Intensity Ratio
2014
Financial Control
DEFRA/DECC (2015) and World Resource
Institute (2015) GHG Protocol tool
The Greenhouse Gas Protocol Revised
Edition (2004)
Emissions per FTE
Future developments – please refer to the Strategic Report pages 8 to 31.
Internal control and financial risk management systems in relation to
financial reporting- please refer to the Corporate Governance Report pages
54 to 55.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 85
STRATEGIC REPORTFINANCIALSGOVERNANCE DIRECTORS’ REPORT CONTINUED
GHG EMISSIONS
Total Scope 1 CO2e emissions (t)1
Total Scope 2 CO2e emissions (t)
Lutea House
Croydon
Dorking
Glasgow
Wisbech
Total Scope 1 & Scope 2 CO2e
emissions (tonnes)
2015
61.5
61.5
521.6
268.1
95.8
88.7
47.7
21.3
583.1
2014
50.1
50.1
541.0
269.7
100.5
95.2
52.1
23.5
591.1
Change 2014
to 2015 (%)
22.75
22.75
-3.59
-0.59
-4.68
-6.83
-8.45
-9.36
-1.35
Total emissions per FTE (t)
1.13
1.50
-24.67
1 All reported figures have been stated in accordance with the latest DEFRA/GHG Protocol Gas
Conversion Factors for Company reporting.
2016 Sustainability
Going forward we will continue to monitor and report our GHG emissions,
working to improve our energy efficiency across the Shawbrook portfolio.
As mentioned we will look to collate, calculate and report our Scope 3
emissions in preparation for the 2016 Sustainability Report, while
implementing environmental measures to reduce consumption and GHG
emissions. Shawbrook recently reported energy consumption to the
Environment Agency in line with the mandatory government ‘Energy
Savings Opportunity Scheme’, which has identified £62,650 worth of
potential savings opportunities – representing a 32% reduction on
overall consumption.
AUDITOR
Resolutions to reappoint KPMG LLP as the Group’s auditor and to give the
Directors the authority to determine the auditor’s remuneration will be
proposed at the Annual General Meeting.
ANNUAL GENERAL MEETING
Shawbrook Group plc’s first Annual General Meeting will be held at
Instinctif Partners, 65 Gresham Street, London EC2V 7NQ on 9 June 2016 at
10 a.m. Notice of the forthcoming Annual General Meeting of the
Company, which includes the business to be transacted and resolutions to
be considered at the meeting, appear in the document accompanying this
Report and Accounts.
By order of the Board
STEVE PATEMAN
Chief Executive Officer
2 March 2016
86 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SHAWBROOK GROUP PLC
OPINIONS AND CONCLUSIONS ARISING FROM OUR AUDIT
1 Our opinion on the financial statements is unmodified
We have audited the financial statements of Shawbrook Group Plc for the
year ended 31 December 2015 set out on pages 90 to 133. In our opinion:
– the financial statements give a true and fair view of the state of the
Group’s and of the Parent Company’s affairs as at 31 December 2015
and of the Group’s profit for the year then ended;
– the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards as adopted
by the European Union (IFRSs as adopted by the EU);
– the Parent Company financial statements have been properly prepared
in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006; and
– the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
2 Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks
of material misstatement that had the greatest effect on our audit, in
decreasing order of significance, were as follows:
Impairment of loans and advances to customers (£13.5m)
Refer to page 59 (Report of the Audit Committee), page 105 (Accounting
policy, Critical accounting estimates and judgements and financial
disclosures).
The risk is that impairment provisions on loans and advances to customers
are misstated. Loans for which there is objective evidence that an
impairment event has occurred are assessed individually for impairment. If
there is deemed to be no evidence that an impairment exists on an
individual basis, loans are assessed collectively for impairment.
It is the judgements made by the Directors for collective provisioning
which are the most significant as they are the most sensitive to adjustment.
The two key judgements in the collective provisioning assessment are the
likelihood of default and the emergence period and it is the latter which is
the single most critical judgement as there is limited historic data on which
to accurately assess it.
The Group’s individual provisions are also subjective as a result of the
judgements needed and the relatively limited amount of historic
experience on some of the portfolios in what is a benign economic
environment. The Asset Finance, Business Credit and Commercial portfolios
represent 76% of the Group’s total loans. These loans are individually
monitored and the assessment of individual provisions for these loan
portfolios involves knowledge of each borrower. The key judgement for
individual provisions on these portfolios is the recoverable value of
underlying collateral.
The Secured and Consumer portfolios represent 24% of the Group’s total
loans. These portfolios comprise smaller value loans to a larger number of
customers and they are grouped into homogenous buckets and
monitored using arrears statistics which feed into the individual
provisioning calculations. The key judgement on these portfolios is the
propensity to default, particularly on the Consumer portfolio.
A management overlay is applied to the modelled provisioning balances to
reflect risk factors not taken into account by the models. This requires
judgement in relation to the factors to be reflected as well as their
estimated value.
Our response – In this area our audit procedures included:
– Testing the design, implementation and operating effectiveness of key
controls over the capture, monitoring and reporting of loans and
advances to customers;
– Substantively validating the year end impairment models for collective
and individual provisioning by re-performing calculations and agreeing
a sample of data inputs to source documentation. We also assessed
whether the data used in the models is complete and accurate through
testing a sample of relevant data fields and their aggregate amounts
against data in the source systems;
– Critically assessing and challenging the assumptions used by the Group
in their impairment models using our understanding of the Group, the
historical accuracy of its estimates, current and past performance of the
Group’s loans and our knowledge of the industry in respect of similar
loan types;
– Benchmarking key assumptions, methodology and overall provision
levels/ ratios against the Group’s peers. We also compared other inputs
such as house price inflation to market information to mitigate the risk
of error in collateral valuations;
– Considering the sensitivity of the collective and individual provisioning
models to changes in the key assumptions;
– Undertaking a detailed assessment of a sample of exposures for
individual impairment in the Asset Finance, Business Credit and
Commercial portfolios, taking a risk based approach to focus on those
with the greatest potential impact on the financial statements. Our
assessment specifically challenged the Group’s assumptions of
expected future cash flows including the valuation of realisable
collateral through inquiry with credit managers and inspecting
correspondence and independent valuation reports;
– Examining a sample of performing loans to evaluate if any indicators
of impairment existed to test the completeness of individual
impairment provisions;
– Critically assessing the rationale for the inclusion of elements in the
management overlay as well as the value of the overlay with reference
to our own knowledge of the industry; and
– Considering the adequacy of the Group’s disclosures in relation to
impairment about the changes in estimate occurring during the period
and the sensitivity to the key assumptions.
Income recognition (£212.7m)
Refer to page 60 (Report of the Audit Committee), page 99 (Accounting
policy, Critical accounting estimates and judgements and financial
disclosures).
The risk. Interest and fees earned on loans are recognised using the
effective interest rate (‘EIR’) method which spreads directly attributable
cashflows over the expected lives of the loans. The Directors apply
judgement in deciding which cashflows, including transaction costs, are
spread on an EIR basis and assessing the redemption profiles used to
spread those cashflows. The most critical element of judgement in this area
is the estimation of the redemption profiles of the loans, informed by past
customer behaviour of when loans have been paid off.
Our response – In this area our audit procedures included:
– Inspecting a sample of new product literature to ensure that pricing
structure, fees and costs are appropriately incorporated into the EIR
models as required by the relevant accounting standards;
– Agreeing a sample of data inputs to source information from the
systems. We assessed whether the data used in the models is complete
and accurate through testing a sample of relevant data fields and their
aggregate amounts against data in the source systems;
– Evaluating the accuracy of the models by re-performing a sample of
calculations, testing for model inconsistencies between the portfolios
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 87
STRATEGIC REPORTFINANCIALSGOVERNANCE INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SHAWBROOK GROUP PLC
CONTINUED
and comparing the methodology used to the requirements of the
relevant accounting standards;
– Challenging the appropriateness of key assumptions used in the EIR
We report to the Audit Committee any corrected or uncorrected identified
misstatements exceeding £0.15 million, in addition to other identified
misstatements that warranted reporting on qualitative grounds.
models, including the expected lives, by comparing these to historical
trends within the Group, the Group’s forecasts and our own
expectations based on our knowledge of the Group and experience of
the industry in which it operates;
– Considering the sensitivity of the model to changes in key assumptions;
– Benchmarking the Group’s expected life assumptions to peer data and/
or market information for comparable lending and where available; and
– Considering the adequacy of the Group’s disclosures about the changes
in estimate occurring during the period and the sensitivity to the key
assumptions.
Goodwill Impairment (£44.8m)
Refer to page 60 (Report of the Audit Committee), page 109 (Accounting
policy, Critical accounting estimates and judgements and financial
disclosures)
The risk is that goodwill amounts held on the balance sheet are not
supported by future cashflows of the underlying business. The recoverable
amounts for each cash generating unit (‘CGU’) are calculated using
discounted future cash flow forecasts and compared to the carrying value
for each CGU. In calculating the recoverable amounts, the Directors’ make
judgements over certain key inputs including revenue growth, discount
rate and long term growth rates.
£24.2m of the total goodwill balance relates to Business Credit, being the
area of most significant judgement in light of financial performance in the
year. Both the discount rate and the forecast cash flows used in calculating
the recoverable amounts are critical elements of judgement in this area.
Our response – In this area our audit procedures included:
– Assessing whether the CGUs have been appropriately identified in
relation to the requirements of the accounting standards, with
consideration of how Directors monitor and manage the business;
– Considering the adequacy of the Group’s disclosures about the key
assumptions, including the sensitivity of the recoverable amount to
those assumptions;
For Business Credit specifically our procedures included:
– Assessing the appropriateness of the Group’s forecasting approach and
the calculation of discount rates with the support of our valuation
specialists;
– Comparing discount rates used to externally available information for
other financial services institutions;
– Challenging forecast cash flows and growth rates in the context of the
historical experience of the CGU as well as our knowledge of the market
and wider economic environment;
– Considering the consistency of forecast cashflows used in the
impairment model with management forecasts and other key internal
documents; and
– Considering the sensitivity of the recoverable amounts to changes in
key assumptions.
3 Our application of materiality and an overview of the scope of
our audit
The materiality for the Group financial statements as a whole was set at
£3.0 million, determined with reference to a benchmark of Group profit
before tax of which it represents 4.3 %.
88 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
22%
Profit before tax
£70.1m
30%
Materiality
£3m
£3m
Whole financial
statements materiality
Mis-statements reported
£0.15m
to the Audit Committee
The Group audit team performed the audit of the Group as if it was a single
aggregated set of financial information. The audit was performed using the
materiality levels set out above and covered 100% of total Group Revenue,
Group profit before tax, and total Group assets.
4 Our opinion on other matters prescribed by the Companies Act
2006 is unmodified
In our opinion:
– the part of the Directors’ Remuneration Report to be audited has been
properly prepared in accordance with the Companies Act 2006; and
– the information given in the Strategic Report and the Directors’ Report
for the financial year for which the financial statements are prepared is
consistent with the financial statements;
5 We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing
material to add or draw attention to in relation to:
– he Group Viability statement on page 42, concerning the principal risks,
their management, and, based on that, the directors’ assessment and
expectations of the group’s continuing in operation over the 3 years to
31 December 2018; or
– the disclosures in note 1 of the financial statements concerning the use
of the going concern basis of accounting.
6 We have nothing to report in respect of the matters on which we
are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on
the knowledge we acquired during our audit, we have identified other
information in the annual report that contains a material inconsistency with
either that knowledge or the financial statements, a material misstatement
of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
– we have identified material inconsistencies between the knowledge we
acquired during our audit and the Directors’ statement that they
consider that the Annual Report and financial statements taken as a
whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s position
and performance, business model and strategy; or
– the Report of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
Under the Companies Act 2006 we are required to report to you if, in our
opinion:
– adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
– the Parent Company financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
– certain disclosures of Directors’ remuneration specified by law are not
made; or
– we have not received all the information and explanations we require
for our audit
Under the Listing Rules we are required to review:
– the Directors’ statements, set out on pages 85 and 42, in relation to
going concern and longer-term viability; and
– the part of the Corporate Governance Statement on page 55 relating to
the Company’s compliance with the eleven provisions of the 2014 UK
Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope and responsibilities
As explained more fully in the Directors’ Responsibilities Statement set out
on page 82, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair
view. A description of the scope of an audit of financial statements is
provided on the Financial Reporting Council’s website at www.frc.org.uk/
auditscopeukprivate. This report is made solely to the Company’s members
as a body and is subject to important explanations and disclaimers
regarding our responsibilities, published on our website at www.kpmg.
com/uk/auditscopeukco2014a, which are incorporated into this report as if
set out in full and should be read to provide an understanding of the
purpose of this report, the work we have undertaken and the basis of
our opinions.
SIMON CLARK
(SENIOR STATUTORY AUDITOR)
FOR AND ON BEHALF OF KPMG LLP, STATUTORY AUDITOR
CHARTERED ACCOUNTANTS
15 CANADA SQUARE, LONDON, E14 5GL
2 March 2016
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 89
STRATEGIC REPORTFINANCIALSGOVERNANCE CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2015
Interest income and similar income
Interest expense and similar charges
Net interest income
Operating lease rentals
Other income
Depreciation on operating leases
Net income from operating leases
Fee and commission income
Fee and commission expense
Net fee and commission income
Fair value gains/(losses) on financial instruments
Net operating income
Administrative expenses
Impairment losses on loans and advances to customers
Provision for liabilities and charges
Total operating expenses
Profit before taxation
Income tax charge
Profit after taxation, being total comprehensive income, attributable to owners
Earnings per share
Basic
Diluted
The notes on pages 95 to 130 are an integral part of these financial statements.
Note
3
4
16
5
15
6
14
23
12
Note
35
35
2015
£m
216.9
(63.8)
153.1
14.9
1.1
(12.2)
3.8
13.1
(2.8)
10.3
(0.3)
166.9
(88.7)
(6.5)
(1.6)
(96.8)
70.1
(11.6)
58.5
2015
Pence
24.1
24.1
2014
£m
156.7
(54.0)
102.7
15.7
1.1
(13.1)
3.7
7.6
(1.7)
5.9
(0.1)
112.2
(59.1)
(6.7)
(1.1)
(66.9)
45.3
(10.8)
34.5
2014
Pence
17.7
17.7
90 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITION
AS AT 31 DECEMBER 2015
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Derivative financial instruments
Property, plant and equipment
Intangible assets
Deferred tax assets
Other assets
Investment in subsidiaries
Subordinated loan receivable
Total assets
Liabilities
Customer deposits
Due to banks
Provisions for liabilities and charges
Other liabilities
Subordinated debt
Total liabilities
Equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings
Total Equity
Total equity and liabilities
Note
Group
2015
£m
Company
2015
£m
Group
2014
£m
Company
2014
£m
13
15
16
17
18
19
20
26
21
22
23
24
26
27
521.9
30.9
3,319.1
2.8
48.6
54.7
14.1
7.9
–
–
4,000.0
3,186.4
39.9
0.9
331.2
74.0
3,632.4
2.5
87.3
183.1
94.7
367.6
4,000.0
–
–
–
–
–
–
–
4.2
272.2
75.0
351.4
–
–
–
1.3
74.0
75.3
2.5
87.3
183.1
3.2
276.1
351.4
313.1
36.6
2,284.8
3.7
49.7
49.5
9.8
6.8
–
–
2,754.0
2,421.0
41.0
0.6
41.9
30.8
2,535.3
185.3
1.3
–
32.1
218.7
2,754.0
–
0.2
–
–
–
–
–
–
186.0
–
186.2
–
–
–
–
–
–
185.3
1.3
–
(0.4)
186.2
186.2
The notes on pages 95 to 130 are an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 2 March 2016 and were signed on its behalf by:
IAIN CORNISH
Chairman
Registered number 07240248
TOM WOOD
Chief Financial Officer
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 91
STRATEGIC REPORTFINANCIALSGOVERNANCE
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2015
Balance as at 1 January 2014
Total comprehensive income for the year:
Profit for the year
Total comprehensive income for the year
Share based payments
Transactions with owners recorded directly in equity
Contributions by and distributions to owners:
Issue of shares
Total contributions by and distributions to owners
Balance at 31 December 2014
Balance as at 1 January 2015
Total comprehensive income for the year:
Profit for the year
Total comprehensive income for the year
Share based payments
Transactions with owners recorded directly in equity
Contributions by and distributions to owners:
Cancellation of shares
Issue of shares
Cost of share issues
Total contributions by and distributions to owners
Balance as at 31 December 2015
The notes on pages 95 to 130 are an integral part of these financial statements.
Share
Capital
£m
138.0
–
–
–
47.3
47.3
185.3
185.3
–
–
–
(183.1)
0.3
–
(182.8)
2.5
Share
Premium
£m
Capital
Redemption
Reserve
£m
–
–
–
–
1.3
1.3
1.3
1.3
–
–
–
–
89.7
(3.7)
86.0
87.3
–
–
–
–
–
–
–
–
–
–
–
183.1
–
–
183.1
183.1
Retained
Earnings
£m
(2.5)
34.5
34.5
0.1
–
–
32.1
32.1
58.5
58.5
4.1
–
–
–
–
94.7
Total
Equity
£m
135.5
34.5
34.5
0.1
48.6
48.6
218.7
218.7
58.5
58.5
4.1
–
90.0
(3.7)
86.3
367.6
92 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2015
Balance as at 1 January 2014
Total comprehensive income for the year:
Profit for the year
Total comprehensive income for the year
Share based payments
Transactions with owners recorded directly in equity
Contributions by and distributions to owners:
Issue of shares
Total contributions by and distributions to owners
Balance at 31 December 2014
Balance as at 1 January 2015
Total comprehensive income for the year:
Loss for the year
Dividends received
Total comprehensive income for the year
Share based payments
Transactions with owners recorded directly in equity
Contributions by and distributions to owners:
Cancellation of shares
Issue of shares
Cost of share issues
Total contributions by and distributions to owners
Balance as at 31 December 2015
The notes on pages 95 to 130 are an integral part of these financial statements.
Share
Capital
£m
138.0
–
–
–
47.3
47.3
185.3
185.3
–
–
–
–
(183.1)
0.3
–
(182.8)
2.5
Share
Premium
£m
Capital
Redemption
Reserve
£m
–
–
–
–
1.3
1.3
1.3
1.3
–
–
–
–
–
89.7
(3.7)
86.0
87.3
–
–
–
–
–
–
–
–
–
–
–
–
183.1
–
–
183.1
183.1
Retained
Earnings
£m
(0.6)
0.1
0.1
0.1
–
–
(0.4)
(0.4)
(4.5)
4.0
(0.5)
4.1
–
–
–
–
3.2
Total
Equity
£m
137.4
0.1
0.1
0.1
48.6
48.6
186.2
186.2
(4.5)
4.0
(0.5)
4.1
–
90.0
(3.7)
86.3
276.1
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 93
STRATEGIC REPORTFINANCIALSGOVERNANCE
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2015
Cash flow from operating activities:
Profit/(Loss) for the year before taxation
Adjustments for non–cash items
Cash flows from operating activities before changes in operating
assets and liabilities
Increase/decrease in operating assets and liabilities:
Increase in mandatory balances with central banks
Increase in loans and advances to customers
Decrease/(increase) in derivatives
(Increase)/decrease in other assets
Increase in customer deposits
Increase in provisions for liabilities and charges
Increase/(decrease) in other liabilities
Net change in operating assets and liabilities:
Tax paid
Net cash flow generated from/(used by) operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Sale of property, plant and equipment
Purchase of intangible assets
Investment in subsidiaries net of cash and cash equivalents acquired
Dividend received from subsidiary
Net cash used by investing activities
Cash flows from financing activities
Increase in amounts due to banks
Repayment of Centric Group third party funding
Repayment of subordinated debt
Issue of subordinated debt
Proceeds from the issue of ordinary share capital
Net cash from/(used by) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
The notes on pages 95 to 130 are an integral part of these financial statements.
Group
2015
£m
70.1
27.1
97.2
(0.6)
(1,040.3)
0.9
(1.1)
765.4
0.3
287.2
11.8
(13.8)
95.5
(14.8)
2.7
(6.1)
–
–
(18.2)
(1.1)
–
(33.7)
74.0
86.3
125.5
202.5
348.0
550.5
Note
28
26
26
28
Company
2015
£m
(4.6)
4.1
(0.5)
–
–
–
(79.2)
–
–
1.4
(77.8)
–
(78.3)
–
–
–
(86.2)
4.0
(82.2)
–
–
–
74.0
86.3
160.3
(0.2)
0.2
–
Group
2014
£m
45.3
23.8
69.1
(1.0)
(749.0)
(3.7)
0.7
958.1
0.2
12.0
217.3
(4.6)
281.8
(11.0)
2.2
(3.9)
(76.3)
–
(89.0)
16.4
(138.2)
–
–
47.3
(74.5)
118.3
229.7
348.0
Company
2014
£m
0.1
0.1
0.2
–
–
–
–
–
–
(1.6)
(1.6)
–
(1.4)
–
–
–
(47.2)
–
(47.2)
–
–
–
–
48.6
48.6
–
0.2
0.2
94 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2015
1. BASIS OF PREPARATION
1.1 Reporting entity
Shawbrook Group plc is domiciled in the UK. The Company’s registered
office is at Lutea House, Warley Hill Business Park, Brentwood, Essex, CM13
3BE. The Consolidated Financial Statements of Shawbrook Group plc, for
the year ended 31 December 2015, comprise the results of the Company
and its subsidiaries (together referred to as the Group and individually as
Group entities).
1.2 Basis of accounting
The Group’s financial statements have been prepared on a historical cost
basis and in accordance with International Financial Reporting Standards
(IFRS) as adopted by the EU. The financial statements are drawn up in
accordance with the Companies Act 2006. No individual profit or loss
account or related notes are presented for the Company as permitted by
section 408 (4) of the Companies Act 2006.
1.3 Functional and presentation currency
The consolidated financial statements are presented in pounds Sterling,
which is the Group’s functional currency.
Foreign currency transactions are translated into functional currency using
the exchange rates prevailing at the dates of the transactions. Monetary items
denominated in foreign currencies are translated at the rate prevailing at the
balance sheet date. Foreign exchange gains and losses resulting from the
restatement and settlement of such transactions are recognised in profit or
loss. Non-monetary items (which are assets and liabilities which do not attach
to a right to receive or an obligation to pay a fixed or determinable number of
units of currency) measured at amortised cost and denominated in foreign
currencies are translated at the exchange rate at the date of the transaction.
1.4 IPO Costs
Qualifying costs directly attributable to the issue of share capital were
charged directly to equity and other associated costs were charged to the
Income Statement.
1.5 Going concern
The financial statements are prepared on a going concern basis, as the
Directors are satisfied that the Group has the resources to continue in
business for at least 12 months following the year end. In making this
assessment, the Directors have considered a wide range of information
relating to present and future conditions, including the current state of the
balance sheet, future projections of profitability, cash flows and capital
resources and the longer term strategy of the business. The Group’s capital
and liquidity plans, including stress tests, have been reviewed by the
Directors.
The Group’s forecasts and projections show that it will be able to operate
at adequate levels of both liquidity and capital for at least 12 months
following the year end, including a range of stressed scenarios, the
availability of alternative sources of capital if required and appropriate
management actions.
After making due enquiries, the Directors believe that the Group has
sufficient resources to continue its activities for at least 12 months
following the year end, and the Group has sufficient capital to enable it to
continue to meet its regulatory capital requirements as set out by the
Prudential Regulation Authority.
1.6 Basis of consolidation
Subsidiaries are entities controlled by the Group. The financial statements
of subsidiaries are included in the consolidated financial statements from
the date that control commences until the date that control ceases.
Entities are regarded as subsidiaries where the Group has the power over
an investee, exposure or rights to variable returns from its involvement with
the investee and the ability to affect those returns. Inter-Company
transactions and balances are eliminated upon consolidation. Subsidiaries
are consolidated from the date on which control is transferred to the Group
and are deconsolidated from the date that power over an investee,
exposure or rights to variable returns and the ability to affect these returns
ceases. A Special Purpose Entity (SPV) is an entity which is formed for a
single, well-defined and narrow, lawful purpose. The Group did not have
any SPEs in the year. Accounting policies are applied consistently across
the Group.
These financial statements consolidate the results of the subsidiary
companies set out in note 31.
1.7 Critical accounting estimates and judgements
The preparation of financial statements in conformity with IFRS adopted in the
EU requires Management to make judgements, estimates and assumptions
that affect the application of accounting policies and the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Although these
estimates are based on Management’s best knowledge of the amount, actual
results may differ ultimately from those estimates.
The areas involving a higher degree of judgement or complexity, or areas
where assumptions and estimates are significant to the financial
statements, are disclosed within the notes to the financial statements
which the estimate or judgement relates to as follows:
Area of significant judgement or estimate
Note reference
Effective interest rate
Fair value of share based payments
Impairment of loans and advances
Impairment assessment of goodwill
3
10
14
17
Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which
the estimates are revised and in any future periods affected.
1.8 New Standards and interpretations not yet adopted
A number of International Accounting Standards Board (IASB)
pronouncements have been issued but are not effective for this financial
year. The standards considered most relevant to the Group are as follows:
– IFRS 9 ‘Financial Instruments’
Effective from 1 January 2018 and not yet endorsed by the EU. The
standard largely replaces IAS 39, addressing recognition, basis of
valuation, income recognition methods, impairment and hedging for
financial instruments.
While areas such as the amortised cost basis of valuation and the
effective interest rate method of recognition are largely unchanged in
the new standard, the new basis of accounting for impairments is likely
to have a significant impact on the Group due to the requirement of
earlier recognition of losses. Changes to the hedging rules are not
expected to have a significant impact on the Group as the Group
currently uses limited hedge accounting.
Early adoption is permitted once endorsed by the EU. The Group has
started to design systems to facilitate phase one of the process, and has
plans in place to build and implement all required systems and
processes before the effective date. The Group has commissioned
external consultants to assist in monitoring the development of IFRS 9,
considering the associated impact on the Group’s financial statements
and ensuring total compliance with the standard; the Group intends to
adopt the standard on the date it becomes effective.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 95
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
1. BASIS OF PREPARATION continued
– IFRS 16 ‘Leases’
Effective from 1 January 2019 and not yet endorsed by the EU. The
standard replaces IAS 17, IFRIC 4, SIC-15 and SIC 27. It applies to all leasing
arrangements. The standard introduces a new recognition model that
recognises all leases on a lessee’s balance sheet (subject to certain
exemptions), reducing off-balance sheet financing and increasing
balance sheet value and operating profit. Lessor accounting is largely
unchanged. Early adoption is permitted if IFRS 15 ‘Revenue from
Contracts with Customers’ has also been applied. The Group is
considering the impact on the Group’s financial statements, although
the standard is not anticipated to have a material impact on the Group;
the Group intends to adopt the standard on the date it becomes
effective.
-
Short term loans: loans for property refurbishment for professional
property investors; and
- HMO Investment: loans for multilet properties operated by property
investors.
– Asset Finance – provides the following key products, predominately
originated via a direct origination team who have long standing
relationships with clients:
- Corporate Asset Finance: provides full pay-out finance leases and
hire purchase agreements to UK SMEs secured on hard, mainly
wheeled, assets ;
Block and Wholesale Finance: provides block lines and wholesale
facilities to SMEs secured against loan receivables; and
-
- Healthcare Finance: provides operating and finance leases to the
NHS Trusts and other private healthcare providers.
– Amendments to IAS 16 and IAS 38 ‘Clarification of Acceptable
Methods of Depreciation and Amortisation’
Effective from 1 February 2016 and not yet endorsed by the EU. The
amendments introduce a rebuttable presumption that the use of
revenue-based amortisation methods for intangible assets is
inappropriate. This presumption can be overcome only when revenue
and the consumption of the economic benefits of the intangible asset
are ‘highly correlated’, or when the intangible asset is expressed as a
measure of revenue. While this is not an outright ban, it creates a high
hurdle for when these methods may be used for intangible assets. This
is unlikely to have a material impact on the Group. The Group intends to
adopt the standard on the date it becomes effective.
– Business Credit – provides asset based working capital and loan
facilities to SMEs with invoice discounting as the core product for all
clients accounting for 77% of the book. It also complements the invoice
discounting facility with loans secured against stock, plant and
machinery and property. New business is originated through a national
network of direct sales staff providing full UK coverage.
– Secured Lending – second charge mortgage lender, loans typically
used for home improvements, large consumer purchases and debt
consolidation. The book is weighted towards London and the South
East, distributed through a broker panel of c. 85 accredited brokers.
– IFRS 15 ‘Revenue from Contracts with Customers’
– Consumer Lending – provides the following key products,
Effective from 1 January 2018 and not yet endorsed by the EU. The
standard replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-3. It
applies to contracts with customers but does not apply to insurance
contracts, financial instruments or lease contracts, which fall under the
scope of other IFRSs. It also does not apply if two companies under the
same line of business exchange non-monetary assets to facilitate sales
to other parties.
predominantly to prime home owners:
- Home improvement loans sold by c. 100 established suppliers
focussing on products such as windows, kitchens, bedrooms,
bathrooms, conservatories and solar panels;
- Holiday ownership loans sold through proven specialist time share
providers;
Retail point of sale loans sold through c. 20 retailers; and
Personal loans.
-
-
The standard introduces a new revenue recognition model that
recognises revenue either at a point in time or over time. The model
features a contract-based five-step analysis of transactions to determine
whether, how much, and when revenue is recognised. This is unlikely to
have a material impact on the Group. The Group intends to adopt the
standard on the date it becomes effective.
– Central – this represents the reconciling items between the total of the
five lending segments and the consolidated income statement. As well
as common costs, Central includes the Group’s Treasury function and
Retail Savings business which are responsible for raising finance on
behalf of the lending segments.
Information regarding the results of each reportable segment and their
reconciliation to the total results of the Group are included below.
Performance is measured based on the product contribution as included in
the internal Management reports. All revenue for each operating segment
is earned from external customers.
2. OPERATING SEGMENTS
The Group has six reportable operating segments as described below
which are based on the Group’s five lending Divisions plus a Central
segment which represents the Deposit business, Central functions and
shared central costs. The underlying basis is the basis on which financial
information is presented to the chief operating decision maker which
excludes certain items included in the statutory results.
The following summary describes the operations in each of the Group’s
reportable segments:
– Commercial Mortgages – provides the following key products,
distributed primarily via a broker panel of c. 400 accredited brokers:
Residential: loans to experienced buy-to-let property investors;
-
Semi-Commercial: loans for mixed use residential and commercial
-
property operated by either seasoned SMEs or investors;
- Commercial: loans for properties operated by either seasoned SMEs
or investors;
96 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
2. OPERATING SEGMENTS continued
Year ended 31 December 2015
Interest income and similar income
Interest expense and similar charges
Net interest income
Operating lease rentals
Other income
Depreciation on operating leases
Net income from operating leases
Fee and commission income
Fee and commission expense
Net fee and commission income
Fair value gains/(losses) on financial
instruments
Net operating income
Administrative expenses
Impairment losses on loans and
advances to customers
Provision for liabilities and charges
Statutory profit before tax
Underlying adjustments
Profit before tax on an
underlying basis
Income tax charge (Underlying basis)
Profit for the year on an
underlying basis
Assets
Liabilities
Net Assets/(Liabilities)
Commercial
Mortgages
£m
Asset
Finance
£m
74.3
(24.6)
49.7
–
–
–
–
0.1
(0.7)
(0.6)
–
49.1
(8.5)
(0.3)
–
40.3
–
40.3
56.3
(14.6)
41.7
14.9
1.1
(12.2)
3.8
4.3
–
4.3
–
49.8
(7.4)
(1.5)
–
40.9
–
40.9
Business
Credit
£m
10.9
(4.3)
6.6
–
–
–
–
8.3
(0.5)
7.8
–
14.4
(6.4)
(2.3)
–
5.7
–
5.7
Secured
Lending
£m
42.1
(13.3)
28.8
–
–
–
–
0.2
(1.1)
(0.9)
–
27.9
(5.6)
(0.6)
–
21.7
–
21.7
Consumer
Lending
£m
28.9
(6.9)
22.0
–
–
–
–
0.2
(0.5)
(0.3)
–
21.7
(8.7)
(1.8)
–
11.2
0.6
11.8
Central
£m
4.4
(0.1)
4.3
–
–
–
–
–
–
–
(0.3)
4.0
(52.1)
–
(1.6)
(49.7)
9.4
(40.3)
Total
Business
£m
216.9
(63.8)
153.1
14.9
1.1
(12.2)
3.8
13.1
(2.8)
10.3
(0.3)
166.9
(88.7)
(6.5)
(1.6)
70.1
10.0
80.1
(12.8)
67.3
1,595.9
–
1,595.9
761.2
–
761.2
183.3
–
183.3
487.2
–
487.2
333.4
–
333.4
639.0
(3,632.4)
(2,993.4)
4,000.0
(3,632.4)
367.6
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 97
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
2. OPERATING SEGMENTS continued
Year ended 31 December 2014
Interest income and similar income
Interest expense and similar charges
Net interest income
Operating lease rentals
Other income
Depreciation on operating leases
Net income from operating leases
Fee and commission income
Fee and commission expense
Net fee and commission income
Fair value gains/(losses) on financial
instruments
Net operating income
Administrative expenses
Impairment losses on loans and
advances to customers
Provision for liabilities and charges
Statutory profit before tax
Underlying adjustments
Profit before tax on an
underlying basis
Income tax charge (Underlying basis)
Profit for the year on an
underlying basis
Assets
Liabilities
Net Assets/(Liabilities)
Commercial
Mortgages
£m
47.4
(16.6)
30.8
–
–
–
–
–
(0.2)
(0.2)
–
30.6
(6.3)
(1.0)
–
23.3
–
23.3
Asset
Finance
£m
45.3
(12.6)
32.7
15.7
1.1
(13.1)
3.7
2.2
–
2.2
–
38.6
(7.3)
(1.5)
–
29.8
–
29.8
Business
Credit
£m
5.9
(2.6)
3.3
–
–
–
–
5.0
(0.2)
4.8
–
8.1
(3.3)
(0.3)
–
4.5
–
4.5
968.9
–
968.9
564.1
–
564.1
169.8
–
169.8
Secured
Lending
£m
35.0
(11.2)
23.8
–
–
–
–
0.2
(0.9)
(0.7)
–
23.1
(4.2)
0.1
–
19.0
–
19.0
401.3
–
401.3
Consumer
Lending
£m
20.3
(5.1)
15.2
–
–
–
–
0.2
(0.4)
(0.2)
–
15.0
(5.5)
(4.0)
–
5.5
–
5.5
Central
£m
2.8
(5.9)
(3.1)
–
–
–
–
–
–
–
(0.1)
(3.2)
(32.5)
–
(1.1)
(36.8)
3.8
(33.0)
226.9
–
226.9
423.0
(2,535.3)
(2,112.3)
Total
Business
£m
156.7
(54.0)
102.7
15.7
1.1
(13.1)
3.7
7.6
(1.7)
5.9
(0.1)
112.2
(59.1)
(6.7)
(1.1)
45.3
3.8
49.1
(10.8)
38.3
2,754.0
(2,535.3)
218.7
Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to those segments as they are managed on a Group basis.
98 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
3. INTEREST RECEIVABLE AND SIMILAR INCOME
Accounting policy
Revenue represents income derived from loans and advances to customers, operating lease rentals together with fees and commissions receivable.
Interest income and expense are recognised in the statement of comprehensive income for all instruments measured at amortised cost using the
effective interest rate method (‘EIRM’).
The EIRM is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense
over the relevant period. The effective interest rate (‘EIR’) is the rate that exactly discounts estimated future cash flows through the expected life of the
financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the
effective interest rate, the Group takes into account all contractual terms of the financial instrument, for example prepayment options, but does not
consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective
interest rate, transaction costs and all other premiums or discounts.
Income from finance lease and instalment credit agreements is recognised over the period of the leases so as to give a constant rate of return on
the net investment in the leases.
Fees and commissions which are not considered integral to the EIR are recognised on an accruals basis when the service has been provided or received.
Critical accounting estimates and judgements
Effective interest rate
IAS 39 requires interest earned from loans and advances to be measured under the EIRM. Management must therefore use judgement to estimate the
expected life of each instrument and hence the expected cash flows relating to it. Management reviews the expected lives on a segmental basis,
whereby products of a similar nature are grouped into cohorts that represent homogenous behavioural attributes.
The key assumptions applied by management in the EIR methodology are behavioural life of the assets and the quantum of future early settlement fee
income. The expected life behaviours are subjected to changes in internal and external factors and may result in adjustments to the carrying value of
loans which must be recognised in the Statement of Profit and Loss. Management has limited historical experience of customer behaviours due to the
relative immaturity of the portfolios and therefore models expected behaviour based on market trends and experience. The actual behaviour of the
portfolios are compared to the modelled behaviour on a quarterly basis and the modelled behaviours are adjusted if the modelled behaviour
materially deviates from actual behaviour, with adjustments recognised in the Statement of Profit and Loss.
During 2015 management assessed that the level of early redemption fees exceeded the modelled levels due to higher redemptions driven by higher
liquidity levels in the market. The modelled behavioural lives were adjusted, resulting in an adjustment to the Statement of Profit and Loss increasing
profit by £2.4m.
Management continues to perform sensitivity analyses on the EIR models applied. An increase/(decrease) in the behavioural life of a loan by 10% per
calendar month would result in a net income statement increase/(decrease) of £0.6m (2014: £0.1m).
Interest paid by customers
Interest received from derivative financial instruments
Interest on loans and advances to banks
Interest receivable and similar income
2015
£m
212.7
2.9
1.3
216.9
2014
£m
153.8
1.0
1.9
156.7
The interest income recognised during the year on loans impaired was £1.0m (2014: £1.0m). The group did not capitalise any interest during the year.
4. INTEREST EXPENSE AND SIMILAR CHARGES
Interest paid to depositors
Interest on amounts due to banks
Interest on subordinated debt
Other interest
Interest expense and similar charges
2015
£m
59.9
1.0
2.9
–
63.8
2014
£m
50.2
0.5
3.2
0.1
54.0
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 99
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
5. FEE AND COMMISSION INCOME
Fee income on loans and advances to customers
Credit facility related fees
Fee and commission income
6. ADMINISTRATIVE EXPENSES
2015
£m
8.8
4.3
13.1
Accounting policy
Operating lease rentals
Rentals received from operating leases are recognised in the income statement on a straight line basis over the term of the lease. Lease incentives
received are recognised in the income statement as an integral part of the total lease expense.
Staff costs
Depreciation (excluding operating lease assets)
Amortisation of intangible assets
Operating lease rentals – land and buildings
Other administrative expenses
Administrative expenses
IPO related costs
Total administrative expenses
7. AUDITOR’S REMUNERATION
Audit of these financial statements
Amounts receivable by the Company’s auditor and their associates in respect of other services
Audit of the financial statements of subsidiaries of the Company
Tax compliance services
Other tax advisory services
Audit related assurance services
All other assurance services
Corporate finance services
All other services
8. EMPLOYEES
The average number of persons employed by the Group (including Directors) during the year was as follows:
Customer facing
Non-customer facing
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Social security costs
Pension costs
9. EMPLOYEE RETIREMENT OBLIGATIONS
Accounting policy
The Group does not operate a pension scheme. Pension contributions are paid to staff and Directors personal pension schemes. The costs of the
Group’s contributions to defined contribution pension arrangements are recognised as an employee benefit expense when they are due.
The Group made contributions of £1.6m (2014: £1.2m) during the year.
100 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
2014
£m
5.4
2.2
7.6
2014
£m
31.2
1.0
0.4
0.7
25.2
58.5
0.6
59.1
2014
£000
50
338
58
–
40
92
335
162
Note
8
16
17
2015
£m
46.6
1.5
0.9
1.1
34.4
84.5
4.2
88.7
2015
£000
100
385
86
72
200
30
400
124
1,397
1,075
2015
No.
319
195
514
2015
£m
41.1
3.9
1.6
46.6
2014
No.
269
145
414
2014
£m
27.3
2.7
1.2
31.2
10. EMPLOYEE SHARE-BASED PAYMENT TRANSACTIONS
Accounting policy
Where the Group engages in share based payment transactions in respect of services received from certain of its employees, these are accounted for as
equity settled share based payments in accordance with IFRS 2. The equity is in the Ordinary £0.01 Shares.
The grant date fair value of a share based payment transaction is recognised as an employee expense, with a corresponding increase in equity over the
period that the employees become unconditionally entitled to the awards. In the absence of market prices, the fair value of the equity at the date of the
grant is estimated using an appropriate valuation technique.
The amount recognised as an expense in the Statement of Profit and Loss is based on amortising the grant date fair value at a constant rate to the vesting
date. Taxation on the amount recognised as an expense is charged to the Statement of Profit and Loss. Tax benefits of equity settled share-based payment
transactions that exceed the tax effected cumulative remuneration expenses are considered to relate to an equity item and are recognised directly in equity.
Critical accounting estimates and judgements
The fair value of shares in the employee Share Scheme was determined using valuation models. The inputs to these models require management
judgement to estimate the probability and timings of events taking place in the future. The significant inputs used in the models include the attrition rates,
expected volatility, expected dividend yield and expected life. The share-based payment recognised can be materially affected by these assumptions and
the key drivers of change in the value are timing, probability and attrition rates.
The combined charge to the Consolidated Income Statement was £4.1m (2014: £0.1m). The composition of the charge was PSP £3.4m, LTIP £0.6m and SAYE £0.1m.
Performance Share Plan
On 31 January 2011 the Performance Share Plan was introduced for Directors and senior employees. All shares were issued at a price of £1 per share.
Holders were entitled to receive a return on the shares acquired in the event of a prescribed exit event of the A shareholders. The Incentive Share Scheme
was governed by the Company’s Articles of Association and is deemed by Management to be an equity settled scheme and has been accounted for as
such in the financial statements of both the Company and its subsidiary, Shawbrook Bank Limited. Participants had to remain in employment or be
deemed as a good leaver to continue to qualify for the scheme. This scheme ceased during 2015.
Details of shares issued are shown in the table below:
At 1 January
Granted
Forfeited
Converted to £0.01 ordinary shares
At 31 December
2015
No. of shares
106,381
3,704
(2,696)
(107,389)
2014
No. of shares
94,630
19,750
(7,999)
–
–
106,381
The average fair value of shares issued was £5.15 (2014: £5.15). The fair values of the shares at the date of grant were valued using the Black-Scholes
valuation model. The assumptions used are as follows:
Expected volatility
Risk free rate
Dividend yield
Expected life
2015
2014
20%
0.4%
0%
1–2 years
20%
0.4%
0%
1–2 years
Although the Black-Scholes equation assumes predictable constant volatility, this is not observed in real markets. In order to estimate the annualised
volatility we have assessed the past standard deviation of the stock price of comparable quoted banks over various time frames.
Long Term Incentive Plan (LTIP)
During 2015 a number of share awards were granted to a set of individuals excluding Directors. The individuals are entitled to receive an award to acquire
a specific number of ordinary shares in Shawbrook Group Plc, subject to performance conditions. The scheme is deemed to be an equity settled scheme
and has been accounted for as such in the financial statements of both the Company and its subsidiary, Shawbrook Bank Limited. The share awards are
subject to performance conditions, being the Group earning a defined underlying profit before tax in 2017, and subject to the Group maintaining its
threshold capital and liquidity requirements.
Details of shares issued are shown in the table below:
At 1 January
Granted
Forfeited
At 31 December
2015
No. of shares
–
1,492,901
–
1,492,901
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 101
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
10. EMPLOYEE SHARE-BASED PAYMENT TRANSACTIONS continued
The fair value of the shares is based on the share price at the dates of the grant discounted for any expected dividends over the vesting period. The
weighted average fair value of the shares issued adjusted for dividends was £3.25.
Save-As-You-Earn Scheme (SAYE)
In October 2015 the Save-As-You-Earn (SAYE) scheme was introduced for all employees. The Scheme provides employees with the opportunity to take
part in a tax efficient savings scheme and to acquire Shawbrook Group plc shares at a discount to market value. The shares subject to this option have no
restrictions, save those restrictions applying as a matter of law, regulation and the Company’s dealing code. The SAYE scheme is governed by the
Company’s Articles of Association and is deemed by Management to be an equity settled scheme and has been accounted for as such in the financial
statements of both the Company and its subsidiary, Shawbrook Bank Limited.
Detail of shares issued are shown in the table below:
Shares in existence at 1 January 2015
Granted
Forfeited
Outstanding at 31 December 2015
2015
No. of shares
–
1,104,214
–
1,104,214
The fair value of the call options was calculated as £0.71. The awards generally require employees to remain in employment over the vesting period and
are not subject to performance conditions after the grant date. The awards vest over a period of three years.
Share price
Expected volatility
Risk free rate
Dividend yield
Weighted average remaining contractual life (years)
11. DIRECTORS’ REMUNERATION
Directors’ emoluments
Contributions to money purchase scheme
Directors’ remuneration
12. TAXATION
2015
£
3.10
25.90%
0.74%
2.08%
3.17
2014
£000
30.0
–
30.0
2015
£000
1,894.3
55.5
1,949.8
Accounting policy
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates
to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the
balance sheet date, and any adjustment to tax payable in respect of previous years.
Recognised in the Income Statement
Current tax:
Current year
Adjustment in respect of prior years
Total current tax
Deferred tax:
Origination and reversal of temporary difference
Adjustment in respect of prior years
Total deferred tax
Total tax charge
102 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
2015
£m
15.8
0.1
15.9
(3.9)
(0.4)
(4.3)
11.6
2014
£m
11.5
0.5
12.0
(0.8)
(0.4)
(1.2)
10.8
12. TAXATION continued
Tax reconciliation
Profit before tax
Implied tax charge thereon at 20.25% (2014: 21.5%)
Adjustments:
Prior year adjustment
Disallowable expenses and other permanent differences
Effect of tax rate changes
Total tax charge
2015
£m
70.1
14.2
(0.3)
0.9
(3.2)
11.6
2014
£m
45.3
9.7
0.1
1.0
10.8
Reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further reductions to 19%
(effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015. This will reduce the Company’s future
current tax charge accordingly. The deferred tax asset at 31 December 2015 has been calculated based on an aggregation of the rate of 18% substantively
enacted at the balance sheet date and the additional 8% of tax suffered in relation to the banking surcharge.
13. LOANS AND ADVANCES TO CUSTOMERS
Accounting policy
Assets acquired in exchange for loans
Included within loans and advances to customers are assets acquired in exchange for loans, instalment credit and finance lease receivables as part of
an orderly realisation. The asset acquired is recorded at the lower of its fair value (less costs to sell) and the carrying amount of the lease (net of
impairment allowance) at the date of exchange. Any subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the
Income Statement. Any subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative write down, is also
recognised in the Income Statement, together with any realised gains or losses on disposal.
Loans and advances to customers include those classified as loans and advances, finance leases and instalment credit advances as summarised below:
Loan receivables
Finance lease receivables
Instalment credit receivables
Total loans and advances to customers
2015
£m
2,873.0
114.3
331.8
3,319.1
2014
£m
1,861.4
114.0
309.4
2,284.8
At 31 December 2015, loans and advances to customers of £612.3m (2014: £535.2m) were pre-positioned with the Bank of England and HM Treasury for use
as collateral within the Funding for Lending Scheme.
Loan receivables
Gross: loan receivables
Less: allowances for impairment losses
Net loan receivables
Note
14
2015
£m
2,883.5
(10.5)
2,873.0
2014
£m
1,870.4
(9.0)
1,861.4
The Group provides finance lease and instalment credit agreements to customers for a variety of assets including plant and machinery, taxis and aviation
and marine vessels. These assets provide security against the gross receivables. Included within instalment credit receivables are block discounting
facilities of £105.6m (2014: £79.9m).
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 103
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
13. LOANS AND ADVANCES TO CUSTOMERS continued
Finance lease receivables
Gross amounts receivable
within one year
in the second to fifth year inclusive
after five years
Less: unearned finance income
Less: allowances for impairment losses
Net investment in finance lease receivables
Amounts falling due:
within one year
in the second to fifth year inclusive
after five years
Net investment in finance lease receivables
Instalment credit receivables
Gross amounts receivable
within one year
in the second to fifth year inclusive
after five years
Less: unearned finance income
Less: allowances for impairment losses
Net investment in instalment credit receivables
Amounts falling due:
within one year
in the second to fifth year inclusive
after five years
Net investment in instalment credit receivables
Cost of equipment acquired during the year
Finance leases
Instalment credit
Total cost of equipment acquired during the year
Note
14
Note
14
2015
£m
55.3
79.9
0.5
135.7
(19.4)
(2.0)
114.3
44.7
69.2
0.4
114.3
2015
£m
176.3
198.1
0.8
375.2
(42.4)
(1.0)
331.8
152.4
178.9
0.5
331.8
2015
£m
68.2
170.0
238.2
2014
£m
54.7
78.8
1.0
134.5
(19.8)
(0.7)
114.0
41.2
72.0
0.8
114.0
2014
£m
149.3
201.5
4.0
354.8
(44.0)
(1.4)
309.4
118.5
186.9
4.0
309.4
2014
£m
66.4
270.8
337.2
104 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
14. IMPAIRMENT PROVISIONS ON LOANS AND ADVANCES TO CUSTOMERS
Accounting policy
On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or Group of financial assets is impaired. A financial
asset or a Group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of
one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated
future cash flows of the financial asset or Group of financial assets that can be reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of impairment loss include, but are not limited to, the following:
– Delinquency in contractual payments of principal or interest;
– Cash flow difficulties experienced by the borrower; and
– Initiation of bankruptcy proceedings.
If there is objective evidence that an impairment loss on an individual financial asset has occurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest
rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income
statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined
under the contract.
If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it
includes the asset in a Group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Objective evidence
of impairment of a portfolio of receivables exists if objective data indicates a decrease in expected future cash flows from a collection of receivables
and the decrease can be measured reliably but cannot be identified with the individual receivables in the portfolio in which case a collective provision
is applied.
The Group operates a forbearance policy in situations where it becomes aware that an individual customer is experiencing financial hardship.
Repayment options are discussed with the customer that is appropriate to the customer’s specific situation. The Group seeks to ensure that any
forbearance results in a fair customer outcome and will not repossess an asset unless all other reasonable attempts to resolve the position have failed.
Further information is provided on page 118.
Critical accounting estimates and judgements
Individual impairment losses on loans and advances are calculated based on an assessment of the expected cash flows and the underlying collateral.
For the purpose of collective impairment, financial assets are grouped on the basis of similar risk characteristics. Collective provisions are calculated
using roll rates on different segments of the loan book not subject to an individual provision. Management also consider the need for a management
overlay to take into account additional risk factors of the portfolio. The management overlay has led to an increase of £1.9m (2014: £1.8m) to the
impairment allowances to reflect management’s assessment of risk.
The key assumptions, being the emergence periods, cost of risk and roll rates, are monitored regularly to ensure the impairment allowance is entirely
reflective of the current portfolio. The accuracy of the impairment calculation would therefore be affected by unanticipated changes to the economic
situation and assumptions which differ from actual outcomes. For loans and advances to the extent that:
– There is a change of one month in the emergence period across all portfolios, this would have the effect of changing the collective provision by
£0.5m (2014: £0.5m);
– There is a change in the loss rate by 10 basis points, this would have the effect of changing the collective provision by £1.5m (2014: £1.1m);
– There is an increase in the forced sale discount by 5%, this would have the effect of increasing the individual provisions by £0.4m (2014: £0.4m); and
– There is an increase in the propensity to default by 10%, this would have the effect of increasing the individual provisions by £1.0m (2014: £0.8m).
The movement in the allowances for losses in respect of loans, finance leases and instalment credit agreements during the year was as follows:
At 1 January
Charge for impairment losses
Provisions utilised
At 31 December
Analysis of impairment type:
Loan receivables
Finance lease receivables
Instalment credit receivables
At 31 December
2015
£m
11.1
6.5
(4.1)
13.5
10.5
2.0
1.0
13.5
2014
£m
5.4
6.7
(1.0)
11.1
9.0
0.7
1.4
11.1
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 105
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
15. DERIVATIVE FINANCIAL INSTRUMENTS
Accounting policy
Derivatives and hedge accounting
The Group’s derivative activities are entered into for the purposes of matching or eliminating risk from potential movements in interest rates in the
Group’s assets and liabilities.
The Group uses interest rate swaps to hedge its interest rate risks. Such derivative financial instruments are initially recognised at fair value on the date
on which the derivative contract is entered into and are subsequently remeasured at fair value.
Derivatives are reviewed regularly for their effectiveness. Fair values are obtained from quoted market prices in active markets and, where these are not
available, from valuation techniques including discounted cash flow models and option pricing models. Derivatives are measured as assets where their
fair value is positive and liabilities where their fair value is negative.
The Group has adopted hedge accounting in accordance with IAS 39 which specifies that the hedge relationship must be clearly documented at
inception and the derivative must be expected to be highly effective in offsetting the hedged risk. Effectiveness is tested throughout the life of the
hedge relationship.
The Group does not apply a credit valuation adjustment (CVA) or debit valuation adjustment (DVA) of its derivative exposures as the Group’s portfolio
is fully collateralised. The Group does not apply funding fair value adjustment (FFVA) or its derivative exposures as it deems the adjusment to be
immaterial).
Fair values of derivatives are obtained from quoted market prices in active markets and, where these are not available, from valuation techniques
including discounted cash flows at a benchmark interest rate, typically Libor or its equivalent.
Fair Value Hedge
The change in the fair value of a hedging instrument is recognised in the statement of profit or loss. The change in the fair value of the hedged item
attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in the statement of profit and loss.
The Group uses derivatives to reduce exposure to market risks, and not for trading purposes. The Group uses the International Swaps and Derivatives Association
(‘ISDA’) Master Agreement to document these transactions in conjunction with a Credit Support Annex (‘CSA’). The fair value of derivatives is set out below:
Interest rate swaps
Interest rate swaps:
At 31 December 2015
Interest rate swaps:
At 31 December 2014
Gains and losses from derivatives and hedge accounting are as follows:
(Loss)/Gain on derivative financial instrument
Fair value gain/(loss) on hedged risk
Fair value loss on financial instruments
Notional Amount
£m
Fair Value of assets
£m
535.0
195.0
2015
£m
(0.9)
0.6
(0.3)
2.8
3.7
2014
£m
3.7
(3.8)
(0.1)
It is the Group’s policy to enter into master netting and margining agreements with all derivative counterparties. In general, under master netting agreements
the amounts owed by each counterparty that are due on a single day in respect of all transactions outstanding under the agreement are aggregated into a
single net amount being payable by one party to the other. In certain circumstances, for example when a credit event such as a default occurs, all outstanding
transactions under the agreement are aggregated into a single net amount being payable by one party to the other and the agreements terminated.
Under the margining agreements where the Group has a net asset position valued at current market values, in respect of its derivatives with a
counterparty, then that counterparty will place collateral, usually cash, with the Group in order to cover the position. Similarly, the Group will place
collateral, usually cash, with the counterparty where it has a net liability position.
106 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
15. DERIVATIVE FINANCIAL INSTRUMENTS continued
The table below illustrates the amounts that are covered by enforceable netting arrangements (i.e. offsetting agreements and any related financial
collateral). The table excludes financial instruments not subject to offset and that are only subject to collateral arrangements (e.g. loans and advances).
2015
Assets
Derivative financial instruments
Total assets
2014
Assets
Derivative financial instruments
Total assets
Gross
Amount
£m
2.8
2.8
Amounts subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Amount
offset
%
Net amount
reported on
balance sheet
£m
Cash
collateral
£m
Net
amount
£m
Amounts not
subject to
enforceable
netting
arrangements
£m
–
–
2.8
2.8
2.8
2.8
–
–
–
–
Amounts subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Gross
Amount
£m
3.7
3.7
Amount
offset
%
Net amount
reported on
balance sheet
£m
–
–
3.7
3.7
Cash
collateral
£m
3.5
3.5
Net
amount
£m
0.2
0.2
Amounts not
subject to
enforceable
netting
arrangements
£m
–
–
Collateral amounts (cash and non-cash financial collateral) are reflected at their fair value; however this amount is limited to the net balance sheet
exposure in order not to include any over-collateralisation.
16. PROPERTY, PLANT AND EQUIPMENT
Accounting policies
Operating leases
Included within property, plant and equipment are assets leased to customers under operating leases in respect of medical equipment. The net book
value of operating leases represents the original cost of the equipment less cumulative depreciation. Rentals are recognised on a straight line basis
over the lease term. Depreciation is recognised on a straight line basis to a residual value over the life of the associated agreement.
Depreciation
Tangible fixed assets are stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the
acquisition of the items.
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of plant and equipment
as follows:
– Office equipment
– Fixtures and fittings
– Motor vehicles
– Freehold property
– Leasehold costs
– Operating leases*
three years/five years
five years
four years
50 years
life of the lease
life of the lease
* Operating leases are assets leased to customers
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
Assets acquired in exchange for loans
Included within property, plant and equipment are assets acquired in exchange for operating leases as part of an orderly realisation. The asset acquired
is recorded at the lower of its fair value (less costs to sell) and the carrying amount of the lease (net of impairment allowance) at the date of exchange.
No depreciation is charged in respect of assets held for sale. Any subsequent write-down of the acquired asset to fair value less costs to sell is
recognised in the Income Statement. Any subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative
write down, is also recognised in the Income Statement, together with any realised gains or losses on disposal.
Residual values
The residual values of assets under operating leases are reviewed by management for impairment, taking into account the nature and state of condition of
the assets. Where the residual value of the assets exceeds the estimated recoverable amount, the assets are impaired and the impairment charged to the
profit and loss account.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 107
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
16. PROPERTY, PLANT AND EQUIPMENT continued
Freehold
property
£m
Leasehold
property £m
Fixtures,
fittings
& equipment
£m
Assets on
operating
leases
£m
Cost
At 1 January 2014
Acquired in business combinations
Additions
Disposals
Transfer to finance leases
At 31 December 2014
Additions
Disposals
Transfer to finance leases
Balance at 31 December 2015
Depreciation
At 1 January 2014
Depreciation charge for the year
Disposals
Transfer to finance leases
At 31 December 2014
Depreciation charge for the year
Disposals
Transfer to finance leases
Balance at 31 December 2015
Net book value
At 31 December 2014
At 31 December 2015
0.2
–
–
–
–
0.2
–
–
–
0.2
–
–
–
–
–
–
–
–
–
0.2
0.2
0.1
–
–
–
–
0.1
–
–
–
0.1
0.1
–
–
–
0.1
–
–
–
0.1
–
–
2.9
0.1
2.5
–
–
5.5
4.7
–
–
10.2
1.2
1.0
–
–
2.2
1.5
–
–
3.7
3.3
6.5
73.1
–
9.0
(3.5)
(1.1)
77.5
10.1
(14.8)
(5.5)
67.3
21.2
13.1
(2.1)
(0.9)
31.3
12.2
(13.1)
(5.0)
25.4
46.2
41.9
Total
£m
76.3
0.1
11.5
(3.5)
(1.1)
83.3
14.8
(14.8)
(5.5)
77.8
22.5
14.1
(2.1)
(0.9)
33.6
13.7
(13.1)
(5.0)
29.2
49.7
48.6
108 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
17. INTANGIBLE ASSETS
Accounting policies
Goodwill
Goodwill has arisen on the acquisition of companies whose businesses have been integrated within the Group and reflects the difference between the
consideration paid and the fair value of net assets acquired. Subsequent to initial recognition, goodwill is stated at cost less any accumulated
impairment losses. Goodwill is not amortised but is tested annually for impairment by reviewing detailed cash flow projections from the Group’s latest
approved forecast. Goodwill is stated at cost less any accumulated impairment losses.
Where impairment is required, the amount is recognised in the income statement and cannot be subsequently reversed. Goodwill is tested for
impairment at least annually. For the purpose of impairment testing, goodwill is allocated to cash generating units (‘CGU’). An impairment loss is
recognised if the carrying amount of a CGU exceeds its recoverable amount. The recoverable amount of a CGU is the greater of its value in use and its
fair value less costs to sell. The estimation of recoverable value is based on value in use calculations incorporating forecasts by management of pre–tax
profits for the subsequent five years, and a residual value, discounted at a risk-adjusted interest rate appropriate to the cash generating unit.
The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful
life from indefinite to finite is made on a prospective basis. An impairment loss is recognised if the carrying amount of an asset is greater than its
recoverable amount. No impairment losses were recognised during 2015 (2014: £nil).
Computer software
Expenditure on software development activities is capitalised if the product or process is technically and commercially feasible and the Group intends,
has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Group can measure
reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production
of new or substantially improved products or processes. The expenditure capitalised includes the cost of direct labour and software licence costs.
Other development expenditure is recognised in the income statement as an expense is incurred. Capitalised developments are stated at cost less
accumulated amortisation and less accumulated impairment losses.
Amortisation
Intangible assets are amortised on a straight line basis through administrative expenses over the estimated useful life of the asset according to the
following timescales:
– Computer software & licences
3–7 years
Critical accounting estimates and judgements
The review of goodwill for impairment reflects management’s best estimate of future cash flows of the CGU’s and the rates used to discount these
cash flows, both which are subject to uncertain factors as follows:
– The future cash flows of the CGU’s are sensitive to projected cash flows based on the forecasts and assumptions regarding the projected periods
and the long-term pattern of sustainable cash flows thereafter.
– The rates used to discount future expected cash flows can have a significant effect on their valuations and are based on the Capital Asset Pricing
Model, which incorporates inputs reflecting a number of variables. These variables are subject to fluctuations beyond management’s control, are
subject to uncertainty and require the exercise of significant judgement.
The factors and inputs are described in more detail in the note below.
At 1 January 2015
Additions during the year
Amortised in the year
At 31 December 2015
At 1 January 2014
Acquired in business combinations
Additions during the year
Amortised in the year
At 31 December 2014
Goodwill
£m
Computer software
£m
44.8
–
–
44.8
4.7
6.1
(0.9)
9.9
Goodwill
£m
Computer software
£m
21.1
23.7
–
–
44.8
1.1
0.1
3.9
(0.4)
4.7
Total
£m
49.5
6.1
(0.9)
54.7
Total
£m
22.2
23.8
3.9
(0.4)
49.5
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 109
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
17. INTANGIBLE ASSETS continued
Impairment testing for CGUs containing goodwill
For the purposes of impairment testing, goodwill is allocated to the Group’s CGUs as follows:
Secured Lending
Asset Finance
Consumer Lending
Business Credit
Commercial Mortgages
At 31 December
2015
£m
6.4
10.5
1.1
24.2
2.6
44.8
2014
£m
6.4
10.5
1.1
24.2
2.6
44.8
The recoverable amounts of the CGUs have been calculated based on their value in use (‘VIU’), determined by discounting the cash flows expected to be
generated from the continuing use of the CGU. No impairment losses were recognised in 2015 (2014: £nil) because the recoverable amounts of the CGUs
were determined to be higher than their carrying values.
The key assumptions used in the calculation of value in use were as follows:
Pre-tax Discount rate
Terminal value growth rate
Cash flow period (Years)
%
%
31 December 2015
13.80
2.50
5
Discount rate: The discount rate is an estimate of the return that investors would require if they were to choose an investment that would generate cash
flows of amounts, timing and risk profile equivalent to those that the entity expects to derive from the asset, which is derived using CAPM. The CAPM
depends on inputs reflecting a number of financial and economic variables including the risk-free rate and a premium to reflect the inherent risk of the
business being evaluated. These variables are based on the market’s assessment of the economic variables and management’s judgement. For the
31 December 2015 test, the methodology used to determine the discount rate for the business was refined to more accurately reflect the risk profile of the
Group. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rate derived
using the internally generated CAPM with costs of capital rates produced by external sources.
Terminal value growth rate: The terminal value growth rate is an estimate of the rate of growth of future cash flows beyond the cash flow period of 5
years. The rate is estimated by management, taking into account rates disclosed by comparable institutions.
Management’s judgement in estimating the cash flows of a CGU: Five years of cash flows were included in the discounted cash flow model, which is
based on a Board approved plan. A long-term growth rate into perpetuity has been determined as the long term compound annual profit before tax
growth rate estimated by Management.
The Dividend Discount Model (‘DDM’) is used to calculate the recoverable amount of future cash flows. The DDM discounts future cash flows (post-tax
profits) generated by the CGU, however the cash flows are reduced by any earnings retained to support the growth in the underlying CGU loan books
through higher regulatory capital requirements. Forecasted post-tax profits were based on expectations of future outcomes taking into account past
experience, adjusted for anticipated revenue growth.
The key assumptions described above may change as economic and market conditions change. The Group estimated that reasonably possible changes in
these assumptions would not cause the recoverable amount of any CGU to decline below the carrying amount.
18. DEFERRED TAX
Accounting policy
Deferred tax is provided in full using the liability method on temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation
or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future
taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the
extent that it is no longer probable that the related tax benefit will be realised.
110 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
18. DEFERRED TAX continued
Deferred tax assets are attributable as follows:
Accelerated tax depreciation
Deferred tax on acquisition adjustments
Other
Deferred tax asset
At 1 January
Current period movement – recognised in income
Prior year adjustment
Effect of tax rate changes
At 31 December
2015
£m
13.5
(0.1)
0.7
14.1
9.8
0.7
0.4
3.2
14.1
2014
£m
9.6
(0.2)
0.4
9.8
8.6
0.8
0.4
–
9.8
The Group had a deferred tax asset of £14.1m at 31 December 2015 (2014: £9.8m) resulting primarily from decelerated capital allowances. The business plan
projects profits in future years sufficient to recognise the £14.1m deferred tax asset. The tax assets will unwind over the remaining life of the underlying
leased assets with which they are associated.
Reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further reductions to 19%
(effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015. This will reduce the Company’s future
current tax charge accordingly. The deferred tax asset at 31 December 2015 has been calculated based on an aggregation of the rate of 18% substantively
enacted at the balance sheet date and the additional 8% of tax suffered in relation to the banking surcharge.
19. OTHER ASSETS
Other debtors
Prepayments
Total other assets
20. INVESTMENT IN SUBSIDIARIES
At 1 January
Issue of share capital in Shawbrook Bank Limited
Share based payments
At 31 December
21. CUSTOMER DEPOSITS
Instant access
Term deposits and notice accounts
Fair value adjustment for hedged risk
Total customer deposits
2015
£m
1.9
6.0
7.9
Company
2015
£m
186.0
82.1
4.1
272.2
2015
£m
102.9
3,080.3
3.2
3,186.4
2014
£m
4.1
2.7
6.8
Company
2014
£m
138.8
47.1
0.1
186.0
2014
£m
52.4
2,364.9
3.7
2,421.0
22. DUE TO BANKS
Total amounts due to banks of £39.9m includes £36.3m of Treasury Bills (2014: £37.5m) which are monies arising from the sale and repurchase of Treasury
Bills drawn under the Bank of England’s Funding for Lending Scheme (FLS) and fall due for repayment in 2016 and 2017.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 111
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
23. PROVISIONS FOR LIABILITIES AND CHARGES
At 1 January
Provisions utilised
Provisions made during the year
At 31 December
2015
£m
0.6
(1.3)
1.6
0.9
2014
£m
0.4
(0.9)
1.1
0.6
Financial Services Compensation Scheme
In common with all regulated UK deposit takers, the Group pays levies to the FSCS to enable the FSCS to meet claims against it. The FSCS levy consists of
two parts: a management expenses levy and a compensation levy. The management expenses levy covers the costs of running the scheme and the
compensation levy covers the amount of compensation the scheme pays, net of any recoveries it makes using the rights that have been assigned to it.
The FSCS meets these current claims by way of loans received from HM Treasury. The terms of these loans were interest only for the first three years, and
the FSCS seeks to recover the interest cost, together with ongoing management expenses, by way of annual management levies on members, including
the Group, over this period.
The Group’s FSCS provision reflects market participation up to the reporting date. The above provision includes the estimated management expense levy
for the scheme year 2015/16. This amount was calculated on the basis of the Group’s current share of protected deposits taking into account the
regulator’s estimate of total management expense levies for the scheme year.
In addition to the management levies, the FSCS commenced charging for compensation levies over a number of scheme years commencing 1 April 2012 and
an instalment of this was paid during the year. No provision in respect of the capital compensation levy is included in the provision at 31 December 2015.
24. OTHER LIABILITIES
Other creditors
Corporation tax payable
Accruals
Total other liabilities
Group
2015
£m
306.6
7.4
17.2
331.2
Other creditors has increased to £306.6m in 2015 (2014: £23.8m). This is due to amounts owing to a bank in relation to the purchase of a loan book.
25. OPERATING LEASES
Leases as lessee
Non-cancellable operating lease rentals on land and buildings are payable as follows:
Less than one year
Between one and five years
2015
£m
1.0
3.6
4.6
Leases as lessor
Operating lease rentals receivable from agreements classified as property, plant and equipment, as disclosed in note 16, are receivable as follows:
Less than one year
Between one and five years
More than five years
2015
£m
12.4
18.3
1.1
31.8
Group
2014
£m
23.8
5.3
12.8
41.9
2014
£m
0.8
2.3
3.1
2014
£m
14.4
20.3
0.5
35.2
112 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
26. SUBORDINATED DEBT
Accounting policy
The subordinated debt is a non-derivative financial liability with fixed or determinable payments. The subordinated debt is recognised initially at fair
value and subsequently measured at amortised cost. Interest costs arising are capitalised in accordance with agreed terms and incorporated into the
total debt payable and recognised on an effective interest rate basis.
Subordinated debt liability:
The Group issued £75m fixed rate reset callable subordinated notes due 2025 with an initial semi-annual coupon of 8.50%, which was listed for trading on
the London Stock Exchange on 28 October 2015. Fees of £1m were incurred on the issuance. On the same date the subordinated debt dated 31 October
2013 was cancelled and repaid.
At 1 January
Issued in year
Repaid in year
Interest expense
Total subordinated debt at 31 December
2015
£m
30.8
74.0
(33.7)
2.9
74.0
2014
£m
27.6
–
–
3.2
30.8
Subordinated debt receivable:
Following the issue of subordinated debt to the market, subordinated debt was issued from the Bank to the Group on consistent terms with the listed
loan notes.
The subordinated debt ranks behind any claims against the Group from all depositors and creditors.
27. SHARE CAPITAL
On 31 March 2015, the Company underwent a capital restructuring prior to its Admission to the London Stock Exchange. This resulted in the conversion of
certain A, B and C ordinary shares into deferred shares with the remaining shares being converted into ordinary shares of £1 each. Each Ordinary share of
£1 was then subdivided into 100 ordinary shares. The deferred shares were repurchased by the Company and cancelled, generating a capital contribution
reserve of £183,067,856 which is distributable.
On 8 April 2015, upon Admission to the London Stock Exchange, the Company issued 31,034,483 £0.01 shares for consideration of £90,000,000. This
generated a share premium of £89,689,655. A further 500,000 £0.01 ordinary shares were issued under a block listing in December 2015. The market value
of shares issued on 8 April 2015 was £2.90 per share.
Ordinary shares of £0.01 each: issued and fully paid
Ordinary £0.01 shares
On issue at 31 December 2014
Converted from £1 ordinary shares
Issued during the year
On issue at 31 December 2015
31 December 2015
No.
31 December 2014
No.
250,500,000
Total
No.
–
218,965,517
31,534,483
–
Total
No.
–
2,189,655
315,345
250,500,000
2,505,000
Each Ordinary Share of £0.01 has full voting, dividend and capital distribution rights, including on a winding up, and does not have any rights of
redemption. Par value is £0.01 per share.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 113
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
27. SHARE CAPITAL continued
Ordinary shares of £1 each: authorised and issued
Ordinary Class A
Ordinary Class B
Ordinary Class C
Total
On issue at 31 December 2013
Issued during the year
On issue at 31 December 2014
Converted to £0.01 ordinary shares
Cancelled during the period
On issue at 31 December 2015
28. NOTES TO THE CASH FLOW STATEMENT
31 December 2015
No.
31 December 2014
No.
–
–
–
–
185,147,511
100,000
10,000
185,257,511
Class C
No.
10,000
–
10,000
(10,000)
–
–
Total
No.
137,961,021
47,296,490
185,257,511
(2,189,655)
(183,067,856)
–
Class A
No.
137,851,021
47,296,490
185,147,511
(2,079,655)
(183,067,856)
–
Class B
No.
100,000
–
100,000
(100,000)
–
–
Accounting policy
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash and balances at central banks, loans and advances to banks
and building societies and short-term highly liquid debt securities with less than 3 months to maturity from the date of acquisition. Loans to banks and
building societies comprise cash balances and call deposits.
Non-cash items in the cash flow statement
Capitalisation of subordinated debt interest
Depreciation
Amortisation of intangible assets
Provisions against loans and advances to customers
Amortisation of Share Scheme fair value
Profit on sale of operating leased assets
Total non-cash items
Cash and cash equivalents
Cash and balances at central banks
Loans and advances to banks
Less: mandatory deposits with central banks
Cash and cash equivalents
Note
26
16
17
14
Group
2015
£m
2.9
13.7
0.9
6.5
4.1
(1.0)
27.1
Group
2015
£m
521.9
30.9
552.8
(2.3)
550.5
Company
2015
£m
–
–
–
–
4.1
–
4.1
Company
2015
£m
–
–
–
–
–
Group
2014
£m
3.2
14.1
0.4
6.7
0.1
(0.7)
23.8
Group
2014
£m
313.1
36.6
349.7
(1.7)
348.0
Company
2014
£m
–
–
–
–
0.1
–
0.1
Company
2014
£m
–
0.2
0.2
–
0.2
Mandatory deposits are not available for use in the Group or Bank’s day to day business and are non-interest bearing.
114 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
29. FINANCIAL INSTRUMENTS
Accounting policies
Financial assets
The Group classifies its financial assets in the following categories:
– At fair value through profit or loss; and
– Loan receivables.
The Group’s financial liabilities are designated as other financial liabilities at amortised cost and at fair value through profit or loss. A financial asset is
measured initially at fair value plus the transaction costs that are directly attributable to its acquisition. A financial liability is measured initially at fair
value less the transaction costs that are directly attributable to its issue.
Derivative financial assets are classified at fair value through profit or loss.
The Group has not classified any assets or liabilities as held to maturity or as available for sale (AFS).
Loan receivables
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and
advances to banks and building societies are classified as loans and receivables. Loans and advances to customers include finance leases and
instalment credit advances.
Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses.
The net investment in finance leases and instalment credit agreements represents the future lease rentals and instalments receivable less profit and
costs allocated to future periods. Income is recognised throughout the life of the agreement to provide a constant rate of return on the net
investment in each lease or instalment credit agreement.
Where an agreement is classified as an operating lease at inception, but is subsequently reclassified as a finance lease following a change to the
agreement or an extension beyond the primary term, then the agreement is accounted for as a finance lease.
Financial liabilities
Customer deposits and amounts due to banks are non-derivative financial liabilities with fixed or determinable payments. Deposits and amounts due
to banks are recognised initially at fair value and are subsequently measured at amortised cost using the effective interest method.
Accounting policies
De-recognition of financial assets and liabilities
De-recognition is the point at which an asset or liability is removed from the balance sheet. The Group’s policy is to derecognise financial assets when
the contractual rights to the cash flows from the financial asset have expired or where all the risks and rewards of ownership have been transferred.
The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, or expired.
If the terms of the financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of
the borrower, then an assessment is made of whether the financial asset should be derecognised. If the net present value of the cash flows from the
original financial asset are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired.
In this case, the original financial asset is derecognised and the new financial asset is recognised at fair value. The impairment loss before an
unexpected restructuring is measured as follows:
– If the expected restructuring will not result in derecognition of the existing asset, then the estimated cash flows arising from the modified financial
asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original effective
interest rate of the existing financial asset.
– If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final
cash flow from the existing financial asset at the time of its derecognition. This amount is discounted from the expected date of derecognition to
the reporting date using the original effective interest rate of the existing financial asset.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 115
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
29. FINANCIAL INSTRUMENTS continued
The Group determines fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:
Level 1:
Level 2:
Level 3:
Quoted prices in active markets for identical assets or liabilities;
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
Inputs for the asset or liabilities that are not based on observable market data (unobservable inputs).
Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations.
The Group uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like interest rate
and currency swaps that use only observable market data and require little Management judgement and estimation. Observable prices and model inputs
are usually available in the market for simple over the counter derivatives like interest rate swaps. Availability of observable market prices and model inputs
reduces the need for Management judgement and estimation and also reduces the uncertainty associated with the determination of fair values.
Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and
general conditions in the financial markets.
The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads assist in the
judgement as to whether a market is active. If, in the opinion of Management, a significant proportion of the instrument’s carrying amount is driven by
unobservable inputs, the instrument in its entirety is classified as valued at Level 3 of the fair value hierarchy. ‘Level 3’ in this context means that there is
little or no current market data available from which to determine the level at which an arm’s length transaction would be likely to occur. It generally does
not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).
Cash and balances with central banks
Fair value approximates to carrying value because cash and balances at central banks have minimal credit losses and are either short-term in nature or
reprice frequently.
Loans and advances to banks
Fair value was estimated by using discounted cash flows applying either market rates where practicable or rates offered by other financial institutions for
loans with similar characteristics. The fair value of floating rate placements, fixed rate placements with less than six months to maturity and overnight
deposits is considered to approximate to their carrying amount.
Loans and advances to customers, customer deposits, derivatives, amounts due to banks and subordinated debt
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the balance sheet
date, adjusted for future credit losses if considered material. Fair values of derivatives are obtained from quoted market prices in active markets and, where
these are not available, from valuation techniques including discounted cash flows.
Fair value hierarchy
The table below analyses the Group’s financial instruments measured at amortised cost into a fair value hierarchy:
Financial assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Financial liabilities
Customer deposits
Amounts due to banks
Subordinated debt
2015
Level 3
£m
521.9
30.9
3,319.1
–
(39.9)
(74.0)
2015
Level 2
£m
–
–
–
(3,186.4)
–
–
2014
Level 3
£m
313.1
36.6
2,284.8
–
(41.0)
(30.8)
2014
Level 2
£m
–
–
–
(2,421.0)
–
–
There were no transfers between levels of the fair value hierarchy during the year (2014: £nil).
The table below analyses the Group’s financial instruments measured at fair value into a fair value hierarchy:
Financial assets
Derivative financial instruments
2015
Level 3
£m
2015
Level 2
£m
–
2.8
2014
Level 3
£m
–
2014
Level 2
£m
3.7
116 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
29. FINANCIAL INSTRUMENTS continued
The fair values of all financial assets and financial liabilities by class together with their carrying amounts shown in the balance sheet are shown in the
following table:
Loans and
receivables
£m
Other liabilities at
amortised cost
£m
Total Carrying
amount
£m
At 31 December 2015
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Customer deposits
Due to banks
Subordinated debt
At 31 December 2014
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Customer deposits
Due to banks
Subordinated debt
30. RISK MANAGEMENT
The main areas of risk that the business is exposed to are:
– Credit risk;
– Liquidity risk;
– Market risk;
– Capital risk and management;
– Operational risk; and
– Conduct Risk.
521.9
30.9
3,319.1
3,871.9
–
–
–
–
313.1
36.6
2,284.8
2,634.5
–
–
–
–
–
–
–
–
3,186.4
39.9
74.0
–
–
–
–
2,421.0
41.0
30.8
Fair Value
£m
521.9
30.9
3,351.0
521.9
30.9
3,319.1
3,871.9
3,903.8
3,186.4
39.9
74.0
3,189.7
39.9
74.0
313.1
36.6
2,284.8
313.1
36.6
2,340.6
2,634.5
2,690.3
2,421.0
41.0
30.8
2,447.8
41.0
30.8
2,519.6
3,300.3
3,300.3
3,303.6
2,492.8
2,492.8
Credit risk
Credit risk is the risk of suffering financial loss should borrowers or counterparties default on their contractual obligations to the Group. These risks are
managed by the Board Risk Committee and Asset and Liability Committee. This risk has two main components:
– Customer risk (individual and business lending); and
– Treasury risk
The Group’s maximum exposure to credit risk is the carrying value of its financial assets, without taking account of any underlying collateral, and
contractual contractual commitments, which represent agreements entered into but not advanced as at 31 December 2015.
2015
£m
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Derivative financial assets
Contractual commitments
Maximum exposure to credit risk
521.9
30.9
3,319.1
2.8
3,874.7
378.6
4,253.3
2014
£m
313.1
36.6
2,284.8
3.7
2,638.2
469.3
3,107.5
The amount of collateral held at 31 December 2015 is £2,994.9m (2014: £2,063.4m) of which £2,086.6m (2014: £1,373.2m) is in the form of residential and
commercial property and £908.3m (2014: £690.2m) is secured on other assets and debt receivables. Collateral held in relation to secured loans is capped at
the amount outstanding on an individual loan basis.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 117
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
30. RISK MANAGEMENT continued
Credit quality of assets
Loans and receivables
The Group defines three classifications of credit quality (low risk, medium risk and higher risk) for all credit exposures. These are based on the following
criteria:
– Commercial mortgages: A risk rating scale is applied to the individual loans and weighs the propensity of non-performance and write-offs. The
combined propensity scores are scaled into a scale of low risk, medium risk and higher risk.
– Asset finance: Loans are classified with reference to the arrears position and provisions against the loans. Low risk items are items that are in arrears but
have sufficient collateral against the outstanding balance, medium risk loans are in arrears, have sufficient collateral but are classified as medium risk
due to forbearance measures applied, and higher risk loans are loans that are provided for.
– Business Credit: Loans are classified as low risk, medium risk and higher risk on a case-by-case basis and decisions are based on management’s review
of the individual circumstances of every case.
– Secured Lending: All cases are deemed low risk due to the collateral held against the outstanding loan balances.
– Consumer Lending: The classification of loans as low risk, medium risk and higher risk is based on the maturity of the loans outstanding.
The credit quality of asset that are neither past due nor impaired are as follows:
As at 31 December 2015
Low Risk
Medium Risk
Higher Risk
Total neither past due nor
impaired
Commercial Mortgages
Asset Finance
Business Credit
Secured Lending
Consumer Lending
£m
1,577.7
0.9
5.7
%
99.5
0.1
0.4
£m
684.6
1.0
3.9
%
99.3
0.1
0.6
£m
168.6
10.0
5.6
%
91.6
5.4
3.0
£m
470.9
–
–
%
100.0
–
–
£m
331.8
–
–
%
99.9
–
0.1
Total
£m
3,233.6
11.9
15.2
%
99.2
0.4
0.4
1,584.3
100.0
689.5
100.0
184.2
100.0
470.9
100.0
331.8
100.0 3,260.7
100.0
Customer risk
The Group maintains a forbearance policy for the servicing and management of customers who are in financial difficulty and require some form of
concession to be granted, even if this concession entails a loss for the Group. A concession may be either of the following:
– A modification of the previous terms and conditions of an agreement, which the borrower is considered unable to comply with due to its financial
difficulties, to allow for sufficient debt service ability, that would not have been granted had the borrower not been in financial difficulties; or
– A total or partial refinancing of an agreement that would not have been granted had the borrower not been in financial difficulties.
Forbearance in relation to an exposure can be temporary or permanent in nature depending on the circumstances, progress on financial rehabilitation
and the detail of the concession(s) agreed. A forbearance classification can be discontinued when all of the following conditions have been met:
– The exposure is considered as performing, including, if it has been reclassified from the non-performing category, after an analysis of the financial
condition of the borrower shows it no longer meets the conditions to be considered as non-performing;
– A minimum two year probation period has passed from the date the forborne exposure was considered as performing;
– Regular payments of more than an insignificant aggregate amount of principal or interest have been made during at least half of the probation period;
and
– None of the exposures to the debtor is more than 30 days past-due at the end of the probation period.
As at 31 December 2015, the number of forbearance arrangements in place was 559 (2014: 531), the carrying value of which was £19.0m (2014: £8.7m)
against which impairment provisions of £2.6m (2014: £2.9m) were held.
Forbearance as at 31 December 2015
Consumer
Secured
Asset Finance
Commercial
Business Credit
Total
Forbearance as at 31 December 2014
Consumer
Secured
Asset Finance
Total
118 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
2015
Number
249
170
123
14
3
559
2014
Number
390
122
19
531
Capital
balances
2015
£m
Provisions
2015
£m
Coverage
2015
%
1.7
5.1
3.8
2.6
5.8
19.0
Capital
balances
2014
£m
2.8
3.7
2.2
8.7
1.1
0.3
0.3
0.3
0.6
2.6
Provisions
2014
£m
2.3
0.4
0.2
2.9
64.7
5.9
7.9
11.5
10.3
13.7
Coverage
2014
%
82.1
10.8
9.1
33.3
30. RISK MANAGEMENT continued
There were five property repossessions during the year (2014: 10).
Loans and advances to customers are reviewed regularly to determine whether there is any objective evidence of impairment and assets are categorised
as detailed in the tables below:
Type of impairment assessment
Individual impairment
Description
Where specific circumstances indicate that a loss is likely to be incurred.
Collective impairment
Risk categorisation
Neither past due nor impaired
Past due but not impaired
Impairment allowances are calculated for each portfolio on a collective basis, given the
homogenous nature of the assets in the portfolio.
Description
Loans that are not in arrears and which do not meet the impaired asset definition. This
segment can include assets subject to forbearance solutions.
Loans that are in arrears or where there is objective evidence of impairment, but the
asset does not meet the definition of an impaired asset as the expected recoverable
amount exceeds the carrying amount.
Impaired assets
Loans that are in arrears or where there is objective evidence of impairment and where
the carrying amount of the loan exceeds the expected recoverable amount.
The Group enters into agreements with customers and where appropriate takes security. Loan receivables include amounts secured against property
(commercial and residential), secured against other assets such as asset backed loans and invoice receivables. Finance lease and instalment credit is
secured on a variety of assets including but not limited to plant and machinery.
The security profile of the loan receivable book is shown below:
Loan receivables
Finance lease receivables
Instalment credit receivables
Total loans and advances to customers
Loan receivables
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30–60 days
60–90 days
Over 90 days
Impaired
Less: allowances for impairment losses
Net loan receivables
2015
£m
2,873.0
114.3
331.8
3,319.1
2014
£m
1,861.4
114.0
309.4
2,284.8
2015
£m
2014
£m
2,842.0
1,841.4
4.7
15.0
3.6
5.7
29.0
12.5
2.1
10.8
2.3
2.8
18.0
11.0
2,883.5
1,870.4
(10.5)
(9.0)
2,873.0
1,861.4
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 119
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
30. RISK MANAGEMENT continued
The Group enters into agreements with customers and where appropriate takes security. The security for Loans to customers is in the form of a first or
second charge over property and debt receivables. Finance leases and instalment credit are secured on the underlying assets which can be repossessed
in the event of a default. The security profile of loans and advances to customers is shown below:
2015
£m
2014
£m
Secured on commercial and residential property
Secured on debt receivables
Secured by finance lease and instalment credit
Secured on other assets
Total secured receivables
Unsecured
Gross loan receivables
2,086.6
386.4
449.1
72.8
2,994.9
337.7
3,332.6
1,373.2
264.7
425.5
–
2,063.4
232.5
2,295.9
Collateral held in relation to secured loans is capped, after taking into account the first charge balance, at the amount outstanding on an individual loan basis.
Finance lease receivables
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30–60 days
60–90 days
Over 90 days
Impaired
Less: allowances for impairment losses
Net finance lease receivables
Instalment credit receivables
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30–60 days
60–90 days
Over 90 days
Impaired
Less: allowances for impairment losses
Net instalment credit receivables
2015
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30–60 days
60–90 days
Over 90 days
Total past due but not impaired
Impaired
Less: allowances for impairment losses
Net loan receivables
2015
£m
101.1
5.6
3.3
1.1
1.7
11.7
3.5
116.3
(2.0)
114.3
2015
£m
317.6
11.3
1.9
0.4
0.7
14.3
0.9
332.8
(1.0)
331.8
Consumer
Lending
£m
331.8
–
–
–
–
–
5.9
337.7
(4.3)
333.4
2014
£m
102.9
6.9
1.5
0.9
1.6
10.9
0.9
114.7
(0.7)
114.0
2014
£m
305.2
3.6
0.4
0.2
0.1
4.3
1.3
310.8
(1.4)
309.4
Total
£m
3,260.7
21.6
20.2
5.1
7.9
54.8
17.1
3,332.6
(13.5)
3,319.1
Commercial
Mortgages
£m
1,584.3
1.2
7.7
1.0
1.4
11.3
1.9
1,597.5
(1.6)
1,595.9
Asset
Finance
£m
689.5
19.0
5.5
1.5
2.4
28.4
4.4
722.3
(3.0)
719.3
Business
Credit
£m
184.2
–
–
–
–
–
1.8
186.0
(2.7)
183.3
Secured
Lending
£m
470.9
1.4
7.0
2.6
4.1
15.1
3.1
489.1
(1.9)
487.2
120 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
30. RISK MANAGEMENT continued
2014
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30–60 days
60–90 days
Over 90 days
Total past due but not impaired
Impaired
Less: allowances for impairment losses
Net loan receivables
Commercial
Mortgages
£m
963.8
0.4
4.4
–
–
4.8
1.7
970.3
(1.4)
968.9
Asset
Finance
£m
502.4
10.5
1.9
1.1
1.7
15.2
2.4
520.0
(2.1)
517.9
Business
Credit
£m
169.9
–
–
–
–
–
0.3
170.2
(0.4)
169.8
Secured
Lending
£m
387.0
1.7
6.4
2.3
2.9
13.3
2.6
402.9
(1.6)
401.3
Consumer
Lending
£m
226.1
–
–
–
–
–
6.4
232.5
(5.6)
226.9
The Group’s lending portfolio is geographically diversified across the UK as shown below:
Commercial
Mortgages
£m
Asset
Finance
£m
Business
Credit
£m
Secured
Lending
£m
Consumer
Lending
£m
2015
East Anglia
East Midlands
Greater London
Guernsey/Jersey/Isle of Man
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire/Humberside
2014
East Anglia
East Midlands
Greater London
Guernsey/Jersey/Isle of Man
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire/Humberside
60.3
37.2
643.2
4.5
16.7
149.4
2.5
78.7
315.9
126.3
24.6
63.4
74.8
30.6
23.9
140.8
0.6
7.5
85.6
2.1
104.5
153.0
55.9
41.0
26.3
50.5
1,597.5
722.3
Commercial
Mortgages
£m
34.8
29.6
411.3
–
15.5
88.6
–
43.4
169.4
82.1
17.8
31.9
45.9
Asset
Finance
£m
26.1
21.2
90.5
0.4
5.1
61.1
3.4
85.7
120.6
45.9
20.8
22.3
16.9
29.2
4.8
26.1
–
4.8
31.9
–
14.0
21.9
7.3
11.6
24.5
9.9
186.0
Business
Credit
£m
36.2
6.7
26.1
–
2.1
26.5
–
3.7
20.2
6.6
8.8
21.1
12.2
16.9
18.7
137.2
–
8.6
31.1
–
29.5
144.4
41.2
15.1
23.7
22.7
489.1
Secured
Lending
£m
14.1
16.7
103.3
–
8.2
27.2
–
27.9
115.5
35.8
13.5
21.2
19.5
Total
£m
2,249.2
12.6
12.7
3.4
4.6
33.3
13.4
2,295.9
(11.1)
2,284.8
Total
£m
154.8
112.3
977.5
5.1
56.9
334.2
5.1
273.2
690.7
257.6
105.1
174.8
185.3
17.8
27.7
30.2
–
19.3
36.2
0.5
46.5
55.5
26.9
12.8
36.9
27.4
337.7
3,332.6
Consumer
Lending
£m
13.3
19.7
18.5
–
14.5
24.5
0.3
34.8
33.7
19.0
8.5
27.5
18.2
Total
£m
124.5
93.9
649.7
0.4
45.4
227.9
3.7
195.5
459.4
189.4
69.4
124.0
112.7
970.3
520.0
170.2
402.9
232.5
2,295.9
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 121
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
30. RISK MANAGEMENT continued
The Group’s lending portfolio falls into the following concentrations by loan size:
2015
0 – £50k
£50k – £100k
£100k – £250k
£250k – £500k
£500k – £1m
£1m – £2.5m
£2.5m – £5m
£5m – £10m
£10m – £25m
Total
2014
0 – £50k
£50k – £100k
£100k – £250k
£250k – £500k
£500k – £1m
£1m – £2.5m
£2.5m – £5m
£5m – £10m
£10m – £25m
Total
Commercial
Mortgages
£m
17.3
122.0
431.3
403.8
308.5
223.7
72.0
18.9
–
Asset
Finance
£m
182.3
84.3
100.3
68.1
55.5
40.9
41.3
66.5
83.1
1,597.5
722.3
Commercial
Mortgages
£m
4.1
67.1
274.5
244.7
194.0
134.5
39.3
12.1
–
Asset
Finance
£m
168.3
64.5
71.2
47.3
37.5
36.7
29.0
40.4
25.1
Business
Credit
£m
Secured
Lending
£m
Consumer
Lending
£m
1.1
3.8
11.3
20.9
38.4
57.6
42.9
–
10.0
186.0
Business
Credit
£m
0.2
4.6
9.4
22.9
31.2
61.1
29.5
11.3
–
209.5
151.9
101.8
20.8
3.1
2.0
–
–
–
489.1
Secured
Lending
£m
202.2
121.8
64.2
10.9
1.8
2.0
–
–
–
Total
£m
747.8
362.1
644.7
513.6
405.5
324.2
156.2
85.4
93.1
337.6
0.1
–
–
–
–
–
–
–
337.7
3,332.6
Consumer
Lending
£m
232.5
–
–
–
–
–
–
–
–
Total
£m
607.3
258.0
419.3
325.8
264.5
234.3
97.8
63.8
25.1
970.3
520.0
170.2
402.9
232.5
2,295.9
Treasury credit risk
Treasury credit risk arises from the wholesale investments made by the Group’s Treasury function, which is responsible for managing this aspect of credit
risk in line with the Board approved risk appetite and wholesale credit policies. The credit quality of loans and advances to banks is assessed by rating
agency designation as at 31 December 2015, based on Moody’s long term ratings.
Loans and advances to banks
A1
A2
A3
Baa1
Total credit risk
2015
£m
9.1
1.1
20.7
–
30.9
2014
£m
18.6
1.1
–
16.9
36.6
The Group only lends to UK high-street banks. Deposits are placed either overnight or for a short term with a duration of less than three months. No
collateral or other credit enhancements are held against loans and advances to banks.
The Group’s exposure to the Bank of England is set out below:
Loans and advances to central banks
Aa1
2015
£m
521.9
2014
£m
313.1
Credit risk derived from derivative transactions is mitigated by collateralising the exposures. Such collateral is subject to the standard industry CSA and is
paid or received on a regular basis. At 31 December 2015 cash collateral of £3.7m had been received by the Group (2014: £3.5m).
122 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
30. RISK MANAGEMENT continued
Liquidity risk
Accounting policy
Funding for Lending Scheme (FLS)
The Group is a participant in the FLS which enables it to borrow highly liquid UK Treasury Bills in exchange for eligible collateral. The Treasury Bills
issued are for an original maturity of nine months and if delivered back prior to their maturity date can be exchanged for further nine month Bills. Costs
of borrowing are charged directly to the Income Statement.
The Treasury Bills are not recorded on the Group’s balance sheet as ownership remains with the Bank of England. The risk and rewards of the collateral
provided remains with the Group and continues to be recognised in the Group’s Financial Statements.
Liquidity risk is the risk that the Group is unable to meet its current and future financial obligations as they fall due, or is only able to do so at excessive cost.
The table below analyses the Group’s contractual undiscounted cash flows of its financial assets and liabilities:
Carrying
amount
£m
Gross nominal
inflow/(outflow)
£m
Less than
1 month
£m
1–3 months
£m
3 months
to 1 year
£m
1–2 years
£m
2–5 years
£m
At 31 December 2015
Assets
Cash and balances
at central banks
Loans and advances
to banks
Loans and advances
to customers
Liabilities
Customer deposits
Due to banks
Subordinated debt
At 31 December 2014
Assets
Cash and balances
at central banks
Loans and advances
to banks
Loans and advances
to customers
Liabilities
Customer deposits
Due to banks
Subordinated debt
521.9
30.9
3,319.1
3,871.9
(3,186.4)
(39.9)
(74.0)
521.9
30.9
3,453.1
4,005.9
(3,289.1)
(40.3)
(138.8)
(3,300.3)
(3,468.2)
313.1
36.6
2,284.8
2,634.5
(2,421.0)
(41.0)
(30.8)
313.1
36.6
2,337.2
2,686.9
(2,535.3)
(41.7)
(79.6)
(2,492.8)
(2,656.6)
519.6
30.9
86.3
636.8
(364.3)
(15.5)
–
(379.8)
311.4
36.6
40.8
388.8
(172.9)
(16.6)
–
(189.5)
–
–
98.5
98.5
(198.5)
–
–
–
–
431.4
431.4
(1,409.2)
(0.2)
(6.4)
–
–
440.5
440.5
(912.4)
(24.6)
(25.5)
(198.5)
(1,415.8)
(962.5)
–
–
1,087.6
1,087.6
(404.7)
–
–
(404.7)
–
–
60.2
60.2
(188.9)
–
–
–
–
333.7
333.7
(1,023.5)
(0.2)
–
–
–
1,121.2
1,121.2
(1,150.0)
(24.9)
–
(188.9)
(1,023.7)
(1,174.9)
–
–
–
–
–
–
–
–
More than
5 years
£m
2.3
–
1,308.8
1,311.1
–
–
(106.9)
(106.9)
1.7
–
781.3
783.0
–
–
(79.6)
(79.6)
The following table sets out the components of the Group’s liquidity reserve:
Balances with central banks
Loans and advances to banks
Debt securities
Total liquidity reserve
2015
Carrying amount
£m
2014
Carrying amount
£m
2013
Carrying amount
£m
519.6
30.9
270.0
820.5
311.4
36.6
163.1
511.1
205.9
23.8
57.9
287.6
The total liquidity reserve includes £270.0m (2014: £163.1m) of securities issued by the Bank of England through FLS participation which are not recognised
on the Consolidated Statement of Financial Position.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 123
STRATEGIC REPORTFINANCIALSGOVERNANCE
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
30. RISK MANAGEMENT continued
The average liquidity reserve throughout the year was £510.0m (2014: £426.0m).
Asset encumbrance
The Group’s assets can be used to support collateral requirements for central bank operations or third party repurchase transactions. Assets that have
been set aside for such purposes are classified as ‘encumbered assets’ and cannot be used for other purposes.
All other assets are defined as ‘unencumbered assets’. These comprise assets that are readily available to secure funding or meet collateral requirements,
and assets that are not subject to any restrictions but are not readily available for use.
The table below sets out the availability of the Group’s assets to support future funding:
Asset encumbrance 2015
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Property, plant and equipment
Derivative assets held for risk management
Non-financial assets
Total assets
Asset encumbrance 2014
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Property, plant and equipment
Derivative assets held for risk management
Non-financial assets
Total assets
Encumbered
Pledged as
collateral
2015
£m
Unencumbered
Available as
collateral
2015
£m
Unencumbered
Other
2015
£m
2.3
–
476.4
–
–
–
–
30.9
2,842.7
42.3
–
–
519.6
–
–
6.3
2.8
76.7
Total
2015
£m
521.9
30.9
3,319.1
48.6
2.8
76.7
478.7
2,915.9
605.4
4,000.0
Encumbered
Pledged as collateral
2014
£m
Unencumbered
Available as collateral
2014
£m
Unencumbered
Other
2014
£m
1.7
–
438.0
–
–
–
439.7
–
36.6
1,846.8
46.2
–
–
1,929.6
311.4
–
–
3.5
3.7
66.1
Total
2014
£m
313.1
36.6
2,284.8
49.7
3.7
66.1
384.7
2,754.0
Liquidity risk – stress testing
Stress testing is a major component of liquidity risk management and the Group has developed a range of scenarios covering a range of market-wide and
firm-specific factors. A comprehensive stress testing exercise is conducted at least annually and the methodology is incorporated into the Group’s balance
sheet risk management model to ensure that stress tests are run on a regular basis. The output of stress testing is circulated to the Board and to the ALCO
who will use the results to decide whether to amend the Group’s risk appetite and liquidity limits.
Market risk
Market risk is the risk that the value of, or income arising from, the Group’s assets and liabilities change as a result of changes in market prices, the principal
element being interest rate risk.
The Group has minimal foreign currency exposure and does not engage in any treasury trading operations.
The Group’s treasury function is responsible for managing the Group’s exposure to all aspects of market risk within the operational limits set out in the
Group’s treasury policies. The ALCO approves the Group’s treasury policies and receives regular reports on all aspects of market risk exposure, including
interest rate risk.
Interest rate risk
Interest rate risk is the risk of loss arising from adverse movements in market interest rates. Interest rate risk arises from the loan and savings products that
we offer. This risk is managed through the use of appropriate financial instruments, including derivatives, with established risk limits, reporting lines,
mandates and other control procedures.
Basis risk
Basis risk is the risk of loss arising from changes in the relationship between interest rates which have similar but not identical characteristics (for example,
LIBOR and Bank of England Base Rate). This is monitored closely and regularly reported to the ALCO. This risk is managed by matching and where
appropriate and necessary, through the use of derivatives, with established risk limits and other control procedures.
The Group’s forecasts and plans take account of the risk of interest rate changes and are prepared and stressed accordingly, in line with PRA guidance.
124 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
30. RISK MANAGEMENT continued
Foreign exchange risk
Foreign exchange risk is the risk that the value of, or net income arising from, assets and liabilities changes as a result of movements in exchange rates. The
Group has low levels of foreign exchange risk which is managed by by natural hedging. The table below sets out the Group’s exposure to foreign
exchange risk:
Assets and liabilities in foreign currencies at Sterling carrying values
2015
Loans and advances to banks
Loans and advances to customers
Amounts due to banks
Net position
Assets and liabilities in foreign currencies at Sterling carrying values
2014
Loans and advances to banks
Loans and advances to customers
Amounts due to banks
Net position
Euros
£m
3.7
8.1
(8.1)
3.7
Euros
£m
0.1
8.4
(7.8)
0.7
US Dollars
£m
Australian
Dollars
£m
Canadian
Dollars
£m
(1.6)
6.8
(3.4)
1.8
US Dollars
£m
(0.9)
6.1
(5.1)
0.1
(0.1)
–
–
(0.1)
–
–
–
–
Australian
Dollars
£m
Canadian
Dollars
£m
–
–
–
–
0.2
–
–
0.2
Foreign Exchange Sensitivity
The Group estimates that a 5% movement in exchange rates would have no greater impact on the 2015 profit than an increase or decrease of £0.3m.
Interest rate sensitivity gap
The Group considers a parallel 200 basis points (‘bps’) movement to be appropriate for scenario testing given the current economic outlook and industry
expectations. The Group estimates that a +/- 200 bps movement in interest rates paid / received would have impacted the economic value of equity as
follows:
+200 bps – £8.0m positive (2014: £16.5m positive)
–200 bps – £24.5m positive (2014: £14.3m positive)
In addition, the effect of the same two interest rate shocks are applied to the balance sheet at year-end, to determine how the Net Interest Income may
change on an annualised basis for one year, as follows:
+200 bps - £19.9m positive (2014: £19.3m positive)
-200 bps - £1.4m positive (2014: £1.8m positive)
In preparing the sensitivity analyses above, the Group makes certain assumptions consistent with expected and contractual re-pricing behaviour as well as
behavioural repayment profiles, under the two interest scenarios, of the underlying balance sheet items. The results also include the impact of hedge transactions.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 125
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
30. RISK MANAGEMENT continued
The following table summarises the re-pricing periods for the Group’s assets and liabilities at 31 December 2015. Items are allocated to time bands by
reference to the earlier of the next contractual interest rate change and the maturity date.
At 31 December 2015
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Other non-financial assets
Liabilities
Customer deposits
Due to banks
Other non-financial liabilities
Subordinated debt
Total equity
Notional values of derivatives
Interest rate sensitivity gap
Cumulative gap
Within
3 months
£m
519.6
30.9
1,971.5
2.7
2,524.7
659.8
15.5
–
–
–
675.3
535.0
More than
3 months
but less than
6 months
£m
More than
6 months
but less than
1 year
£m
More than
1 year
but less than
5 years
£m
More than
5 years
£m
Non-interest
bearing
£m
–
–
121.1
3.2
124.3
670.3
–
–
–
–
670.3
–
–
–
220.2
5.9
226.1
624.4
–
–
–
–
624.4
(50.0)
(448.3)
1,390.1
–
–
825.5
26.9
852.4
1,231.9
24.4
–
–
–
1,256.3
(485.0)
(888.9)
501.2
–
–
221.0
3.6
224.6
–
–
–
74.0
–
74.0
–
150.6
651.8
2.3
–
(40.2)
85.8
47.9
–
–
332.1
–
367.6
699.7
–
(651.8)
–
2,384.4
2,384.4
(546.0)
1,838.4
Total
£m
521.9
30.9
3,319.1
128.1
4,000.0
3,186.4
39.9
332.1
74.0
367.6
4,000.0
–
–
The following table summarises the re-pricing periods for the Group’s assets and liabilities at 31 December 2014. Items are allocated to time bands by
reference to the earlier of the next contractual interest rate change and the maturity date.
At 31 December 2014
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Other non-financial assets
Liabilities
Customer deposits
Due to banks
Other non-financial liabilities
Subordinated debt
Total equity
Notional values of derivatives
Interest rate sensitivity gap
Cumulative gap
Within
3 months
£m
311.4
36.6
1,247.1
3.6
1,598.7
445.3
16.6
–
–
–
461.9
195.0
1,331.8
1,331.8
More than
3 months
but less than
6 months
£m
More than
6 months
but less than
1 year
£m
More than
1 year
but less than
5 years
£m
More than
5 years
£m
Non-interest
bearing
£m
–
–
95.5
3.6
99.1
766.7
–
–
–
–
766.7
–
(667.6)
664.2
–
–
161.9
7.1
169.0
161.7
–
–
–
–
161.7
–
7.3
671.5
–
–
609.5
30.7
640.2
1,047.3
24.4
–
–
–
1,071.7
(195.0)
(626.5)
45.0
–
–
170.8
1.2
172.0
–
–
–
30.8
–
30.8
–
141.2
186.2
1.7
–
–
73.3
75.0
–
–
42.5
–
218.7
261.2
–
(186.2)
Total
£m
313.1
36.6
2,284.8
119.5
2,754.0
2,421.0
41.0
42.5
30.8
218.7
2,754.0
–
–
126 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
30. RISK MANAGEMENT continued
Capital risk and management
The following shows the regulatory capital resources managed by the Group and Bank:
Share capital
Retained earnings
Share premium account
Merger reserve
Capital contribution reserve
Intangible assets
Common equity tier 1 capital
Subordinated debt
Collective impairment allowance
Tier 2 capital
Total regulatory capital
Group
2015
£m
2.5
94.7
87.3
–
183.1
(54.7)
312.9
74.0
4.6
78.6
391.5
Bank
2015
£m
175.5
79.6
81.0
1.6
4.4
(33.5)
308.6
75.0
4.6
79.6
388.2
The regulatory capital reconciles to the total capital in the Group’s Consolidated Statement of Financial Position as follows:
Regulatory capital
Subordinated debt
Collective impairment allowance
Intangible assets
Total equity
31. SUBSIDIARY COMPANIES
Group
2015
£m
391.5
(74.0)
(4.6)
54.7
367.6
Bank
2015
£m
388.1
(75.0)
(4.6)
33.5
342.1
Group
2014
£m
185.3
32.1
1.3
–
–
(49.5)
169.2
30.8
3.0
33.8
203.0
Group
2014
£m
203.0
(30.8)
(3.0)
49.5
218.7
Bank
2014
£m
174.5
20.4
–
1.6
0.3
(28.4)
168.4
30.8
3.0
33.8
202.2
Bank
2014
£m
202.2
(30.8)
(3.0)
28.4
196.8
Accounting policy
Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the
date that control commences until the date that control ceases.
The Company has the following subsidiary companies whose results are included in these consolidated financial statements:
Country of Incorporation
Class of shares held
Ownership
Shawbrook Bank Limited
and its subsidiaries:
Shawbrook Buildings and Protection Limited
England & Wales
Ordinary
England & Wales
Ordinary
Link Loans Limited
Singers Corporate Asset Finance Limited
Singers Healthcare Finance Limited
Singer and Friedlander Commercial Finance Limited
Hermes Group Limited
Coachlease Limited
Centric Group Holdings Limited
and its subsidiaries:
Centric Group Finance 2 Limited
Centric Group Finance Limited
and its subsidiaries:
Centric Commercial Finance Limited
Resource Partners SPV Limited
Centric SPV 1 Limited
Centric SPV 2 Limited
Singer and Friedlander Finance Limited
East Anglian Finance Limited was sold on 18 February 2015.
England & Wales
England & Wales
England & Wales
Scotland
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
England & Wales
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Principal activity
Banking
FCA authorised
introducer of insurance
Non-trading
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
In Liquidation
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 127
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
31. SUBSIDIARY COMPANIES continued
The following companies were dissolved at Companies House during 2015: Singers Asset Finance Holdings Limited, SAF Funding Limited, Ascot Funding
Limited, Money2Improve Limited, Apple Holdco Limited and Apple Acquisition Limited.
Business combinations
Accounting policies
Business combinations
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to
the Group.
The Group measures goodwill at the acquisition date as:
– the fair value of the consideration transferred; plus
– the fair value of the existing equity interest in the acquiree; less
– the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred in the consolidated
accounts and capitalised within cost of investment in the Company accounts.
Acquisition accounting
The Group recognises identifiable assets and liabilities at their acquisition date fair values. Fair values are determined from the estimated future
cashflows generated by the assets. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition
date fair value and the amount of any non-controlling interests in the acquiree. When the Group acquires a business, it assesses the financial assets and
liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent
conditions as at the acquisition date.
Loans and advances to customers
Property, plant and equipment
Borrowings
Other net liabilities
Net identifiable assets and liabilities
Consideration transferred:
Cash
Ordinary shares in Shawbrook Bank Ltd
Total Consideration
Representing:
Goodwill on acquisition
Note
17
2014
Fair values
£m
195.5
0.1
(138.2)
(3.4)
54.0
70.0
7.7
77.7
23.7
32. RELATED PARTY TRANSACTIONS
Related parties of the Group include key Management personnel, close family members of key Management personnel and entities which are controlled,
jointly controlled or significantly influenced, or for which significant voting power is held, by key Management personnel or their close family members.
Key Management personnel are defined as the Directors.
Company
Amounts owed to Group Companies:
Balance at 1 January
Issue of share capital
Costs of issue of share capital
Investment in subsidiary
Repayment of subordinated debt
Issue of subordinated debt
Dividend received from Shawbrook Bank Limited
Professional fees and other costs
Transfer of funds
Balance at 31 December
128 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
2015
£m
–
90.0
(3.7)
(82.0)
33.7
(75.0)
4.0
(0.3)
35.9
2.6
2014
£m
0.9
–
–
–
–
–
–
0.5
(1.4)
–
32. RELATED PARTY TRANSACTIONS continued
During the year, Shawbrook Group plc entered into a £75m subordinated debt with it’s subsidiary, Shawbrook Bank Limited. The terms and conditions
mirror the subordinated debt listed by the Company on the London Stock Exchange on 28 October 2015 (See note 26).
Pollen Street Capital is a private equity firm whose shares are held by Special Opportunities Fund (Guernsey) LP acting through its general partner and
manager, SOF General Partner (Guernsey) Limited which holds its shares in Shawbrook through its nominee, SOF Annex Nominees Limited.
Target Group Limited is an investment of Pollen Street Capital Limited. The Group has an amortising term loan, secured on mortgage assets, to Target
Financial Systems Limited, a wholly owned subsidiary of Target Group Limited. Income earned during the year was £0.6m (2014: £0.8m) and the balance
outstanding at 31 December 2015 was £10.1m (2014: £7.3m).
The Group has also entered into a contract with Target Servicing Limited, a wholly owned subsidiary of Target Group Limited, for administration services
on various portfolios. Target Servicing Limited services various portfolios, under customary commercial arrangements, on behalf of the Group. The Group
has been charged £6.6m during 2015 for these services (2014: £4.6m) and no amounts were due at 31 December 2015. In addition, the Group paid £1.3m
for additional services. During 2015 Target paid the Group £0.7m to settle a contingent liability from 2014 in respect of customer redress.
The Group has paid £1.4m (2014: £1.3m) in broker fees to Freedom Finance Limited, an investment company of Pollen Street Capital Limited since August 2014.
On 18 February 2015, the Group sold its entire shareholding in East Anglian Finance Limited to the shareholders of Pollen Street Capital Limited for £15k.
Transactions with key management personnel
The aggregate value of the transactions and outstanding balances related to key management personnel (as defined by IAS 24 Related Party Disclosure,
were as follows:
Transaction values for the year ended
Deposits
Deposits
Deposits
31 December
2015
£000
252
31 December
2014
£000
303
Maximum balance for the year ended
31 December
2015
£000
347
31 December
2014
£000
314
Balance outstanding at
31 December
2015
£000
62
31 December
2014
£000
314
The charge for share based payments provided to key Management personnel during 2015 was £4.1m (2014: £0.1m).
33. CAPITAL COMMITMENTS
The Group has capital commitments totalling £0.9m at 31 December 2015 (2014: £1.3m).
34. CONTINGENT LIABILITIES AND GUARANTEES
Accounting policies
Financial guarantee contracts
Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded initially at their fair value, which is generally
the fee received or present value of the fee receivable. Subsequently, financial guarantee liabilities are measured at the higher of the initial fair value,
less cumulative amortisation, and the best estimate of the expenditure required to settle the obligations.
Contingent Liabilities
Contingent liabilities, which includes contingent liabilities related to legal proceedings or regulatory matters, are possible obligations that arise from
past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within
the control of Shawbrook Group; or are present obligations that have arisen from past events but are not recognised because it is not probable that
settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities
are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 129
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 DECEMBER 2015
34. CONTINGENT LIABILITIES AND GUARANTEES continued
Financial guarantee contacts
The Group entered into a financial guarantee contract to the amount of £2.5m. This contract is a continuous obligation which may be terminated by the
Group on giving three months’ written notice. The contract is fully collateralised through a first fix charge over a blocked deposit account to the amount
of £2.5m.
Contingent liabilities
Part of the Group’s business is regulated by the Consumer Credit Act (‘CCA’), which contains very detailed and highly technical requirements. The Group
continues to commission external reviews of its compliance with the CCA and other consumer regulations. The Group has identified some areas of
potential non-compliance, although these are not considered to be material. While the Group considers that no material present obligation in relation to
non-compliance with the CCA and other consumer regulations is likely, there is a risk that the eventual outcome may differ.
35. EARNINGS PER SHARE
IAS 33 requires that if the number of ordinary shares increases as a result of a capitalisation, bonus issue or share split then the calculation of basic and
diluted earnings per share shall be adjusted retrospectively. The tables below are based on the number of shares in issue after the capital restructure as
set out in Note 27. On this basis, the 31 December 2014 EPS has been restated from 20.9p to 17.7p.
Earnings per share
Basic
Diluted
2015
Pence
24.14
24.14
2014
Pence
17.67
17.67
Basic EPS amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of the parent by the weighted average number
of ordinary shares outstanding during the year, excluding own shares held in employee benefit trusts.
Diluted EPS amounts are calculated by adjusting the profit for the year attributable to ordinary equity holders of the parent and the weighted average
number of ordinary shares outstanding for the effects of all the dilutive potential ordinary shares into ordinary shares, which comprise share options
granted to employees.
There are no discontinued operations during the period (2014: £nil).
Basic and diluted EPS computations are based on profit attributable to ordinary equity holders of the parent of £58.5m (2014: £34.5m) and weighted
number of ordinary shares of 242.3m (2014: 195.3m).
36. ULTIMATE PARENT COMPANY
No single entity or individual has a controlling interest in the Company. The largest company in which the results of the Group are consolidated is that
headed by Shawbrook Group Plc (previously known as Laidlaw Acquisitions Limited), incorporated in England and Wales. No other financial statements
include the results of the Group.
37. COUNTRY BY COUNTRY REPORTING (‘CBCR’)
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain reporting obligations
on financial institutions that are within the scope of the EU Capital Requirements Directive IV (CRD IV).
The objective of the Country-by-Country Reporting requirements is to provide increased transparency regarding the source of the Financial Institution’s
income and locations of its operations.
Shawbrook Group Plc and its Subsidiaries are all UK registered entities, the activities of which are disclosed on page 127 of the Annual Report and Accounts.
The Group’s net operating income, profit before taxation, income tax charge and the number of full time equivalent employees were:
Net operating income (£m)
Profit before tax (£m)
Income tax charge (£m)
Average number of employees on a full time equivalent basis
The Group did not receive any public subsidies.
130 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
2015
166.9
70.1
(11.6)
514
2014
112.2
45.3
(10.8)
414
GLOSSARY
ALCO
BAC
BRC
Basel II
Basel III
Asset and Liability Committee.
Board Audit Committee.
Board Risk Committee.
The capital adequacy framework issued by the Basel Committee on Banking Supervision in June 2006 in the form of
the ‘International Convergence of Capital Measurement and capital standards’.
Global regulatory standard on Bank Capital Adequacy, Stress Testing and Market and Liquidity proposed by the Basel
Committee on Banking Supervision in 2010. It aims to strengthen regulation, supervision and risk management in the
banking sector. See also CRD IV.
Basis Point (bps)
One hundredth of a percent (0.01%). 100 basis points is 1%. It is used in quoting movements in interest rates or yields
on securities.
BBA
BIPRU
Board
BOE
British Bankers Association, the leading trade association for the UK banking sector.
The prudential sourcebook for banks, building societies and investment firms. The part of the Financial Conduct
Authority’s (FCA) Handbook that sets out these detailed prudential requirements for the banks that they regulate.
The Company’s Board of Directors.
Bank of England.
Buy-to-let Mortgages
Capital Requirements
Regulation (CRR)
Buy-to-let mortgages are those mortgages offered to customers purchasing residential property as a rental
investment.
The European Union has implemented the Basel III capital proposals through the Capital Requirements Regulation
(CRR) and the Capital Requirements Directive (CRD), collectively known as CRD IV. CRD IV was implemented on
1 January 2014.
Code
The FRC’s UK Corporate Governance Code (2014 edition).
Common Equity Tier 1 Capital
(CET1)
The highest quality form of capital under CRD IV that comprises common shares issued and related share premium,
retained earnings and other reserves excluding the cash flow hedging reserve, less specified regulatory adjustments.
Cost of Risk
Cost of risk is defined as impairment losses on financial assets divided by average principal employed for a given
period.
Cost:Income Ratio
Calculated as administrative expenses plus provisions for liabilities and charges, divided by net operating income.
CRD
CRD IV
Customer Deposits
Deferred Tax Asset
Capital Requirements Directive.
In June 2013, the European Commission published legislation for a Capital Requirements Directive (CRD) and Capital
Requirements Regulations (CRR) which form the CRD IV package. The package implements the Basel III proposals in
addition to the inclusion of new proposals on sanctions for non-compliance with prudential rules, corporate
governance and remuneration. The rules are implemented in the UK via the PRA policy statement PS7/13 and came
into force form 1 January 2014, with certain sections subject to transitional phase in.
Monies deposited by retail and commercial savings account holders. Such funds are recorded as liabilities of the
Group.
Income taxes recoverable in future periods as a result of deductible temporary differences (temporary differences
between the accounting and tax base of an asset or liability that will result in tax deductible amounts in future
periods) and the carry-forward of tax losses and unused tax credits.
Earnings at Risk (EaR)
Approach set out for the quantification of interest rate risk expressed as the impact of the sensitivity analysis on the
change to net interest income.
Effective Interest Rate (EIR)
Encumbrance
EPS
Expected Loss (EL)
The effective interest rate method calculates the amortised cost of a financial asset or financial liability, and allocates
the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial asset or financial liability. Calculation of the effective
interest rate takes into account all contractual terms of the financial instrument but includes all amounts received or
paid that are an integral part of the overall return, direct incremental transaction costs related to the acquisition or
issue of a financial instrument and all other premiums and discounts.
An interest in an asset held by another party. Encumbrance usually impacts the transferability of the asset and can
restrict its free use until the encumbrance is removed.
Earnings per share.
This is the amount of loss that can be expected by the Group calculated in accordance with PRA rules. In broad terms
it is calculated by multiplying the Default Frequency by the Loss Given Default by the Exposure at Default.
Exposure
A claim, contingent claim or position which carries a risk of financial loss.
Exposure at Default
An estimate of the amount expected to be owed by a customer at the time of a customer’s default.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 131
STRATEGIC REPORTFINANCIALSGOVERNANCE GLOSSARY CONTINUED
Fair Value
FCA
Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between willing
parties in an arm’s length transaction.
Financial Conduct Authority.
Financial Services
Compensation Scheme (FSCS)
The Financial Services Compensation Scheme is the UK’s independent statutory compensation fund for customers of
authorised financial service firms and pays compensation if a firm is unable to pay claims against it. The FSCS is
funded by management expenses levies and, where necessary, compensation levies on the authorised firms.
Forbearance
Forbearance takes place when a concession is made on the contractual terms of a loan in response to borrowers’
financial difficulties. Forbearance options are determined by assessing the customer’s personal circumstances.
FTP
Funds Transfer Pricing.
Full Time Equivalent (FTE)
A full time employee is one that works a standard five day week. The hours worked by part time employees are
measured against this standard and accumulated along with the number of full time employees and counted as full
time equivalents. This is a more consistent measure of the amount of time worked than employee numbers which
will fluctuate as the mix of part time and full time employees changes.
Funding for Lending Scheme
(FLS)
The Bank of England launched the Funding for Lending scheme in 2012 to allow banks and building societies to
borrow from the Bank of England at cheaper than market rates for up to four years. This was designed to increase
lending to businesses by lowering interest rates and increasing access to credit.
Group
Gross Yield
HPI
IFRS
ILAA
Impaired Assets
Impairment Allowance
Impairment Losses
The Company and its subsidiaries.
Gross yield is calculated as the sum of interest receivable and similar income, net income from operating leases, net
fee and commission income and fair value losses on financial instruments divided by average principal employed.
House Pricing Index.
International Financial Reporting Standards.
Individual Liquidity Adequacy Assessment
Loans that are in arrears, or where there is objective evidence of impairment, and where the carrying amount of the
loan exceeds the expected recoverable amount.
Impairment allowances are a provision held on the balance sheet as a result of the raising of a charge against profit
for the incurred loss inherent in the lending book. An impairment allowance may either be individual or collective.
An impairment loss is the reduction in value that arises following an impairment review of an asset that determined
that the asset’s value is lower than its carrying value. For impaired financial assets measured at amortised cost,
impairment losses are the difference between the carrying value and the present value of estimated future cash
flows, discounted at the asset’s original effective interest rate. Impairment losses can be difficult to assess and critical
accounting estimates and judgements are made when determining impairment losses.
Interest Rate Risk in the
Banking Book (IRRBB)
The risk to interest income arising from a mismatch between the duration of assets and liabilities that arises in the
normal course of business activities.
Internal Capital Adequacy
Assessment Process (ICAAP)
The Group’s own assessment, based on Basel II requirements, of the levels of capital that it needs to hold in respect of
its regulatory capital requirements (for credit, market and operational risks) and for other risks including stress events
as they apply on a solo level and on a consolidated level.
IASB
IPO
Leverage Ratio
International Accounting Standards Board.
Initial Public Offering.
The leverage ratio is calculated as common equity tier 1 capital divided by the total of on and off balance sheet assets
adjusted for deductions.
LIBOR
London Inter-Bank Offered Rate.
Liquidity Coverage Ratio (LCR)
The ratio of the stock of high quality liquid assets to expected net cash outflows over the following 30 days. High
quality liquid assets should be unencumbered, liquid in markets during a time of stress, and ideally, central bank
eligible.
Loan-to-Deposit Ratio
The ratio of loans and advances to customers net of allowance for impairment divided by customer deposits.
Loss Emergence Period
The loss emergence period is the estimated period between impairment occurring and the loss specifically identified
and evidenced by the establishment of an appropriate impairment allowance.
Loss Given Default
MLRO
The estimated loss that will arise if a customer defaults. It is calculated after taking account of credit risk mitigation
and includes the cost of recovery.
A Money Laundering Reporting Officer (MLRO) is the officer nominated within a firm or practice to make disclosures
to the Serious Organised Crime Agency (SOCA) under the Proceeds of Crime Act 2002 and the Terrorism Act 2000.
Neither past due nor impaired
Loans that are not in arrears and which do not meet the impaired asset definition. This segment can include assets
subject to forbearance solutions.
132 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
Net Interest Income
The difference between interest received on assets and interest paid on liabilities.
Net Interest Margin (NIM)
Calculated as net operating income divided by average principal employed.
Net Loans
Loans and advances to customers, net of impairment provision, plus operating leases.
Net Stable Funding Ratio (NSFR) The ratio of available stable funding to required stable funding over a one year time horizon, assuming a stressed
scenario. The ratio is required to be 100% with effect from 2018. Available stable funding would include such items as
equity capital, preferred stock with a maturity of over one year, or liabilities with a maturity of over one year.
Past due
A financial asset such as a loan is past due when the counterparty has failed to make a payment when contractually
due.
Past due but not impaired
Loans that are in arrears or where there is objective evidence of impairment, but the asset does not meet the
definition of an impaired asset as the expected recoverable amount exceeds the carrying amount.
PRA
Prudential Regulation Authority.
Repurchase Agreements or
‘Repos’
An agreement where one party, the seller, sells a financial asset to another party, the buyer, at the same time the
seller agrees to reacquire and the buyer to resell the asset at a later date. From the seller’s perspective such
agreements are repurchase agreements (repos) and from the buyer’s reverse repurchase agreements (reverse repos).
Return on Lending Assets
Return on lending assets before taxation is calculated as profit/(loss) before taxation divided by average principal
employed.
Risk-weighted Assets
Sum of all risk-weighted assets as required for regulatory capital ratio measures.
Secured Lending
Lending on which the borrower uses collateral such as equity in their home.
Standardised Approach
Stress Testing
Tangible Equity
Tier 1 Capital
In relation to credit risk, a method for calculating credit risk capital requirements using External Credit Assessment
Institutions (ECAI) ratings of obligators (where available) and supervisory risk weights. In relation to operational risk, a
method of calculating the operational risk capital requirement by the application of a supervisory defined
percentage charge to the gross income of specified business lines.
Stress and scenario testing is the term used to describe techniques where plausible events are considered as
vulnerabilities to ascertain how this will impact the capital resources which are required to be held.
A subset of shareholders equity that is not intangible assets.
A measure of banks financial strength defined by the PRA. It captures Common Equity Tier 1 capital plus other Tier 1
securities in issue, but is subject to a deduction in respect of material holdings in financial companies.
Tier 1 Capital Ratio
Tier 1 capital as a percentage of risk-weighted assets.
Tier 2 Capital
A further component of regulatory capital defined by the PRA. It comprises eligible collective assessed impairment
allowances under CRD IV.
Total Capital Ratio
Total regulatory capital expressed as a percentage of risk-weighted assets.
TNAV
Tangible net asset value.
Unencumbered Assets
Underlying EPS
Assets that are readily available to secure funding or to meet collateral requirements, and assets that are not subject
to any restrictions but are not readily available for use.
Underlying profit after taxation attributable to ordinary shareholders of the Parent Company divided by the
weighted-average number of ordinary shares outstanding during the period excluding own shares held in employee
benefit trusts or held for trading.
Underlying return on tangible
equity
Underlying profit before taxation divided by average tangible equity. Average tangible equity is calculated as total
equity less intangible assets at the beginning of a period plus total equity less intangible assets at the end of the
period divided by two.
Underlying profit before
taxation
Statutory profit before taxation adjusted for distortive non-recurring items that are not part of the Group’s ongoing
business activities.
Yield Curve
A line that plots the interest rates, at a set point in time, of an asset class or swap rate at varying maturities. This can
be used as a gauge to evaluate the future of interest rates.
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 133
STRATEGIC REPORTFINANCIALSGOVERNANCE NOTES
134 SHAWBROOK GROUP PLC Annual Report and Accounts for the year ended 31 December 2015
NOTES
Annual Report and Accounts for the year ended 31 December 2015 SHAWBROOK GROUP PLC 135
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SHAWBROOK GROUP PLC
Lutea House
Warley Hill Business Park
The Drive, Great Warley,
Brentwood,
Essex CM13 3BE
Company number 07240248