Shawbrook Group plc
Annual Report & Accounts 2017
Proudly different
Proudly different
Word
Contents
Strategic report
The Strategic report provides readers with a holistic
picture of Shawbrook’s business model, strategy,
2017 performance and future prospects.
1
2
4
6
7
9
The difference in being different
Basis of preparation
Our business
Chairman’s statement
Chief Executive Officer’s statement
Our strategy
10 Our business model
12
24
Business review
Risk management report
42 Corporate social responsibility
Corporate governance report
In this section we set out our commitment to the
highest standards of corporate governance in line
with UK best practice, our approach to remuneration
and Directors’ Responsibilities.
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50
76
81
85
86
Corporate governance report
Board of Directors
Directors’ Remuneration Report
Directors’ report
Statement of Directors’ responsibilities
Independent Auditor’s report
Financial statements
The financial statements comprise of the statutory
financial statements and notes to the accounts for 2017.
94
95
96
97
98
Consolidated statement of profit and loss
and other comprehensive income
Consolidated and Company statement
of financial position
Consolidated statement of changes in equity
Company statement of changes in equity
Consolidated and Company statement
of cash flows
99
Notes to the financial statements
167 Glossary
shawbrook.co.uk
twitter.com/shawbrookbank
twitter.com/shawbrookbroker
linkedin.com/company/shawbrook-bank
The difference in
being different
Shawbrook is a growing UK specialist bank. Our approach
to lending and savings is founded on the simple and good
old-fashioned quality of good sense.
What sets us apart is the deep relationships we develop with our
customers and business partners. We take the time to get to know
them; we learn more about their specific needs and this allows us
to identify and tailor the products that will help them to maximise
their opportunities.
Our chosen target markets are selected carefully and are ones that
are poorly served by the mainstream banks. We are determined
to support our customers and business partners by being highly
engaged, straightforward, agile and easy to do business with.
Drawing on a deep understanding of our clients’ businesses
and our specialist knowledge, we offer a clear proposition
and certainty in the markets in which we operate.
We use our experience and judgement to make decisions
that balance risk, return and customer needs.
Shawbrook – Proudly different.
How we’ve done 2017 key highlights
How we have
delivered
against our
strategic pillars
Achieve strong
risk adjusted
returns
Maintain
excellent
credit quality
5.4%
Stable NIM1
throughout 2017
53bps
Cost of risk
Progressively
increase
originations
Maintain
conservative
foundations
Enhance
customer
focus
20%
Increase in loan book
to £4.9bn
12.9%
19.1%
CET1
Total Capital
Ratio
89%
Customer satisfaction*
*As conducted in our 2017 Charterhouse survey
1. Refer to the Glossary on page 167 for definitions
1
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
results, 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 they should not be considered in isolation
or as substitutes for analysis of the Group’s results as
reported on a statutory basis. Limitations may include,
but are not limited to, the following:
■ they may not reflect every cash expenditure, future
requirements for capital expenditure 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 ongoing operations.
Because of these limitations, underlying results are
not intended as an alternative to the Group’s statutory
results or 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 results,
to assist in the evaluation of operating performance.
The following items have been excluded from
underlying results:
■ Costs of £13.2 million include expenses incurred
during the year in relation to the offer from
The Marlin Consortium for the entire share
capital of Shawbrook Group plc.
■ IFRS 2 charges amounting to £5.9 million were
recognised in 2017 in respect of share-based
awards made to employees that vested on The
Marlin Consortium gaining control of Shawbrook
Group plc. IFRS 2 charges recognised in 2016
amounting to £2.2 million related to share-based
awards to Steve Pateman, Chief Executive Officer,
which were fully satisfied by Special Opportunities
Fund (Guernsey) LP. This was the result of a one-off
award for compensation against forfeited long-term
incentives at a previous employer.
■ Corporate activity costs of £0.4 million in 2017
relate to the cost of the incremental deposits
raised to prefund the acquisition of a c.£190 million
portfolio of property loans at the end of Q3 2017,
which completed at the end of November 2017.
In 2016 the costs of £1 million related to the cost
of the incremental deposits raised to prefund the
acquisition of the c.£300 million portfolio of property
loans at the end of 2015, which completed in H2
2016. In both instances, during the period between
acquisition and completion, the portfolio was funded
by the vendor due to the length of the transition
period, and reimbursed by Shawbrook, thus resulting
in Shawbrook paying to fund the portfolio twice.
International Organisation of Securities Commissions
regulation does not permit adjustment for items that
are reasonably likely to occur in the foreseeable future,
or activities that affected the entity’s recent past, when
considering underlying results as in their experience
there are rarely circumstances where an explanation
is sufficiently robust to result in restructuring costs or
impairment losses being described as non-recurring.
In addition, European Securities and Markets Authority
regulation states that items which affected past periods
and will affect future periods – such as restructuring
costs or impairment losses – will rarely be considered
as non-recurring, infrequent or unusual.
2
Shawbrook Group plc Annual Report and Accounts 2017 Profit and Loss
Interest income, net fee and operating lease income
Interest expense and similar charges
Net operating income
Costs and provisions for liabilities and charges
Impairment losses on financial assets
Statutory profit before taxation
Income tax charge
Statutory profit after taxation, attributable to owners
Underlying adjustments
Project Marlin costs
IFRS 2 charge
Corporate activity costs
Underlying profit before taxation
Income tax on an underlying basis
Underlying profit after taxation, attributable to owners
Comparison of statutory KPIs to underlying KPIs1
2017
£m
2016
£m
314.7
292.7
(76.0 )
(83.1 )
238.7
209.6
(128.9)
(97.1 )
(23.3 )
(24.3 )
86.5
88.2
(25.3)
(23.4 )
61.2
64.8
13.2
5.9
0.4
–
2.2
1.0
106.0
91.4
(26.8)
(24.3 )
79.2
67.1
Gross asset yield (%)
Liability yield (%)
Net interest margin (%)
Management expenses ratio (%)
2017
2016
Statutory Underlying
Statutory Underlying
7.1
(1.7 )
5.4
(2.9 )
7.1
(1.7 )
5.4
(2.5 )
7.8
(2.2 )
5.6
(2.6 )
7.8
(2.2 )
5.6
(2.5 )
Cost of risk (%)
(0.53)
(0.53)
(0.64 )
(0.64)
Return on lending assets before tax (%)
Return on lending assets after tax (%)
Return on tangible equity (%)
Cost to income ratio (%)
2.0
1.4
15.1
54.0
2.4
1.8
19.5
45.9
2.3
1.7
18.8
46.3
2.4
1.8
19.4
45.1
Average principal employed (£m)
4,424.9
4,424.9
3,769.3
3,769.3
Customer loans (£m)
4,880.4
4,880.4
4,088.5
4,088.5
1 Refer to the Glossary on page 167 for KPI definitions and calculations.
3
Strategic reportCorporate governanceFinancial statements
Our business
What we do
Shawbrook is a specialist UK lending and savings bank focused on
Property Finance, Business Finance and Consumer Lending and savings.
We differentiate ourselves by concentrating on markets where our specialist
knowledge, judgement and personalised approach to underwriting offers
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 mainstream banks.
Our divisions
Property Finance
Business Finance
Consumer
The Property Finance division
has a well diversified product
range with both residential and
commercial mortgage offerings.
The Business Finance division
offers an extensive product
range, enabling it to provide a
comprehensive suite of services
to address the needs of the UK
SME market.
£3.2bn
Customer loans
£1.1bn
Customer loans
The Consumer division offers
a broad range of lending and
savings products enabling it
to provide unsecured loans
to consumers for a variety
of purposes in addition to
a range of savings products.
£0.6bn
Customer loans
Read more about
Property Finance
12
Read more about
Business Finance
16
Read more about
Consumer
20
4
Shawbrook Group plc Annual Report and Accounts 2017 Our differentiated approach
The Shawbrook way
A customer led approach...
Specialists
Thoughtful decision making
through judgement
Driven by customer needs
Innovative and tailored products
Focus on quality
Read more about
Our business model
10
Our
values
Our
people and
community
We are expert:
We are quietly
confident and
enabling.
671
Employees
(period average)
We are driven:
We are ambitious
and passionate.
52
Charities supported
Our five
strategic
pillars
Achieve strong risk
adjusted returns
Maintain excellent
credit quality
Progressively increase
originations
Maintain conservative
foundations
Enhance customer
focus
We are
practical:
We are down to earth
and pragmatic.
We act with
integrity:
We are thoughtful
and responsible.
Male
58%
42%
Female
Gender split
5
Strategic reportCorporate governanceFinancial statements Chairman‘s statement
Iain Cornish
I am delighted to introduce
this year’s Annual Report
& Accounts, in what has
been another successful
year for the Group in 2017,
with continued growth
across the business.
The Group has achieved a strong performance,
with underlying profit before tax of £106 million
and an underlying return on tangible equity of 19.5%.
We are confident that our clear and consistent
strategy and the disciplined implementation
of our business model will ensure we continue
to support our clients and generate good
returns even in a more uncertain environment.
Accelerating our strategy
Clearly a significant event in 2017 has been the
Board’s decision ultimately to accept a bid from
the Marlin Consortium (a private equity consortium
of Pollen Street Capital and BC Partners). Throughout
the offer process the Board considered the interests of
the independent shareholders and other stakeholders
at every phase, and notwithstanding the significant
time consumed by this, the Executive management
team did a tremendous job in continuing to keep
focussed on the progression of the business.
Commitment to strong governance
The Board’s responsibility to provide strong and
effective governance remains paramount. Throughout
2017 we aligned to the provisions included within the UK
Corporate Governance Code (the Code) as detailed
within the Corporate Governance Report. We remain
committed to strong governance standards and we
have worked closely with our new Shareholder to ensure
that the Board can operate independently and continue
to protect the interests of all stakeholders.
During 2017 the Board welcomed the appointment
of Andrew Didham, Independent Non-Executive
Director and Chairman of the Audit Committee,
Cédric Dubourdieu, Non-Executive Director and
Dylan Minto as Chief Financial Officer. I believe the
Board is well placed to provide effective oversight
of the Group in the delivery of its strategy.
Our communities
We remain committed to investing in the communities
we are part of, whether that is within Shawbrook
through development of our people; our local
communities through volunteering and fundraising;
or the broader UK economy through lending to
businesses, landlords, house builders or personal
customers. We are also committed to strong
corporate responsibility.
Outlook
I am highly confident in the capability of the Group,
with an Executive Management team with strength and
depth, and the excellence of colleagues throughout the
business to continue delivering growth and value into
the future. During the year I took the decision that with
the change in ownership it was an appropriate time to
step down. Finally, I would like to express my gratitude
to all my colleagues over the last three years for the
support they have given to me and to the Group.
Iain Cornish
Chairman
6
Shawbrook Group plc Annual Report and Accounts 2017 Chief Executive Officer’s statement
Steve Pateman
2017 was another year of
considerable progress for
Shawbrook and one of great
change with the company
accepting a bid from the
Marlin Consortium valuing
the company at c.£850
million in July and de-listing
its securities in August.
Our Property business grew 27% to £3.2 billion albeit
adversely impacted in the final quarter by changes to
our underwriting criteria in second charge mortgages;
Consumer grew 33% to £0.6 billion as our Personal and
Retail Finance franchises gathered momentum whilst
maintaining origination levels in our maturing Home
Improvement and Holiday Ownership businesses.
Business Finance held flat at £1.1 billion and remained
a highly competitive market whilst the Regional Business
Centres continued to establish themselves, Specialist
Asset Finance had a record year and was offset by a
high level of redemption in Wholesale Finance where
pricing has moved outside our return criteria.
We continued to bring new products to the market
with the launch of the Motor Flexiloan in Consumer in
partnership with the RAC, expansion of our first charge
mortgage business into more complex mortgage
products and the introduction of further specialist asset
classes in Asset Finance, agriculture and renewables.
7
The change in ownership creates a stable and
supportive shareholder base upon which to build a
medium term plan to develop our existing business
recognising the opportunities and challenges that
will arise from the pace of technological change and
how this impacts both our traditional distribution and
servicing methodologies as well as the ongoing changes
within the banking market as the mainstream banks
refine their risk appetite, capital planning in preparation
for Basel 4 and distribution leaving many business and
personal customers looking for banking providers that
have a more accommodating risk appetite.
Shawbrook was created to serve customer markets
with an adjacent risk profile to the mainstream providers
but to do so with thoughtful and considered underwriting
rather than rely purely on scorecards, models and
algorithms, all of which have a part to play in an
effective risk management model; our approach
to risk management was once again a core strength
with our underlying cost of risk at 0.53% on a customer
loan book which grew 20% to £4.9 billion.
Our markets continued to be challenging reflecting the
impact of high liquidity on both competitive pricing and
risk appetite; by maintaining an appropriate discipline
we were able to hold our NIM at 5.4% offsetting margin
compression by improving funding costs.
Strategic reportCorporate governanceFinancial statements Chief Executive Officer’s statement continued
Our Jersey business continued to grow and in
December we completed the acquisition of the Royal
Bank of Scotland International offshore portfolio in
partnership with Investec. We have now staffed and
opened seven Regional Business Centres and these will
also house our growing Development Finance business
which from a standing start in 2017 now has committed
facilities of c.£110 million. We also successfully adapted
our buy to let business to the revised underwriting
regulatory standards introduced in September.
Profitability was impacted by the one-off costs incurred
on the change in ownership and on an underlying
basis was up 16%; whilst the outlook for the economy is
challenging reflecting the uncertainty around how the
UK will exit the European Union and we would expect
price and risk competition to remain intense, we believe
that our product diversity will allow us to maintain our
levels of organic growth and there will continue to
be modest inorganic opportunities. Accordingly, we
took the opportunity in December to strengthen our
capital base with the successful issue of £125 million
of Additional Tier 1 securities.
Our strong income growth has allowed us to continue
to invest in the franchise with headcount increasing
to 671 (2016: 569). Our underlying cost to income ratio
increased to 45.9% as we invested for the future and
continue to plan to reduce this further to 35% by
2020, notwithstanding the investment required to
maintain and enhance our IT architecture. The strong
disciplines applied to capital allocation, underwriting
and investment allowed us to deliver a RoTE of 19.5%,
however we are carrying surplus levels of capital to
support growth with a Total Capital Ratio of 19.1% and
continue to target RoTE in the range of 22-25%.
I would like to close by thanking my colleagues
for their contribution to the business over the last
12 months, to the Board for their continued support
and to Iain Cornish whose counsel I will miss when he
passes on the role of Chairman to his successor. Iain
has guided the Group through a challenging period
following the Initial Public Offering in April 2015 and
it is appropriate to thank him for his contribution to
the significant progress we have made in building
the banking business we have today.
“ The strong disciplines
applied to capital allocation,
underwriting and investment
allowed us to deliver a RoTE1
of 19.5%”
Steve Pateman
Chief Executive Officer
1. Refer to the Glossary on page 167 for definitions
8
Shawbrook Group plc
Annual Report and Accounts 2017
Strategic report
Corporate governance
Financial statements
Our strategy
Our five
strategic pillars
How we will achieve these
1
2
3
4
5
■ Continue to identify specialist lending sectors
■ Achieve strong returns whilst maintaining high quality
underwriting standards
■ Ensure that the loan book is sustainable over the long term
when markets may not be so benign
Achieve strong
risk-adjusted returns
Maintain excellent
credit quality
Progressively increase
originations
■ Increase organic originations
■ Continue to identify and carefully enter adjacent
specialist markets
■ Further increase diversification
Maintain conservative
foundations
■ Conservative approach to risk management
■ Prudently positioned capital, funding and liquidity
Enhance customer
focus
■ The SME Champion – we meet the needs of poorly
served markets
■ Consumer specialists – we serve sectors where our products
and high degree of choice differentiate our offer
■ Exploit leading edge technology to enhance customer
experience and drive efficiencies
9
Our business model
A unique model
for a ‘proudly
different bank’...
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 mainstream 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.
1.
The Shawbrook way. A customer led approach…
Specialists
Thoughtful
decision
making
Driven by
customer
needs
Innovative
and
tailored
products
Focus on
quality
We use our expertise and judgement to make individual decisions that balance risk
and return with customer needs.
2.
where we leverage our key differentiators...
Our ability to serve markets where there is a structural supply and demand imbalance.
Our people
Unique expertise
Deep relationships with customers
and business partners
Diversification across core asset
classes and new markets
Specialist underwriting
Thoughtful innovation
10
Shawbrook Group plc Annual Report and Accounts 2017 3.
across our carefully
selected markets...
4.
to our
customers...
6.
to create value for
all our stakeholders.
SMEs
Landlords
Property Finance
Homeowners
Consumers
Business Finance
Savers
5.
through direct and
indirect channels...
Established distribution
channels with wide reach
through business partners,
intermediates and directly
to customers.
Business partners
/ Customers
89%
customer
satisfaction1
Our customers
84%
partner
satisfaction2
Our partners
50+
charities
supported
Our communities
Consumer Finance
Underpinned by exemplary risk management, strong governance and our pragmatic culture
How we create value
Customer
deposits
Existing loan book
OR Originations
Lend to poorly
served customers
Interest
charged
=
Strong
Returns
1 Charterhouse customer survey, Q4 2017.
2 Property Finance partner surveys, Q2 2017 – Partner satisfaction regarding product proposition.
11
Strategic reportCorporate governanceFinancial statements Business review
Property Finance
We provide finance to the
specialist residential investment
and commercial property market,
to professional property investors
and SME owner occupiers together
with a range of first and second
charge and complex mortgages
for personal customers.
Property.
Activity
The Property Finance division has a well diversified
product range with both residential and commercial
mortgage offerings. Within these broad markets, we
actively specialise in the following areas:
■ Residential: serving homeowners primarily through
second charge mortgages and specialist first charge
mortgages.
■ Commercial: serving property professionals in both
residential and commercial investment markets
through the provision of traditional mortgages
and also through both short-term lending, and
development finance to established SME house
builders and well established SME owner occupiers.
The division’s products are distributed, in the main,
through the mortgage intermediary market,
leveraging long established relationships
and a highly regarded brand.
12
Shawbrook Group plc
Annual Report and Accounts 2017
Strategic report
Corporate governance
Financial statements
Differentiation
The Property Finance division is our most mature business, built on
foundations of strong, long standing relationships with mortgage
brokers and intermediaries, working hand in hand to deliver
exceptional service and positive outcomes for our customers.
We have continued to develop our product range and innovate
our approach so we can offer our customers more choice and
a timely and well considered response. For example, during 2017,
we introduced a new ‘lending into retirement’ mortgage proposition
as well as a complex first mortgage product whilst developing our
award winning Electronic Application In Principle (EAIP) system,
and expanding our distribution in both residential and commercial
mortgages to leverage the broader network distribution. Our
Development Finance business agreed facilities of c.£110 million
from a standing start.
Our specialist knowledge and deep sector expertise allow us to
continue to provide thoughtful judgement and a personal service
whilst utilising technology to support process improvements and
response times. We operate selectively within extensive markets
and our specialist approach continues to resonate with customers.
Each loan is manually underwritten, allowing our teams to provide
pragmatic and good sense solutions. As with all our divisions, we
continue to maintain a sensible and clearly defined risk appetite
which, allied to our robust underwriting processes, positions us
appropriately through the cycle. The breadth of our product range,
combined with the exceptional service levels delivered by our teams,
continue to receive industry accolades. We received a total of
13 awards during 2017.
Residential
Our residential proposition remains predominantly focused on
the second charge mortgage market. We provide a wide range
of secured loans, principally to prime borrowers for a variety of
purposes including home improvements, loan consolidation
and large consumer purchases.
During 2017, our second charge mortgage proposition has continued
to evolve and we launched a broader suite of products and pricing
points in December 2017. This new proposition provides the broker
community and our customers with a clearer understanding of our
risk appetite and has allowed us to become more competitive in
the pricing options we are able to offer.
Whilst remaining committed to maintaining our prominent position
in the second charge mortgage market, we have made progress
with our plans to diversify into specialist segments of the first charge
market. In 2017, we launched a range of ‘lending into retirement’
products and started to write complex first charge mortgages; we
continue to explore other segments where our pragmatic approach
can deliver good outcomes for carefully identified customer segments
and would expect to launch further first charge propositions in 2018.
13
Commercial
Our activity in the commercial markets remains
focused on providing financing to property
professionals for investment, refurbishment or
redevelopment and to SMEs for owner-occupied
property. Specialist buy-to-let (BTL) mortgages
remain a significant part of our activity and we
have seen strong growth during the year.
We have progressed with our ambition to develop a
capability within the development finance market,
and we have continued to build a dedicated and
experienced team. Our early engagement in the
market has reaffirmed our confidence in our product
design and capability to offer a selective service to
professional SME house builders, many of whom we
have existing relationships with. Allied to the distribution
reach we have with our intermediary partners, we
have adopted a controlled entry into this market,
validating our principles regarding risk appetite and
customer service delivery. We will continue to expand
this throughout 2018 and leverage the presence and
profile of our Regional Business Centres (RBCs) network
across the UK.
“ In today’s market, you need a
bank that can keep up with the
demands placed on its customers.
Shawbrook understands these
demands and removes a lot of the
stress that comes with refinancing
on a scale that the high street
cannot match. Their continuing
growth and support makes them
the obvious choice for investors”
Mr Geoff Knight
Joy International
14
Shawbrook Group plc
Annual Report and Accounts 2017
Strategic report
Corporate governance
Financial statements
Outlook
Whilst the BTL market is forecast to contract further in
2018 as a result of the cumulative effect of tax changes
on investors, there will continue to be a positive shift
towards the professional segment, in which we
specialise, and this asset class remains an attractive
one for long term investors underpinned by favourable
supply/demand dynamics in UK housing; we would
thus expect to be able to grow our share and flow
whilst also looking at options to participate in the
wider BTL market.
We have taken steps to improve the breadth and
depth of our second charge portfolio of products
and having undertaken a soft launch of our complex
first charge products, would expect to expand this
range in 2018 whilst building out options to respond
to the impact of technology on the distribution of
residential mortgages.
Development Finance offers significant opportunity
as the Government seek to encourage supply of new
housing and where smaller house builders continue
to find it hard to access attractively priced and
sensibly structured funding support; we have built
a small business from scratch in a market that has
annual flow of up to £3 billion and are confident that
by utilising the Group’s RBC presence, we can scale
this business towards a £1 billion portfolio over the
medium-term through a combination of organic
growth and strategic partnerships.
15
1. Regional Business
Centres: we have seven
RBCs which provide
our full suite of debt
financing solutions
to local SMEs.
2. Structured Finance:
provides finance to
companies that in
turn provide a mix
of consumer and
SME funding; finance
is secured over a pool
of portfolio receivables.
4. Shawbrook
International Limited:
provides a range of
consumer, property
and SME financing
solutions in Jersey.
3. Specialist Asset
Finance: leasing and
hire purchase finance
solutions in specialist
UK SME market
segments including
marine and aviation,
healthcare, taxis,
technology, agriculture
and renewables.
Business review
Business Finance
Business
Finance.
Activity
Business Finance’s primary focus is on providing
debt based financing solutions to support SME
businesses through a combination of asset
finance, working capital finance, commercial
mortgages and growth capital; finance is
predominantly secured over a pool of assets.
Business Finance operates through:
Differentiation
Business Finance provides a range of debt based
financing solutions targeted on the SME market
working with companies whose risk profile or product
needs sit outside the appetite or capabilities of the
mainstream banking providers.
Whilst our focus remains predominantly on providing
finance secured over fixed soft and hard assets,
pools of receivables, or commercial property,
we can provide unsecured working capital where
there is evidence of sustainable earnings and
growth capital to support expansion of an existing
business helping to grow future earnings. The
combination of our sector expertise and regional
presence provide the foundation for thoughtful
underwriting helping to provide solutions that
meet the needs of our customers.
We believe that there is significant potential
to develop our Business Finance proposition
and we were pleased to appoint Ian Cowie as
Managing Director, Business Finance in April;
Ian brings considerable experience from his
time with Royal Bank of Scotland where he led
many of their corporate, commercial and asset
financing businesses. Whilst competition and
strong level of liquidity have challenged historic
margins and risk appetite, there remains room for
a specialist proposition and this was reflected
in the maintenance of our NIM at 7%.
16
Shawbrook Group plc Annual Report and Accounts 2017 Regional Business Centres (RBCs)
In 2017, the Group developed the Regional Business
Centre model, establishing a network of seven
centres in Maidstone, Dorking, Bristol, Birmingham,
Manchester, Leeds and Glasgow bringing together our
existing field based sales teams in Asset and Invoice
Finance. These new centres provide the foundations
for a national network of teams providing advice,
execution and in-life management for complex non-
standard asset, working capital, property and growth
finance solutions. New business is originated through
direct channels, particularly as regional teams begin
to integrate with local professional communities, and
also through commission based intermediaries via
broker managers based in each RBC.
The RBC network is at the heart of the Business
Finance division, giving us a physical footprint across
the UK, allowing us to work with businesses, brokers
and advisors in their own communities. Investing in
a physical presence and recruiting more specialists
to supplement our existing teams are a clear sign
of our commitment to this market.
Specialist Asset Finance (SAF)
A portfolio of asset finance businesses offering
solutions tailored to the specific dynamics of a number
of niche and specialist markets, including agriculture,
marine and aviation, healthcare, taxi, technology and
paper professionals. Origination is both direct and via
specialist brokers.
Across SAF, the balance of old and new businesses
has delivered a real advantage. Technology is a new
specialist sector for us but we have already delivered
some significant and exciting transactions, which
has given us real credibility in this market; similarly,
with agriculture.
Our more established sectors including marine
and aviation, healthcare and taxi have performed
impressively, showing year on year growth of 32%
and delivering some landmark transactions.
“ The ongoing relationship is
important to us. Since inception, the
Shawbrook team has been actively
engaged in what we are looking to
achieve, providing a service that is
supportive and pragmatic as well as
flexible. With the transaction with
Shawbrook completed, all of the
constituent parts are now in place
to deliver our next phase of strong
commercial growth.”
“ Graham Stott
Group Finance Director of Dudson Limited
17
Strategic reportCorporate governanceFinancial statements Business review
Business Finance continued
Structured Finance (SF)
A London based team offering access to wholesale
funding through both Block Discounting and Wholesale
Finance facilities. Clients vary from early-stage fintech
platform funders through to established regional
specialist lending businesses. Origination is direct.
The SF business has faced significant pressures in its
market throughout 2017, driven largely by aggressive
pricing from a number of new and established
providers, but across Wholesale and Block we have
continued to attract and retain a high quality franchise
with attractive risk and reward characteristics which is
testament to the expertise within the team. Under new
leadership, the team is now focussed on broadening its
proposition whilst delivering the highest levels of service
that has helped to set Shawbrook apart in this market.
“ We have found Shawbrook to be very
familiar with the unsecured consumer
finance arena in which we operate and
how to assess the risks. The team at
Shawbrook immediately demonstrated
a clear understanding of our operating
model and leveraged their institutional
knowledge and experience to support
the build out of our procedures,
processes and infrastructure.”
Julia Throop
Managing Director, PayBreak
Shawbrook International Limited (SIL)
Shawbrook International houses the expansion
of the complete Shawbrook proposition into
the Channel Islands, where there is demand for
our approach and portfolio of solutions. Able to
draw upon the scale, expertise and capabilities
of the wider Group, SIL is able to offer personal
loans, asset finance, development finance and
motor finance. SIL have also recently launched
a partnership with Jersey Post which extends
the reach and profile of the Group on the island.
Deal flow is currently driven by brokers and
intermediaries, but continued to focus on building
the brand on the island is helping to establish SIL’s
direct proposition.
As SIL approaches its first anniversary, it is
now looking to extend its reach into Guernsey
after making significant progress in Jersey. The
acquisition of the offshore asset finance loan book
from Lombard, in partnership with Investec, was
a significant event at the end of 2017 that gives
SIL a step up in scale and presence.
18
Shawbrook Group plc
Annual Report and Accounts 2017
Strategic report
Corporate governance
Financial statements
“ The service was first class and we
were able to get the equipment
quickly and on competitive terms.
I would have no hesitation in
recommending Shawbrook.”
Nick Mourant
Owner, Meleches Farms
Investing in a safe and sustainable model
With the appointment of a new Director of Risk,
our approach to risk and the way we now recognise,
understand, manage and mitigate risks across
the business has moved on considerably during
the year. Adopting a risk based approach to client
management, delivering a programme of continuous
improvement in detecting and managing problem
loans and generating enhanced risk management
information and reporting gives us real confidence in
our ability to deliver our products in the right way.
We have also completed the design and started the
roll out of a new operating model to ensure greater
customer focus, connectivity, consistency and
operational efficiency across the division. The RBCs are
now responsible for the full life cycle of their customers,
as is already the case in our SAF and SF businesses, and
by being a more connected business we’re concerned
less about individual product lines and more about
finding the right solution for each individual customer.
Progress towards rolling out and embedding the new
operating model is now underway and will continue
throughout Q1 2018.
A new Business Finance induction programme is the
most recent example of how we are working hard to
support individuals as they develop their careers within
Shawbrook, alongside initiatives to improve operational
knowledge and to equip teams with the tools they need
to succeed. Whether through core systems training,
the investment in risk factor or the trial of Artesian
and LinkedIn to support our originators.
Financials and KPIs
Financial performance reflects the transitional nature
of 2017 as the more immature areas of the business took
time to establish themselves against the backdrop of
increased liquidity and competition in the market, which
particularly impacted the Wholesale and Block Finance
businesses. Despite significant competitive pressures,
our loan book and yield remained steady at £1.1 billion
and 8.2% respectively.
Outlook
The foundations are now in place to effectively
manage and grow Business Finance in 2018. Growth
will come from a combination of developing the
RBCs and their product portfolio, adding to and
building on our specialist asset financing activities
and creating a broader proposition in Wholesale
and Block Finance.
19
Consumer.
Business review
Consumer
Activity
The Consumer division has an extensive product range
which allows us to provide unsecured loans for a variety
of purposes, in addition to a range of savings products for
consumer and SME’s. We distribute our products directly to
customers and through strategic partners and intermediaries,
using efficient systems, combined with human oversight of the
underwriting process and the latest technology to give fast
and fair credit decisions with transparent pricing.
Consumer Lending operates through relationships with
major home improvement firms, in store and online retailers,
carefully selected holiday ownership companies, loan broker
partners, affinity partners and through our direct to consumer
channel. Savings products are available directly to personal
and business customers and through partners. The division
is managed in four lending businesses; Home Improvement/
Holiday Ownership (HIL/HOL), Personal Loans, Retail Finance
and Motor Finance, alongside the Savings business.
Differentiation
Shawbrook has a specialist and deep understanding of
the consumer market, both in lending and savings. Our key
differentiator remains our commitment to offer fair and
transparent products and pricing to all customers.
The division’s lending proposition has significant potential
to grow as we develop and provide innovative solutions to
our partners and customers enabling a seamless process for
the provision of credit. Our advanced risk management and
scoring techniques combined with our expert judgement
allow us to make sensible lending decisions whilst providing
the best possible outcome for our partners and customers.
In Savings, we maintain consistently competitive rates
across our broad range of simple and straight forward retail
deposit offerings, providing exceptional levels of service from
our UK call centre. Our Savings franchise is not an advised
service, and has no sales incentives. Our deposit book is fully
administered in-house, which offers the advantage of rapid
execution of decisions on pricing and service.
20
Shawbrook Group plc Annual Report and Accounts 2017 Home Improvement/Holiday Ownership
(HIL/HOL)
The HIL/HOL business provides unsecured financing
for Home Improvement and Holiday Ownership
purposes. We distribute our products through
carefully selected partners, working closely with
them to understand their needs and key customer
demographics to ensure alignment with our own
target markets. We continue to develop innovative
solutions to enhance end customers’ experiences
and deliver a seamless and timely service.
During 2017, the business had to adapt to a number
of changes in the market with headwinds primarily
coming from suppliers who have found trading
conditions increasingly difficult and an increased
level of regulatory focus on certain areas of this
market. Despite this, originations remained stable
resulting in a modest increase in the loan book. In
addition, we entered the USA holiday ownership
market with our HOL proposition and have now
started writing business for customers purchasing
their property share across the Atlantic.
Personal Loans
The Personal Loans market in the UK continues
to be dominated by low representative teaser rates
which are subsidised, in many cases, by a group
of customers being offered much higher rates than
those advertised. The Group’s Personal Loans offering
is built on the principles of fairness and transparency,
providing a risk based pricing solution to consumers
who may be unable to obtain the super prime loss
leading rates available in the mainstream Personal
Loans market.
Our Personal Loans are primarily distributed through
broker and affinity partnerships and through our
direct to consumer proposition. The market in which
we operate is continuing to evolve rapidly through
innovation and digitisation and we continue to be
at the forefront of this evolution, building a strong
presence with key digital partners such as ClearScore,
Totally Money and Credit Matcher. All of our digital
partners focus on working with customers to ensure
they receive fair and transparent outcomes, in line
with our own ethos. This has enabled us to achieve
significant growth whilst remaining true to our
strategy of putting the customer first and avoiding
the misleading teaser rate market.
21
“ Thank you superstars. This was the best
experience ever. I honestly thought it
was going to be a nightmare. It was
so easy, so quick and everyone I spoke
to were so helpful. Can’t rate them
highly enough”
Anonymous
13 November 2017, Trustpilot
Strategic reportCorporate governanceFinancial statements Retail Finance
The Retail Finance business provides point of sale
consumer finance in partnership with recognised
retail brands both in store and online. We distribute our
products directly through retailers as well as through
a number of carefully selected intermediaries.
Throughout 2017, we have actively pursued our
diversification strategy by deepening in our core
markets and expanding into strategic areas such
as motoring, online estate agencies, technology
and furniture. In addition, we have been bold and
innovative with new propositions such as financing
for IVF which allows customers to fund their
treatment and, if it is unfortunately unsuccessful, the
loan is cancelled with no detriment to the customer.
As a result, we have achieved significant growth in
originations, supported by a reduction in application
referral rates as we continue to roll out and embed
our bespoke risk framework and systems.
Business review
Consumer continued
Motor Finance
In Q4 2017, we launched our inaugural
Motor Finance proposition, the Flexiloan; in
collaboration with our affinity partner, RAC.
As with all of our products, the Flexiloan was
developed with the customer at the forefront
of our mind. We recognise that every one of our
customers is different and we therefore created
a product which gives customers, flexible options
to ensure that the finance they acquire suits their
own individual needs. Given this product is not
only new to the Group, but unique in the Motor
Finance market, we are actively pursuing a slow
growth strategy which will enable us to obtain
feedback on the proposition itself, the customer
journey and the behaviour of the portfolio as it
seasons and adapt elements where necessary.
22
Shawbrook Group plc
Annual Report and Accounts 2017
Strategic report
Corporate governance
Financial statements
Savings
The Savings business provides a wide range of cash
savings solutions, primarily targeting affluent UK
consumers. The broad product range, which includes
notice, fixed rate, cash ISAs and easy access products,
has driven sustainable deposit growth by meeting a
wider range of customer savings needs. During 2017,
we have diversified and expanded our proposition
through less traditional channels, partnering with highly
regarded brands to enhance the offerings available
to their customers and increase our customer base,
thus reducing our reliance on best buy tables. These
developments have contributed to an increase in
our addressable market. Whilst the business attracts
deposits from all customer demographics, a significant
proportion of the customer deposit base continues to
be sourced from affluent customers, with a wide range
of savings needs and high average balances.
Our exceptional levels of customer service and
satisfaction combined with a wide product range
have translated into deeper relationships with our
customers and our fair and transparent pricing across
both existing and new customer segments has driven
continued strong fixed rate retention performance.
Whilst we continue to generate new deposits
predominantly through our direct online offering,
we have continued to build our relationships with
affinity partners and identify additional partners
such as Hargreaves Lansdown who work alongside
us to provide our offerings to their customer base.
We will continue to identify and support new partners
and relationships throughout 2018 to broaden our
proposition and provide customers with optionality
for their savings.
The transition towards a fully digitised savings business
that is supporting the progressive growth of the balance
sheet continued throughout 2017, with the launch of our
first ever online only proposition in August 2017, which
enabled record inflows in that month. In the early part
of 2018, we are investing in our Savings platforms to
ensure our capabilities provide customers with the level
of service they expect from such a well known and well
established brand.
Outlook
The Consumer Credit market is subject to increasing
regulatory focus as the levels of unsecured debt
rise and the macroeconomic environment remains
challenging. As the Bank Rate continues its upward
trajectory, affordability may be squeezed and
consumer confidence may fall.
The propositions we have developed at Shawbrook
and the increased investment in our risk management
systems and underwriting processes position us well
to continue to grow in a controlled and sustainable
manner, whilst providing customers with fair and
transparent outcomes.
We continue to identify new partners who share our
ethos and customer focus, allowing us to expand our
distribution channels and increase our addressable
market for each of our propositions. To support these
new partnerships and growth opportunities, we will
continue to enhance our decision making capabilities
and will further develop our broker channel by gaining,
maintaining and deepening relationships, building on
the progress we made in 2017. We will look to enhance
customer level pricing, credit risk and automated
decision making, thus optimising acceptance rates
and further improving customer journeys.
23
Risk management report
The Group seeks to manage 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
continues to evolve and has benefited from further
investment during 2017 in areas such as technology
and information risk, credit grading in support of
preparation for the introduction of IFRS 9 and the
Bank’s key operating divisions to support the Group’s
growth plans. The Bank’s Risk Management Framework
was further enhanced in 2017 to reflect increased focus
on the first line of defence in support of growth in digital
channels, information risk, third party relationships
and the maturity of the Group’s conduct and
compliance capabilities.
The strategic risk management objectives are to:
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
This enterprise wide Risk Management Framework
is underpinned by the following key elements:
Set an appropriate risk appetite with calibrated
measures and tolerance levels
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.
Optimise the risk/reward characteristics
of business written
Set minimum standards in relation to the
acquisition, incurrence and management of risk
Secure and organise the required level and
capability of risk infrastructure and resources
Undertake remedial action where any weaknesses
are identified
Scan the external horizon for emerging risks
24
Shawbrook Group plc Annual Report and Accounts 2017 Risk appetite
The level 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 and reviewed on a regular basis. This
articulates qualitative and quantitative measures of
risk which are cascaded across various areas of the
Group’s operations, calibrated by reference to the
Group’s absolute capacity for risk absorption, limit of
appetite and target thresholds. During 2017 the Group
commenced a full review of the Group Risk Appetite
Framework incorporating greater alignment to the
Group Risk appetite framework, enhancements in risk
measurement and to reflect changes in the ownership
of the Bank. The review includes a full annual review of
the divisional and functional risk appetite statements.
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
(RMF). 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 RMF. The
design and effectiveness of the framework is overseen
and reviewed by the Risk Committee. The key elements
of the framework are set out later in this report.
Governance
All the Group’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 Management 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 RMF.
Escalation and reporting requirements are set out in
risk policies and by the risk appetite thresholds.
Culture
The Group is led by an experienced Executive
management 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
programme and job descriptions; it is carried into
the setting of individual objectives and performance
reviews and ultimately reflected in the compensation
and reward structure.
25
Strategic reportCorporate governanceFinancial statements Risk management report continued
Risk appetite statement
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.
Whilst the RAS provides an aggregated measure of risk
temperature and performance, it is not just a reporting
tool. 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 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. Executive 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 21 appetite
dimensions as set out diagrammatically below. 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 Appetite Statement Objectives and Dimensions
Risk appetite
objectives
Business
Performance
Infrastructure
Conduct
Reputation
Profit Volatility
Systems
Product Design
Customers
Financial Strength
People
Sales
Regulators
Risk appetite
dimensions
Growth and
Concentration
Funding
and Liquidity
Data Quality
Post Sales
Service
Market*
Processes
Culture
People
Transformation
projects
Intermediaries
Outsourcing
Third Parties
Information Security
*the Group delisted in August 2017 and therefore the Shareholder metrics are no longer relevant
Risk Management Framework (RMF)
Responsibility for risk management sits at all levels
across the Group from the Board and Executive
Committee down through the Group’s divisions,
Central Functions, and in turn to each Divisional Head
and their business managers and risk officers.
In 2017 the Group continued to invest in enhancing
the design and build of its integrated risk management
model to support its strategic and commercial
objectives.
The Group’s RMF 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 described in the sections below.
The RMF also incorporates the organisational
arrangements for managing risk with specific
responsibilities distributed to certain functions. This
ensures 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 RMF is organised around the key risk categories.
26
Shawbrook Group plc Annual Report and Accounts 2017 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 Risk Committee and Audit Committee. The
ultimate responsibility for risk remains with the Board.
Accountability, responsibility and authority for risk
management is delegated to the Chief Executive
Officer and Chief Risk Officer, who in turn allocates
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 Chief Risk Officer and the Risk function.
Lesser levels of authority are cascaded to the senior
management within the support functions and
business divisions.
Board/Risk Committee
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 RMF.
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
Managers and Certification 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.
Oversight
Risk Category
Credit Risk
First Line
Second Line
Audit Committee
Third Line
Credit Management
in Business Areas
and Treasury
Credit Risk
Enterprise Risk
Management
Committee
Liquidity and
Market Risk
Treasury
Market and Liquidity
Risk and Finance
Asset and Liability
Committee
Operational Risk
All Business Divisions
and functional areas
Operational Risk
Conduct, Legal and
Compliance Risk
All Business Divisions
and functional areas
Compliance
Strategic Risk
Executive Directors and
Executive Management
Finance
Systems and
Change Risk
IT/Change
Management
Operational Risk
Enterprise Risk
Management
Committee
Enterprise Risk
Management
Committee
Executive
Committee
Enterprise Risk
Management
Committee
Internal Audit
Committee Structure and Risk Responsibilities
An abbreviated Board and Management Committee structure is set out in the Corporate Governance report at
pages 52 and 53. The monitoring and controlling of risk is a fundamental part of the management process within
the Group. The Board oversees the management of the key risk categories across the organisation.
During 2017 the Group made a number of changes to enhance its risk governance. These included the
re-positioning of the Group Product Committee to focus on the approval of new products, changes to existing
products and the annual review of its existing products. Responsibility for pricing transferred to the Executive
Committee. The Chief Risk Officer implemented three additional working groups below the Enterprise Risk
Management Committee including a Complaints Working Group, Intermediary and Broker Working Group
and a Collections and Recoveries Working Group, to increase oversight in these areas.
27
Strategic reportCorporate governanceFinancial statements Risk management report continued
Three Lines of Defence model
The Group’s RMF is underpinned by the ‘three lines of defence’ model which is summarised in the diagram below.
Risk Strategy
Risk Appetite
Business divisions
Group Risk
Led by the CRO
Central Functions
CFO
COO
HR
Legal
1st line of defence
Owner of the risk management
process and regulatory compliance
Identifies, measures, manages,
monitors and reports on risks
Credit and
Concentration
Risk
Market
and Liquidity
Risk
Operational
Risk
Conduct,
Legal and
Compliance
Risk
Strategic Risk
Systems and
Change Risk
2nd line of defence
Design, interpret and develop overall
Risk Management Framework, and
monitor business as usual adherence
Overview and monitors top risks
Compliance; develop compliance
policies, lead requirements for
regulatory change and monitors
horizon risks and regulatory issues
t
i
d
u
A
l
a
n
r
e
t
x
E
l
r
o
t
a
u
g
e
R
Internal Audit
Performed by
Deloitte LLP
3rd line of defence
Independently tests
and verifies the Group’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
First Line of Defence
Responsibility for risk management resides in the front
line business divisions and central 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 three lending divisions. The first line of defence
also includes the Finance function led by the Chief
Finance Officer, Operations led by the Chief Operating
Officer and Human Resources (HR) led by the Group
HR Director, 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 division 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 their particular activity and the divisional and
function 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 programs to ensure knowledge
is refreshed and current.
28
Shawbrook Group plc Annual Report and Accounts 2017
Second 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 Risk Committee
and to the Chief Executive Officer. It also includes the General Counsel and Company Secretary who reports
to the Chief Executive Officer. During 2017 the role of Money Laundering Reporting Officer transferred to the
reporting line of the Chief Compliance Officer from the General Counsel and Company Secretary.
The high level risk structure is shown below:
Board Risk
Committee
Chair
Chief
Executive
Chief Risk
Officer
General
Counsel &
Company
Secretary
Enterprise
Risk
Conduct and
Compliance
Risk
Group
Portfolio Risk
Analytics
Market and
Liquidity Risk
Credit Risk
Legal
Department
Operational
Risk
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
■ Providing advice and support to the first line of
of the Group’s RMF and embedding these, together
with the risk strategy and risk appetite, across
the organisation;
defence in relation to risk management activities;
■ Credit approvals between divisional authority and
the threshold for Credit Approval Committee; and
■ 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 Committee 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
Committee and the Board on all aspects of risk
performance and compliance with the RMF;
■ Undertaking stress testing exercises and working
with Finance and Treasury on the production of
the Internal Capital Adequacy Assessment Process
(ICAAP), Internal Liquidity Adequacy Assessment
Process (ILAAP), Recovery Plan and Resolution Pack.
29
Strategic reportCorporate governanceFinancial statements Risk management report continued
Third Line of Defence
The third line of defence, Internal Audit (currently
outsourced to Deloitte LLP) provides independent
assurance on the activities of the Group and the
effectiveness of the Group’s Risk Management
Framework and internal controls directly to the Board
and Audit Committee. Internal Audit reports directly
to the Chairman of the Audit Committee as well as the
Chief Executive Officer and is independent of the first
and second lines of defence.
The third line of defence has access to the activities
and records of both the first and second lines of
defence. 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 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 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.
Risk policies and Controls
The RMF 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 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.
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 procedures are required to be compliant
with Group policy and dispensations or waivers are
required where gaps are identified. These process
and procedure 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.
30
Shawbrook Group plc Annual Report and Accounts 2017 Asset Class Policies
The Group’s lending policies are contained in 13 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.
Key risk categories
The key risk categories faced by the Group are as follows:
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 management Committee.
Risk Category
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 which is the risk of exposure to particular groups of
customers or sectors or geographies that uncontrolled may lead to additional
losses that the Shareholder or the market may not expect.
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 of financial loss through un-hedged or mismatched
asset and liability positions that are sensitive to changes in interest rates
or currencies.
Operational Risk
■ Operational risk is the risk of loss resulting from inadequate or failed internal
processes, people and system failures, or from external events including
strategy and reputational risks.
Conduct, Legal and
Compliance Risk
■ 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 Group may suffer as a result
of its failure to identify and comply with applicable laws, regulations, codes
of conduct and standards of good practice.
Strategic Risk
■ 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 lending volumes 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.
31
Strategic reportCorporate governanceFinancial statements Risk management report continued
Credit Risk
This risk has two main components:
1
2
Customer risk
(from core lending activity); and
Treasury credit risk
(from treasury activity).
The Group’s Treasury credit risk exposure
is limited to short term deposits placed with
leading UK banks.
Credit Risk Approval Process
The Group operates a hierarchy of lending authorities
based principally upon the size of the aggregated 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.
The Group implemented a number of changes to
its hierarchy of lending mandates during 2017. Each
division has a maximum authority level allocated, with
exposures above these levels requiring approval from
an approver in the second line of defence or the Credit
Approval Committee. In each lending division, at least
one signatory to the loan must be a segregated first line
of defence credit approver who has no responsibility for,
or remuneration arrangements linked to, sales targets,
on-going sales origination or relationship responsibility
with the borrower.
The maximum divisional mandate for Business
Finance regions, Business Finance specialist sectors
and commercial property in the Property division is
£1.25 million. The maximum divisional mandate for
secured lending in the Property division is £100,000
and £75,000 in Consumer. Exposures beyond these
limits up to £5 million may be approved by an approver
in the second line of defence and exposures up to the
Group single name concentration limit of £25 million
must be approved by the Credit Approval Committee.
In addition, where transactions involve financing
portfolios of lending assets in excess of £15 million
or where an individual loan is required in excess of
£25 million Board approval is also required.
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.
Credit Monitoring
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. The Group further invested
in 2017 in developing its operational arrangements
and capabilities for non-performing loan management
to ensure that the Group is capable of operating in a
more challenging environment where interest rates
are rising and there is lower demand and liquidity in
property markets.
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 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. Additionally, a series of liquidity stress tests
are performed weekly by Risk and formally reported to
the Asset and Liabilities Committee and the Board to
ensure that the Group maintains adequate liquidity for
business purposes even under stressed conditions.
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 Funding for Lending scheme, 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.
32
Shawbrook Group plc Annual Report and Accounts 2017 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 Executive
management. 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 Committee and the
Board. The Board received and approved a number of
reports during 2017 including the Strategy Update and
the inception of the 2017 annual review of risk appetite.
It has also been engaged actively in the formation of
the Group’s ICAAP and ILAAP which 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 2017 the Group reviewed its
approach to managing change with a ‘build the bank’
and ‘run the bank’ focus across change and technology
in line with its target operating model.
Operational Risk
The Risk Committee received regular reports across the
spectrum of operational risks and information security.
These reports cover 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 2017, none
of these was material in nature and the Committee
was satisfied that the action taken was appropriate
and that the control of operational incidents continued
to improve. A test of the Group’s Cyber Incident
Response Plan was undertaken to assess the adequacy
of the Group’s internal control framework to respond
to this threat and a maturity assessment of the Group’s
strategy to manage increasing levels of cyber risk in
the market place was completed. The operational risk
reports were developed throughout 2017 to include
more focus on forward looking risks which permits a
more strategic discussion at Risk Committee level.
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 2017 the Group appointed a
Chief Compliance Officer to further develop its risk
appetite for conduct risk and to introduce and embed
measures across the conduct risk lifecycle, which
includes product design, sales or after sales processes
and culture. It also embedded revisions to annual
product reviews and risk appetite to support the
management of brokers, intermediaries and outsource
partners. 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. The Group also
implemented three additional working groups to
oversee complaints, Intermediaries and Brokers
and Collections.
33
Strategic reportCorporate governanceFinancial statements Risk management report continued
Top and emerging risks
The Group’s top and emerging risks are identified through the process outlined in the ‘Risk Management
Framework’ section and are considered regularly by management and subsequently by the Risk Committee.
The Group sees seven themes as its top and emerging risks:
Pace Scale
Geopolitical Risk;
£
Economic and Competitive
Environment;
Pace, Scale of Change and
Management Stretch;
Credit lmpairment; and
Pace of Regulatory Change;
Information Risk.
Intermediary and Outsourcing;
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
Mitigation
Change
Geopolitical Risk
The Group’s financial position
continues to improve with
increasing profitability and strong
capital ratios. However, increasing
Geopolitical risk presents a risk
to the business, its financials and
earnings volatility following an
unprecedented political event.
The UK has experienced a number
of political events during 2017
including the UK government losing
its majority in a snap election,
increasing global populist trends,
terrorist attacks and a weakening
of Sterling. These risks have the
potential to have an impact on the
Group and the impact could be wide
reaching affecting other risks such
as economic, regulatory, business
change, outsourcing, organisational
and business change, regulation
and conduct risk.
Read more about
our strategy
9
The Group monitors the
environment and its chosen markets
on a regular basis and continues to
prioritise RoTE over volume.
The Group operates in specialist
areas where management and
staff have significant expertise
and a deep understanding of
customer needs to drive a long
term relationship with its customers
through the cycle.
The Group undertakes a
comprehensive assessment of
its risk appetite and stress tests
its lending and deposit portfolios
to ensure that it can meet its
objectives in severe but plausible
economic conditions.
The Group regularly reviews its key
outsource partners to establish early
warning indicators and to formalise
exit plans.
The UK economic outlook
is expected to remain
favourable in the short term
but with increasing risks
to the downside driven by
weak productivity that may
increase the potential for
volatility for the Group and
its customers.
Developments regarding
the UK’s withdrawal from
the EU, and in particular
the reaction of households,
businesses and asset prices
to them, remain a significant
influence on, and source
of uncertainty about, the
economic outlook.
Refer to the Glossary on page 167 for definitions
34
Shawbrook Group plc Annual Report and Accounts 2017 Risk
£
Economic & Competitive
Environment
A reversal in UK economic
conditions, 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:
■ lower demand for the Group’s
products and services;
■ changes in funding costs resulting
from ongoing political uncertainty
accompanied by a loss of
confidence;
■ rising competition compressing
Group margins below sustainable
levels; and
■ higher impairments through
increased defaults and/or
reductions in collateral values.
Mitigation
Change
The UK economy remains
resilient with near-term
momentum and following
eight years of consecutive
growth. However, the
Board expects there to be
a period of uncertainty
with increased risks to
the downside as Brexit
negotiations continue.
The Group uses its expertise
and deep understanding of its
customers’ needs to drive customer
service and long-term relationships
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 also reviews opportunities
for inorganic growth. 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 through,
bespoke underwriting to SMEs and
consumers based on their 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
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 and liquidity
and a prudent funding structure.
The Group maintains risk appetite
and pricing discipline.
Change in risk environment
No Change
Risk Decreased
Risk Increased
35
Strategic reportCorporate governanceFinancial statements Risk management report continued
Risk
Mitigation
Change
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.
UK financial services
businesses remain subject
to significant scrutiny and
the current level of risk is
elevated when compared
to last year.
The Bank undertakes forward
capital planning and sensitivity
analysis using its ICAAP to ensure
that the Bank has a long runway
to respond to any changes in
capital requirements.
The Financial Policy Committee
(FPC) in June 2017 announced the
restoration of the countercyclical
buffer (CCyB) to 0.5% with effect
from June 2018. The FPC also
confirmed on 28 November 2017 that
the CCyB will increase from 0.5% to
1% with effect from November 2018
to lock in surplus capital in the PRA
buffer to add resiliency to the market
prior to Brexit.
The Prudential Regulation
Committee has indicated that it
will set additional PRA buffers in
light of the 2017 stress test results
to reflect the judgement that,
following recent rapid growth, the
loss rate on consumer credit may be
understated where they are based
on benign recent conditions.
The FCA has undertaken a number
of thematic reviews during 2017
including high cost consumer credit,
a thematic review of consumer
credit and has set out its plans
for 2018.
The Group adopts the
Standardised Approach
to its assessment of credit
risk regulatory capital.
The Basel Committee
on Banking Supervision
announced changes to the
risk weightings under the
Standardised Approach in
December 2017 that will lead
to an increase in capital
requirements over the period
of the strategic plan.
The Group has completed
its preparations to
support adoption from
1 January 2018.
The Group also remains on
track to ensure it has a fully
resourced plan to support
General Data Protection
Regulation compliance by
25 May 2018 including all
necessary changes.
The Bank completed an
Additional Tier 1 Issue of
£125 million in December 2017.
36
Shawbrook Group plc Annual Report and Accounts 2017 Risk
outsourcing
Mitigation
Change
Intermediary & Outsourcing
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 could
mean that some customers find
themselves with an increased risk
of an unfavourable outcome. For
the Group this could also lead to
increased conduct related redress,
additional fraud or credit risk
impairments.
The Group works with carefully
selected intermediary and broker
partners who take on the role of
advising SMEs and consumers. The
Group recognises that it is ultimately
accountable for the lending it
originates through its partners and
continually undertakes reviews of
their performance.
The Group continually reviews
its risk management approach
to intermediaries, brokers and
outsource partners to reflect the
regulatory environment in which
the Group operates.
The Group continued to
invest in its monitoring
controls to manage its
exposure to intermediaries,
brokers and outsource
partners during 2017 and
believes that it continues
to improve its risk profile.
The Group’s continued to
invest in its relationship with
Target Servicing Limited
and is expected to further
improve its outsourcing risk
profile. The Group continues
to explore other third party
relationships through which
to deliver its objectives.
Risk
Pace Scale
Mitigation
Change
Pace, Scale of Change &
Management Stretch
The scale and pace of change
could create delivery challenges
and could lead to disruption of the
Group’s plans and in the delivery
of its objectives.
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 are led
by a dedicated Executive member.
The risks are further mitigated by
the Group’s strengthening of the
Executive management team.
The Group has a formal Operations
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 continues
to invest in its change
management processes to
increase the pace and scale
of change without impacting
on the Group’s operations
and customer service.
During 2017 this has focussed
on the embedding of the
new target operating model
and the implementation of
the Chief Operating Office.
However, the Group has a
strong appetite for change
and the risk of an impact on
its operations remains.
37
Strategic reportCorporate governanceFinancial statements Risk management report continued
Risk
Mitigation
Change
Credit Impairment
At 31 December 2017 the Group
had customer loans (including
operating leases and net of
impairment provisions) of
£4.9 billion, and is exposed to
credit impairment if customers
are unable to repay loans and any
outstanding interest and fees.
In addition the Group has exposure
to a small number of counterparties
with whom it places surplus funding.
The Group recognises that it will
experience credit impairment in
connection with its lending activities,
but manages its exposure by:
■ undertaking a prudent
assessment of through the cycle
losses in pricing, forecasting
and stress testing;
■ maintaining consistent and
conservative loan to value ratios
and avoiding material weakening
of credit quality to drive volumes;
■ lending predominantly on a
secured basis against identifiable
and accessible assets;
■ operating strong controls and
governance with effective
oversight by a centralised Group
credit team; and
■ maintaining a prudent Treasury
counterparty policy with surplus
funding placed with the Bank of
England and UK clearing banks.
Underlying Group credit
impairment has remained
low, reflecting favourable
market conditions in the
UK and the Group’s
approach to lending.
The Group’s counterparty
exposure has remained
broadly unchanged with the
majority of surplus funding
placed with the Bank of
England and balances with
UK clearing banks.
The Group believes that
the potential for additional
credit impairment has
increased with uncertainty
over the outlook of the
Brexit negotiations and the
outlook for the UK economy
given recent forecasts of
productivity and increasing
consumer debt. The
Group has completed its
assessment of the impact of
IFRS 9 and will make use of
the transition arrangements.
The Group considers that
its borrowers exposure to
Carillion is minimal and has
improved over 2017.
38
Shawbrook Group plc Annual Report and Accounts 2017 Risk
Mitigation
Change
Information Risk
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:
The Group continually reviews its
control environment for information
security to reflect the evolving
nature of the threats to which the
Group is exposed.
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.
■ increasing customer demand
could exceed the Group’s ability to
provide highly reliable and widely
available systems and services;
■ the evolving nature and scale of
criminal activity could increase 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 continues to
invest in its capabilities
to reduce its exposure to
a cyber attack and has
further developed its risk
appetite and controls with
respect to information
security. However, the risk
of information security
breaches, threats from
cyber crime and the impact
of new technology on the
Group’s businesses remain.
39
Strategic reportCorporate governanceFinancial statements Risk management report continued
ICAAP, ILAAP and Stress Testing
The ICAAP, ILAAP and associated stress testing
exercises represent important elements of the Group’s
ongoing risk management processes. The results of
the risk assessment contained in these documents is
embedded in the strategic planning process and risk
appetite to ensure 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 the Executive management team
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
Executive 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 Plan and Resolution Pack
The Group has prepared a Recovery Plan and
Resolution Pack (RP&RP) in accordance with PRA
Supervisory Statements SS18/13 and SS19/13. The Group
is planning to update its RP&RP in 2018 to reflect the
change in ownership.
The plan represents the Group’s ‘Living Will’ and
examines in detail:
■ The consequences of severe levels of stress
(i.e. beyond those in the ICAAP) impacting
the Group 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 Executive 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 Executive management are fully engaged in
considering the scenarios and options available
for remedial actions to be undertaken.
The Board considers that the Group’s business model,
its supportive owners and the diversified nature of
its business markets provides it with the flexibility to
consider selective business or portfolio disposals, loan
book run off, equity raising or a combination of these
actions. The Group would invoke the Recovery Plan and
a Resolution Pack in the event they are required.
40
Shawbrook Group plc Annual Report and Accounts 2017 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 line with good
governance practice and reporting.
The assessment relied on:
■ The Board approved Strategic Update in
December 2017 that outlines the business plans
and financial projections from 31 December 2017
to 31 December 2021;
■ The completion of an issuance of £125m of Additional
Tier 1 in December 2017;
■ The Internal Capital Adequacy Assessment Process
(‘ICAAP’);
■ The Internal Liquidity Adequacy Assessment Process
(‘ILAAP’);
■ A review and evaluation of its top and emerging risks
(as reported upon earlier in this section);
■ Consideration of the effect of a moving regulatory
landscape on the Pillar 2A, Pillar 2B and the CRD IV
Combined Buffer requirements, together with the
effect of the Group’s Capital Contingency Plan to
restore the capital position in scenarios of capital
headwinds; and
■ The effect of the implementation of the IFRS 9
‘Financial Instruments’, taking into account the
phase-in arrangements published in the amended
EU regulation No (EU) 575/2013.
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 equivalent stress tests and reverse stress
tests of its business. These include two market wide
stress tests and five Group specific (idiosyncratic) stress
tests. The stress tests were derived through discussions
with Executive Management and the Board, after
considering the Group’s top risks. The Group also
considered its funding and liquidity adequacy in the
context of the reverse stress testing. The risk of the UK
leaving the EU has been considered and the Board
believe this risk was captured within its stress testing
scenarios, and will keep this risk under review.
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 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 term. The Board monitors a four year strategic
plan that provides a robust planning tool against which
strategic decisions are made. Whilst the Board has
no reason to believe that the Group will not be viable
for a four year period, given the inherent uncertainty
involved, the Board concluded that a three year period
is an appropriate length of time to perform a viability
assessment with a greater level of certainty.
Based on the results of the above mentioned
assessments, 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.
41
Strategic reportCorporate governanceFinancial statements Corporate Social
Responsibility report
During 2017, we continued to develop
our Corporate Social Responsibility
(CSR) programme to better reflect how
we operate as a company and how we
position ourselves in the communities
we operate in. This year, we launched
our CSR programme internally, promoting
our functions, accomplishments and aims
for the future whilst also encouraging new
ideas and ways we can further improve.
Our CSR programme builds on what we have already.
The Shawbrook approach to CSR addresses both how we
deal with our employees and our customers, and how we
manage our ethical and environmental responsibilities.
Our approach to CSR and sustainability builds and focuses on four main stakeholder areas:
Environment Marketplace Workplace
Community
42
Shawbrook Group plc Annual Report and Accounts 2017 Environment
At Shawbrook, we are committed
to creating a strong business that is
not achieved at the expense of the
environment. Our CSR programme defines
our thinking around responsibilities and
processes in relation to waste, energy,
water and travel at our offices across
the UK. We are dedicated to ensuring we
operate and work sustainably, building a
responsible business whilst also making
sure this is reflected in our suppliers,
business partners, contractors and
members of the wider community.
Our Emissions: We are committed to reducing our
Greenhouse Gas emissions. To support this, in 2017
we introduced a Car Share network to encourage
colleagues to share their journey to and from work
and between our offices.
Print and Paper solutions: We have made progress
in implementing an alternative printing solution, our
aim is to become a Hybrid Mail Solution run bank to
further reduce print and mail distribution costs and
our carbon footprint.
At the end of 2017
this provided colleagues
with a saving of over
87,000 miles annually
which equate to:
25+tons of CO2 avoided 1
In 2018, we are looking to implement new ways to
expand our Car Share network by offering further
incentives. The use of alternative forms of transport
is another way we have reduced our impact on the
environment. We provide a shuttle bus service at our
head office covering various locations for employees,
reducing the use of personal vehicles. This year, we also
launched our Cycle2Work scheme. To support this, we
have now introduced more bike racks to our offices,
further reducing our impact on the environment and
promoting a healthier journey to work.
Recycling: As well as using recycled paper for our
printing and hand towels, we have recycling facilities
located in all our offices in support of our commitment
to reduce the waste we send to landfill. We are
continuously looking for new ways to recycle. This
year, we have introduced new recycling facilities to
encourage the appropriate disposal of batteries and
the re-use of plastic bags.
Office plants: Air quality and employee satisfaction are
important to us. As part of our 2017 CSR programme
launch we introduced desk plants to all employees to
boost positive wellbeing and to help improve air quality
in our offices.
1. Assuming that each car share persists for 200 working days.
This figure was calculated using www.carbonfootprint.com/calculator
43
Strategic reportCorporate governanceFinancial statements Corporate Social
Responsibility Report continued
Marketplace
At Shawbrook, we strive to work
with suppliers who subscribe to
operate on and promote similar
principles that match our traditional
values and culture of respect, care
and thoughtful judgement.
Awareness: A key aim for our
Marketplace quadrant is to enhance
awareness and understanding
of key policies and processes
associated with our suppliers and
our supply chain. Shawbrook relies
on an extensive number of external
suppliers and expects all suppliers
and staff to behave ethically at all
times during the sourcing and supply
of goods and services. By promoting
our procurement policy and creating
communications regarding our
suppliers and best practice when
choosing a supplier, we can ensure we
build equitable working relationships.
My Shawbrook Idea: Our initiative
‘My Shawbrook Idea’ encourages
us to start to think about how we
can improve and communicate
with one another with ideas for best
practice. It allows us to listen to our
workforce and capture every small
process improvement, cost reduction,
efficiency gain and helps to prevent
every avoidable waste, re-work,
or complaint.
Sourcing: We are continually working
with the business to source the right
companies and opportunities to
source locally. As we further roll out
our regional business centres, there
will be more opportunity to work
with national companies with local
presence to also offer consistency
across all our Shawbrook sites.
44
By promoting our procurement
policy and creating communications
regarding our suppliers and best
practice when choosing a supplier,
we can ensure we build equitable
working relationships
Shawbrook Group plc Annual Report and Accounts 2017 Workplace
At Shawbrook, we are committed to
ensuring we remain a great place
to work. We work hard to create a
business where we can attract, retain
and reward talented, hardworking
individuals and help them to develop
in their careers through valuable
experience and development and
training programmes. We promote a
diverse and inclusive workplace and
one in which our people think and feel
engaged in our approach and are
supported to be their best at work.
Diversity and inclusion: Last year we
signed up to the Treasury’s (HMT) Women
in Finance Charter and we are keen to
create and encourage a sustainable,
diverse and inclusive culture in all areas
of our business. We have recently set up
our Shawbrook Inclusion Community
which hosts various events to build on our
diversity and inclusion and encourages
our colleagues to engage in discussions
and contribute their feedback.
Health and wellbeing: The health and
wellbeing of our staff is important to us.
Following feedback from our people
steering group, we increased all staff
holidays by two days and withdrew our
policy regarding dress code, ensuring
we all feel comfortable and happy at
work. Our community intranet page
promotes various articles and tips on how
employees can improve their health and
wellbeing both at work and at home. To
encourage healthier eating at work, our
fruit box initiative was trailed in our HQ,
providing fruit in all our communal areas.
Due to its success, we are looking to
expand this across all our offices.
Flexible working: We want to ensure
that our people are happy. Our aim is
to support anyone at Shawbrook who
is a working carer and help them to get
their work and life balance at a level that
is right for them. In 2017, we launched
our ‘Guarding our Guardians’ network
providing a platform to support our
working carers. Run by the CSR team,
the network recognises the importance
of flexibility and hosts numerous events
for colleagues to get involved with and
discuss key topics important to them.
45
Training and development: We have devoted considerable
investment to ensuring that all colleagues are supported in their
training requirements, enabling them to be the best they can be.
Each department is allocated a training champion to ensure that
we can meet the appropriate training needs of each individual.
The Shawbrook Learning Bank launched last year plays a significant
part in our training needs and we are continuously uploading new
modules to complete.
New innovative systems: In November 2017, we launched our new
HR Hub system, simplifying the way our employees seek support
and guidance from HR. It allows colleagues to access their payslips,
highlights rewards schemes such as our Bupa Rewards System and
encourages learning and development.
Strategic reportCorporate governanceFinancial statements Corporate Social
Responsibility Report continued
Community
We are committed to supporting
our communities and local
causes that are close to the
hearts of our people. Dedication
to our community is embedded in
our core values, and we recognise
the importance of investing
time and support to non-profit
organisations, aspiring to make
a difference.
Corporate charities:
We are delighted to support
our three corporate charities,
Contact the Elderly, Little Havens
and Future First, a wide variety
of causes, helping young people
and elders to improve their quality
of life. This year we donated to
over 50 causes. In 2018, we’d like
to further our support to these
charities by gifting our time to
volunteer and assist in any way
we can.
In 2017, we’re proud to say that we
have been able to contribute over
£42,000 to staff nominated causes.
Staff donations:
We want to ensure that the
charities we support are charities
that also matter to our staff.
Each month we host a charity
day to encourage donations and
awareness for a cause nominated
by a member of our team. This
year, we raised over £5,000 from
our charity collections.
Gift Matching:
Our pledge is to support
colleagues and their families
that gift their time and fundraise
for charities they want to help.
In 2017, we’re proud to say
that we have been able to
contribute over £42,000 to
staff nominated causes.
Making a difference:
Engaging with local communities
is important to us. In order to
encourage our employees to
support their local communities
and charities we have now
launched our ‘Making a Difference
Days’. This allows every colleague
up to one volunteer day per year
so they can gift their time to a
cause they’re keen to support.
The Strategic report was approved by the Board and
signed on its behalf by the Chief Executive Officer.
Steve Pateman
Chief Executive Officer
7 March 2018
46
Shawbrook Group plc Annual Report and Accounts 2017 Corporate governance report
47
50
76
81
85
86
Corporate governance report
Board of Directors
Directors’ Remuneration Report
Directors’ report
Statement of Directors’ responsibilities
Independent Auditor’s report
Corporate
governance
47
Corporate governance report
Chairman’s introduction
I am pleased to present
our Corporate Governance
Report for 2017. It includes
reports from the Nomination
Committee, the Audit
Committee, Risk Committee
and Remuneration Committee.
This report also explains how the Group applies
the principles of corporate governance, aligning
our structure and arrangements with best practice
in the sector.
We recognise that effective governance is key to the
successful delivery of the Group’s strategy and that
it continually needs to evolve to meet the requirements
of a growing bank operating in a heavily regulated
and uncertain environment.
Following the change of ownership of the Group,
the commitment to retaining Board and Committee
independence was formalised by the adoption of
a Framework Agreement and Memorandum of
Understanding governing the ongoing interactions
between the Board, Executive management and
the Shareholder. These have formalised governance
arrangements to ensure that appropriate challenge
and independence remains, so supporting the interests
of investors, customers, employees, the regulators and
other key stakeholders. An externally facilitated Board
effectiveness review, will be undertaken in 2018, to
further ensure the effectiveness of the framework.
Full details of the Group’s governance arrangements
are also set out in this report.
48
Shawbrook Group plc Annual Report and Accounts 2017 In addition to its ongoing oversight activities,
the key issues on which the Board focused time
during 2017 included:
■ considering the interests of the independent
shareholders and other stakeholders during
the change of ownership of the Group;
■ consideration of the Group strategy and
formulation of a Group plan to 2021;
■ the evolution of the target operating model
and infrastructure required to support the
future development of the Group;
■ deep dives into each of the business divisions,
considering both current performance and
future opportunities and plans;
■ the people strategy for the business;
■ cyber resilience, information security and
data management;
■ capital and liquidity adequacy, including
consideration of the ICAAP and ILAAP
documents, both with specific sessions held
to ensure the Board had sufficient opportunity
to consider the key elements;
■ oversight of loan portfolio acquisitions including
the acquisition of a portfolio of assets from
Lombard, RBS; and
■ continuing to review how the Group delivers good
customer outcomes across all of its activities.
Andrew Didham joined the Board in February 2017,
taking over from Roger Lovering as Chair of the Audit
Committee. Dylan Minto was also appointed to the
Board as Chief Financial Officer in February 2017,
after holding the position on an interim basis for a
number of months. Cédric Dubourdieu, a Partner at
BC Partners LLP, joined the Board as a shareholder
representative in September 2017 following the change
in ownership of the Group. I believe the addition of
Andrew, Dylan and Cédric means the Board has the
appropriate mix of skills and experience to fulfil its
responsibilities effectively.
We recognise that effective
governance is key to the
successful delivery of the
Group’s strategy and that it
continually needs to evolve
to meet the requirements of
a growing bank operating
in a heavily regulated and
uncertain environment
In January 2018, Stephen Johnson decided to step
down from the Board. Stephen was an integral part
of the Group since inception and the Board thanks
him for his significant contribution during his time.
Having led the Board since shortly after the Initial Public
Offering in April 2015, I believe now is an appropriate
time for me to stand down as Chairman. I believe I leave
with the Group in a strong position well placed for the
future, and I wish my successor every success and will
take all steps to ensure a smooth handover.
I thank the Board and my colleagues throughout the
Group for their support over the last three years and
wish them well.
Profiles of all the Directors are set out on pages 50 to 51.
Iain Cornish
Chairman
7 March 2018
49
Strategic reportCorporate governanceFinancial statements Corporate governance report
Board of Directors
A
Audit Committee
N
Nomination Committee
R
Remuneration Committee
RI
Risk Committee
Committee Chair
Iain Cornish
Chairman and
Independent
Non-Executive
Director
N R
Steve
Pateman
Chief Executive
Officer
Dylan Minto
Chief Financial
Officer
Appointed to the Board in July 2015
Appointed to the Board in January 2016
Appointed to the Board in February 2017
Skills and 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.
External appointments/
directorships
Iain is currently Senior Independent
Director of both Arrow Global Group PLC
and St James’s Place plc. Iain also serves
as a Trustee of Macmillan Cancer Support.
Skills and experience
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.
External appointments/
directorships
Steve is currently a member of the
Financial Capability Board for the
Money Advice Service and was recently
appointed Vice President of the Council
of the Chartered Institute of Bankers
Scotland. He also provides informal
advisor services to Arora Group.
Skills and experience
Dylan joined Shawbrook in 2013 from
KPMG where he spent 11 years in their
Financial Services practice advising
large UK and European banks. Dylan
was appointed permanent CFO in
February 2017 having been Interim
CFO from June 2016. He is a Fellow of
the ICAEW and holds a dual BA Honours
degree in German and Business Studies
from Sheffield University.
External appointments/
directorships
None.
Robin Ashton
Senior
Independent
Director
Andrew
Didham
Independent
Non-Executive
Director
David Gagie
Independent
Non-Executive
Director
A
N
RI
R
A
RI
A RI
Appointed to the Board in March 2015
(Appointed to the Board of Shawbrook
Bank Limited in December 2011)
Skills and experience
Robin has extensive experience of
retail financial services both in the UK
and internationally. He is a chartered
accountant and holds a Bachelor of Arts
(Hons) degree in Economics and Law
from Durham University.
External appointments/
directorships
Robin has been a Non-Executive Director
of Leeds Building Society since April 2011
and Chairman since March 2013.
Appointed to the Board in February 2017
Appointed to the Board in January 2016
Skills and experience
Andrew has extensive financial services
experience. He is a qualified accountant,
having enjoyed a successful career
at KPMG, becoming a partner in 1990
and subsequently as Group Finance
Director of Rothschild.
External appointments/
directorships
Andrew is currently an Executive
Vice-Chairman for Rothschild and also
a Non-Executive Director of Charles
Stanley PLC and is Non-Executive
Chairman of its principal operating
company Charles Stanley & Co Ltd.
He is also Non-Executive Director of
Jardine Lloyd Thompson Group plc.
Skills and experience
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.
External appointments/
directorships
David is a Non-Executive Director
of Lowell GFKL Group and serves
as Chairman on some of the
subsidiaries within the Group. He
is also a Non-Executive Director
of Populus Consulting Ltd and
MWS Technology Ltd.
50
Shawbrook Group plc Annual Report and Accounts 2017 Sally-Ann
Hibberd
Independent
Non-Executive
Director
Paul
Lawrence
Independent
Non-Executive
Director
Roger
Lovering
Independent
Non-Executive
Director
R RI
RI
A N
A RI
Appointed to the Board in November 2015
Appointed to the Board in August 2015
Skills and experience
Sally-Ann has a broad financial services
background having worked in Life
Assurance, Asset Management, Retail
Banking, Bancassurance and General
Insurance. Her particular strengths are
in Operations, Technology and Business
Transformation.
External appointments/
directorships
Sally-Ann is currently a Non-Executive
Director of Equiniti Group plc and sits
on the Governing Body of Loughborough
University.
Skills and experience
Paul has extensive experience in financial
services having had a successful career
within HSBC Group. Paul has particular
strengths in managing risk and internal
audit across a number of business lines.
Paul previously served as a member
on the IIA Committee for Internal Audit
Guidance for Financial Services.
External appointments/
directorships
Paul is currently an independent
consultant to HSBC in the formation
of their UK Ring Fence Bank.
Lindsey
McMurray
Non-Executive
Director
Cédric
Dubourdieu
Non-Executive
Director
A
N
R
RI
A
N
R
RI
Appointed to the Board in April 2010
(Appointed to the Board of Shawbrook
Bank Limited in January 2011)
Skills and experience
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.
External appointments/
directorships
Lindsey is managing partner of private
equity fund manager Pollen Street Capital,
an affiliate of Marlin Bidco Limited of which
she is also a Director. 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
Cashflows Europe Limited.
Appointed to the Board in September 2017
Skills and experience
Cédric has close to 20 years of private
equity experience, having led a number
of investments in a variety of sectors
across Europe. He holds a degree from
Ecole Polytechnique, Paris.
External appointments/
directorships
Cédric is a Managing Partner of
private equity firm BC Partners and sits
on BC Partners’ investment committee.
BC Partners is an affiliate of Marlin Bidco
of which Cédric is also a Director.
Cédric currently serves on the Boards
of MCS, Nille and Allflex.
Appointed to the Board in March 2015
(Appointed to the Board of Shawbrook
Bank Limited in January 2013)
Skills and experience
Roger has over 25 years of experience in
the consumer finance industry, focusing
on lending to individuals. He has extensive
knowledge of secured and unsecured
lending, both fixed and revolving term via
credit cards. Roger is a member of ICAEW
and has a degree in Accountancy and
Financial Analysis from Warwick University.
External appointments/
directorships
Roger is a Non-Executive Director of
Caswell Consultancy Limited, Logical
Glue Limited and Amigo Holdings
Limited. He is also a Non-Executive of
Oodle Finance Services Limited.
Daniel
Rushbrook
General Counsel
and Group
Company
Secretary
Appointed Company Secretary in March
2015 (appointed Company Secretary to
Shawbrook Bank Limited in March 2011)
Skills and experience
Daniel has over 20 years legal experience.
He has experience in private practice
having worked for both Linklaters LLP
and Macfarlanes LLP. Daniel became the
first in-house lawyer for Commercial First
Mortgages Limited, later joining its Board
as Legal Director in 2005. In 2011 Daniel
transferred to Shawbrook becoming
General Counsel and Company
Secretary. Daniel holds a first class law
degree from Oxford University and a
Masters law degree from the University
of Pennsylvania.
External appointments/
directorships
None.
Stephen Johnson resigned as a Director on 23 January 2018
51
Strategic reportCorporate governanceFinancial statements Corporate governance report
Leadership structure
Below is an overview of the delegations in place from the Board to its Committees.
The Executive and Risk Governance structure is included on the following page. It has
delegated authorities from the Chief Executive Officer and members of the Executive
management team. All authorities have documented through terms of reference. Board
Committee terms of reference can be found on the website: investors.shawbrook.co.uk
Audit Committee
■ Oversees financial reporting
■ Monitors internal control
■ Monitors internal and
external auditors
Nomination Committee
■ Recommends Board
appointments
■ Oversees appointments
under the Senior Managers
and Certification Regime.
■ Succession planning
The Board
The primary role of the Board 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. The Board delegates specific
powers to some committees, details
of which are as shown.
Disclosure Committee
■ Monitors disclosure
controls
■ Reviews and advises on
the scope and content
of the disclosure
Remuneration Committee
■ Monitors the level and structure
of remuneration for Executive
management
■ Approves annual performance
objectives
■ Ensure incentives are aligned
with prudent risk taking
52
Risk Committee
■ Reviews the design and
implementation of risk
management
■ Reviews the Group’s ICAAP
■ Monitors the risk framework
Shawbrook Group plc Annual Report and Accounts 2017 Executive Committee
The Executive Committee is responsible for developing the business
and delivering against a Board approved strategy, putting in place
effective monitoring, control mechanisms and setting out a framework
for reporting to the Board.
Operations Committee
■ Provides operational oversight
■ Assures quality and
performance management
Asset and Liability Committee
■ Identifies, manages and controls balance
sheet risks;
■ Oversees and monitors Liquidity control
frameworks;
■ Oversees and monitors of Capital control
frameworks;
■ Recommends Liquidity, Funding, Market and
Counterparty Risk policy for approval; and
■ Recommends Liquidity and Market Risk
Appetite Statements and limits for approval
and monitoring.
Model Management Group
■ Ensures that the Group has in place, and operates
effective, appropriate and robust procedures and
business processes for managing the Group’s
models and model risk policy.
■ Accountable for the overall model maintenance
and governance across the Group
■ Approves/ratifies the model inventory
Credit Approval Committee
■ Considers and approves individual credit
proposals submitted by the business units of
the Group which fall outside their permitted
delegated lending authority
Group Product Committee
■ Approves the Product Approval
and Management policy
■ Reports to ERMC as necessary
■ Carries out annual reviews of
all products across the Group
Enterprise Risk Management Committee
■ Oversees the design and implementation
of the Risk Management Framework; and
conduct of business issues including fair
outcomes for customers
■ Oversees regulatory reporting requirements
and the Financial Crime and Anti-Money
Laundering (AML) regime
■ Defines detailed risk appetite limit and
statements and recommends to Board Risk
Committee material risk appetite limits
and statements
■ Oversees working groups which ensure
risks and trends are appropriately managed.
In 2017 the ERMC formed three new working
groups covering Complaints, Broker and
Intermediary Management and Collections
and Recoveries.
Impairment Committee
■ Oversees impairment forecasts and budgets
■ Monitors impairment from lending portfolios
Policy Review Group
■ Ensures that the Group has in place, and operates
effective and appropriate policies
■ Maintains policies and governance across the Group
■ Oversees the Group Policy Inventory including the
annual refresh of the Group risk policies
53
Strategic reportCorporate governanceFinancial statements Corporate governance report
Leadership structure continued
The Board
The Board has responsibility for ensuring that the Group
is managed effectively and in the best interests of its
Shareholder, investors, customers, employees and other
stakeholders (including regulators) and its principal
banking subsidiary, Shawbrook Bank Limited. A
Framework Agreement has been established containing
a formal schedule of matters reserved for the Board
and those matters requiring a recommendation for
Shareholder approval. This document, alongside the
Memorandum of Understanding, ensures the Board
retains its independence when making significant
decisions. The Board delegates specific powers for
some matters to Board Committees, with the outputs
from each Committee meeting reported to the Board
regularly, thus ensuring the Board maintains the
necessary oversight. More detail on the Committees
and their work is described in the separate Committee
Reports at pages 60 to 80.
Roles and responsibilities
Chairman (Iain Cornish)
Leads the Board, ensuring its effectiveness in all
aspects of its role as well as being responsible for its
governance. Sets the tone for the Group and ensures
effective relationships between management, the
Board and the Shareholder are strong.
Key responsibilities:
■ Ensure effective communication with the
Shareholder and other key stakeholders.
■ Promote effective flow of information between
Board Directors.
■ Provide entrepreneurial leadership.
■ Ensure effective communication between
Executive Directors and Non-Executive Directors.
■ Chair Board and Nomination Committee meetings.
Chief Executive Officer (Steve Pateman)
Responsible for the day to day management of the
Group’s operations, recommending the Group’s
strategy to the Board and the implementation of
the agreed strategy. Accountable to the Board for
the Group’s operational and financial performance.
Supported in decision making by the Executive
management team. The Chief Executive Officer
chairs the Executive Committee, which meets three
times a month to provide oversight and scrutiny of
the Group’s business and consider matters that need
to be escalated to the Board.
Key responsibilities:
■ Maintain a good working relationship with
the Chairman and all Directors.
■ Assess the principal risks of the Group.
■ Lead relationships with government, authorities,
regulators and stakeholders.
■ Ensure effective internal controls and management
information systems are in place.
■ Responsibility for the performance of the Group’s
obligations under the Senior Manager and
Certification Regime.
Senior Independent Director (Robin Ashton)
Provides a sounding board for the Chairman and
serves as an intermediary for the other Directors when
necessary. Available to the Shareholder if they have
concerns, which the normal channels of Chairman,
Chief Executive Officer or other Executive Directors
have failed to resolve, or for which such contact is
inappropriate.
Key responsibilities:
■ Leads the planning for the succession of the
Chairman to the Board.
■ Meet with other Non-Executive Directors to appraise
the Chairman’s performance.
■ Provide feedback to the Chairman, Shareholder
and Executive Directors on the Independent
Non-Executive Directors’ views.
Non-Executive Directors
Provide constructive challenge to management,
and bring experience and objectivity to the Board’s
discussions and decision making. Monitor the delivery
of the Group’s strategy against the governance, risk
and control framework established by the Board. Led
by the Senior Independent Director, the Non-Executive
Directors are also responsible for evaluating the
performance of the Chairman.
Further responsibilities:
■ Scrutinise management performance.
■ Ensure the integrity of financial information and
ensure that the financial controls and systems of
risk management are effective.
■ Seek independent professional advice if needed.
54
Shawbrook Group plc Annual Report and Accounts 2017 Company Secretary (Daniel Rushbrook)
All Directors have access to the services of the
Company Secretary in relation to the discharge of their
duties. Responsible for working with the Chairman to
develop Board and Committee agendas and to ensure
that all Board procedures are complied with. Advises
the Board on corporate governance, legal, regulatory
and compliance matters and developments.
Additional duties:
■ Ensure the Group’s governance framework
is maintained.
■ Organise Directors’ training and induction.
■ Oversee Board and Committee administration
and record keeping.
Division of responsibilities
There is a clear division of responsibility at the head
of the Group. The roles of the Chairman and the
Chief Executive Officer are separate, clearly defined
in writing and have been agreed by the Board.
Board 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
investors.shawbrook.co.uk. All Committees have
access to independent expert advice and the services
of the Company Secretary. Each Committee Chairman
reports on activities throughout the year, highlighting
anything which needs to be brought to the wider
Board’s attention. The 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
and the Shareholder for approval.
The Board has a Disclosure Committee, which
is responsible for monitoring, evaluating and
enhancing disclosure controls and procedures
within the Group. In particular, responsibilities set
out in its 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 also ensures
the Group makes timely and accurate disclosure of
all information where disclosure is required to meet
legal and regulatory obligations.
The Board delegates daily management responsibility
for the Group to the Chief Executive Officer and the
Executive management team, who meet three times
a month. The Executive Committee is responsible
for developing the business and delivering against a
strategy approved by the Board and ensuring effective
monitoring and control mechanisms. There are also a
number of executive sub-committees (a table showing
the governance structure is set out on page 53) which
assist the Executive Committee in discharging its
responsibilities.
Composition, Board Balance
and Time commitment
The Board currently consists of 11 members, namely the
Chairman, six Independent Non-Executive Directors,
two Executive Directors and two Non-Independent
Non-Executive Directors. Biographical details of all
Directors are given on pages 50 to 51.
The Non-Executive Directors have strong and relevant
experience across all aspects of banking including
relevant skills in financial management, regulatory,
credit assessment and pricing, liability management,
technology, operational and conduct matters. To ensure
the Board continues to have an appropriate balance of
skills, these skill sets are reviewed annually through the
completion of a skills matrix which is considered by the
Nomination Committee and the Board.
The Board considers that the balance of skills and
experience is appropriate to the requirements of
the Group’s business and that the balance between
Executive and Non-Executive Directors allows it to
exercise objectivity in decision making and proper
control. 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 governance procedures
are followed) and, as required, external advice at the
expense of the Group.
The Board keeps under review the structure, size
and composition of the Board (and undertakes
an evaluation to ensure it retains an appropriate
balance of skills, knowledge and experience).
The Board also reviews the membership of
the various Board committees and the expected
time commitment.
The terms of appointment of the Non-Executive
Directors specify the amount of time they are expected
to devote to the Group’s business. They are currently
required to commit to at least four days per month
which is calculated based on the time required
to prepare for and attend Board and Committee
meetings, meetings with the Shareholder and training.
55
Strategic reportCorporate governanceFinancial statements Corporate governance report
Leadership structure continued
Meetings and attendance
The Board holds meetings at regular intervals, at
which standing items such as the Group’s financial
and business performance, risk, compliance, IT,
human resources and strategic matters are reviewed
and discussed. 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. Detailed minutes and any actions
arising out of discussions are documented.
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; including but not limited
to approval of appointments to the Board, any material
transactions or the approval of regulatory submissions.
In 2017, there were 42 Board meetings. 10 Board
meetings were scheduled and there were 11 ad hoc
meetings to discuss matters ranging from acquisitions
to the Additional Tier 1 (AT1) issuance. 21 further Board
meetings were held to discuss change of ownership of
the Group. As a result of her involvement with Marlin
Bidco Limited, Lindsey McMurray did not attend the first
three scheduled Board meetings of the year, nor any of
the Board meetings to discuss the change of ownership.
The Board held a strategy workshop with the Executive management team in October 2017
to discuss the Group’s strategic plan.
Attendance at the scheduled Board meetings is shown below:
Director
Date appointed or resigned in the year
Meetings
attended
Meetings eligible to
attend as a Director
Iain Cornish
Robin Ashton
Cédric Dubourdieu
Appointed 5 September 2017
Andrew Didham
Appointed 1 February 2017
David Gagie
Sally-Ann Hibberd
Stephen Johnson
Resigned 23 January 2018
Paul Lawrence
Roger Lovering
Lindsey McMurray
Dylan Minto
Appointed 6 February 2017
Steve Pateman
10
10
4
10
9
10
9
10
9
7
9
10
10
10
4
10
10
10
10
10
10
10
9
10
Throughout the relevant period, the Chairman has held a number of meetings with Non-Executive Directors,
without the Executive Directors being present. The Senior Independent Director has held meetings with
Non-Executive Directors, without the Chairman being present.
56
Shawbrook Group plc Annual Report and Accounts 2017 Independence
The Board has reviewed the independence of each
of the Non-Executive Directors who have served on
the Board throughout the financial year and concluded
that Robin Ashton, Andrew Didham, David Gagie,
Roger Lovering, Paul Lawrence and Sally-Ann Hibberd
are independent. Lindsey McMurray and Cédric
Dubourdieu, who represent the Group’s Shareholder,
are not considered independent. During the relevant
period, the Board has operated with due regard to
the UK Corporate Governance Code (the Code)
requirement that at least half the Board, excluding
the Chairman, should comprise Non-Executive
Directors determined by the Board to be independent.
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 considered the Independence of Roger
Lovering who is a Non-Executive Director of Amigo
Loans, which has a wholesale facility from the Group;
Andrew Didham who is a Non-Executive Director
of Jardine Lloyd Thompson Group plc who are the
Group’s insurance broker and Sally-Ann Hibberd who
is a Non-Executive Director of Equiniti, which was the
Group’s share registrar during and up to the delisting
of the Company. The Board concluded that these
outside interests do not affect their independence.
This is based on observations of the way the above
Directors have discharged their duties as members
of the Board Committees and their contribution to
and challenge in Board meetings.
Conflicts of interest
All Directors have a duty to avoid situations that may
give rise to a conflict of interest (in accordance with
s175 of Companies Act 2006). 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 Board who will take into account the
circumstances of the conflict when deciding whether
to permit potential conflict or to impose conditions on
the Director in the interests of the Group. Any actual
or potential conflicts of interest are recorded in a
central register and 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 on the Board. In addition, Directors are
required to seek the Board’s approval of any new
appointments or changes in commitments.
Induction, training 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 publicly listed company. The Group
also provides additional induction materials and
training for those Directors who are also Committee
Chairman. The content of our Director induction
programmes are tailored and scheduled with input
from the new Director. The induction information is
delivered in a variety of formats; including face to
face meetings with the Chairman, Board Directors
and Executive management and input from external
advisers as appropriate. This is supplemented by the
provision of key governance documents as reading
material, including policies, procedures, Board and
Committee minutes, the Board meeting schedule, the
Group structure chart and copies of the Code, the
FCA Handbook, regulatory codes/requirements and
information on Directors’ duties and responsibilities under
the Companies Act 2006 and other relevant legislation.
Tailored training is made available to all newly
appointed Directors, ensuring any previous experience
they may have as a Director of a financial services
company or otherwise is considered. An ongoing
programme of training is available to all members of
the Board which includes professional external training,
internal online training and bespoke Board training
on relevant topics such as regulatory and governance
developments, changes to the Companies Act 2006 or
accounting requirements. Directors are also encouraged
to devote an element of their time to self development
including attendance at relevant external seminars and
events. This is in addition to any guidance that may be
given from time to time by the Company Secretary.
The Chairman is responsible for reviewing the training
needs of each Director, and for ensuring that Directors
continually update their skills and knowledge of the
Group. All Directors are advised of changes in relevant
legislation, regulations and evolving risks, with the
assistance of the Group’s advisers where appropriate.
During 2017 scheduled training was provided to the
Board on Internal Capital Adequacy Assessment Process
(ICAAP), Internal Liquidity Adequacy Assessment Process
(ILAAP), IFRS 9 requirements, the FCA’s regulation of
conduct, Data Management, Credit Grading Systems
and Corporate Governance developments.
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.
The Board frequently reviews the actual and forecast
performance of the business against the annual plan,
as well as other Key Performance Indicators.
57
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Leadership structure continued
Internal Board Evaluation
The Board carried out an internal evaluation of the
performance of the Board during 2017, in accordance
with the guidance set out in the Code. Further to the
change of ownership the Board thought it important
to assess the performance and effectiveness of the
Board across the year. Each Director was provided
with a questionnaire and the results were presented
to the Board for consideration on 5 December 2017.
Areas for the evaluation included, composition of
the Board and associated governance processes,
workings of the Audit and Risk Committee and
behaviours and activities of Directors. The result
of the evaluation indicated that the Directors
consider the Board to be performing effectively.
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 oversee the Group’s system of
internal control. Material risk or control matters are
reported by the Audit Committee and Risk Committee
to the Board. The Board monitors the ongoing
process by which ‘top risks’ affecting the Group are
identified, measured, managed, monitored, reported
and challenged. This process is consistent with both
the Group Risk Management Framework and with
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
management and Risk Committees, together
with annual budgeting, and monthly financial and
operational reporting for all businesses within the
Group. Conduct and compliance are monitored
by management, the Group Risk function, 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
significant 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, the 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 2017 the Group
continued to invest in its risk management capability
to ensure that it remained relevant, appropriate and
scalable to support the Group’s objectives over the
duration of the strategic plan, and continued to
embed improvements into the Group’s Risk
Management Framework.
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.
58
Shawbrook Group plc Annual Report and Accounts 2017 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 ICAAP and ILAAP on a regular
basis. These processes benefited from ongoing
improvements in risk assessment during 2017
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 capital.
The ICAAP and ILAAP are reviewed by the Board at
least annually. The process involves an assessment
of all the risks that the Group faces in its operating
environment, the likelihood of those 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 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.
Cyber resilience
The Group recognises the importance of cyber
resilience. The Board oversees the Group’s cyber
resilience approach and the level of investment into
cyber security, providing robust challenge and scrutiny
to ensure that the Group is adequately mitigating the
threats it faces. The Board recognises that specialist
knowledge is required in this area and therefore seeks
relevant advice from third parties where appropriate.
The cyber resilience strategy is routinely monitored
by the Risk Committee and reviewed by the Board
on an annual basis. The review takes into account
the latest cyber threat intelligence assessment, the
specialist nature of cyber threats and any outsourcing
risks faced by the Group in this area. This ensures that
the strategy remains fit for purpose to combat the
potential cyber threats the Group may face.
Relationship with the Marlin Consortium
Following the acquisition of the Company by the
Marlin Consortium, the Group remains committed
to maintaining a constructive relationship with the
Shareholder whilst not compromising its independence.
As previously mentioned on page 7 the Company is
now 100% owned by Marlin Bidco Limited.
The Chief Executive Officer and the Chief Financial
Officer meet with the Shareholder and their
representatives on a regular basis outside of regular
Board and Committee meetings. The Shareholder
has the opportunity to meet with the Chairman
and/or other Non-Executive Directors on request.
The Group recognises the potential impact of
the change of ownership on governance and
independence arrangements. To ensure that the
governance arrangements with the Shareholder
are clearly established, the Group has entered into
a Framework Agreement and Memorandum of
Understanding which outlines the responsibilities each
party has to one another. The Framework Agreement
ensures that information flows are clear and that the
independent judgement of the Board is not impacted
and that the Board retains its oversight of the business
in respect of strategy, performance, risk appetite and
assessment of the control framework and governance
arrangements. The Memorandum of Understanding
ensures that the independence of the Board is
protected, particularly in relation to the appointment
of Independent Non-Executive Directors to the Board
and its Committees. It ensures that there will always
be a majority of Independent Non-Executive Directors
in line with good governance practice. As set out in
the Framework Agreement, the Marlin Consortium has
used the right to appoint two Directors to the Board,
both of whom are considered Non-Independent
Non-Executive Directors.
The Group recognises the importance of ensuring
effective communication with all of its stakeholders.
This report, together with a wide range of other
information, including the half-yearly financial report
and regulatory announcements are made available
on the Investor section of the Group’s website at
investors.shawbrook.co.uk.
59
Strategic reportCorporate governanceFinancial statements Corporate governance report
Report of the Nomination Committee
Diversity and
inclusion remains
a strategic priority
for the Group.
I am pleased to present the report of the Nomination
Committee.
During 2017 the Committee focused on a wide range of
governance, succession and development matters. This
has included working with the Group Human Resources
Director to oversee an externally facilitated executive
assessment which provided a thorough evaluation for
our Executive management. We remain committed to
the continued development of key personnel within the
business and ensuring a pipeline of executive talent to
enable us to deal with any future requirements at Board
and senior management levels. We will continue to keep
succession planning and talent development under
close review as part of our annual agenda.
During the year the Committee recommended the
appointment of Andrew Didham as Chairman of the
Board Audit Committee and Cédric Dubourdieu as
a Non-Executive Director. Both Andrew and Cédric
underwent a fitness and propriety assessments
before joining to the Board. Both Directors also
undertook a thorough induction process to assist
with his familiarisation of the Group. Dylan Minto
was appointed Chief Financial Officer, following a
comprehensive recruitment process involving external
candidates. The Committee agreed that Dylan, who
held the interim position for eight months, was the
strongest candidate. This evidences the Committee’s
focus on Executive management as well as Board level
talent development and succession planning. The
Committee also recommended the appointment
of a new Money Laundering Reporting Officer.
As highlighted within my Chairman’s introduction,
I have taken the decision to step down from the Board.
Following a comprehensive search, a candidate
has been identified and regulatory approval is
awaited. The Committee is confident that the chosen
candidate, will bring a vast wealth of expertise and
experience to the Board and will continue to lead the
Group with integrity. I will take all steps to ensure a
smooth succession.
60
Diversity and inclusion remains a strategic priority for
the Group. The Committee and Board recognise the
importance of diversity in enabling Board effectiveness
and improving the quality of decision making, and are
committed to increasing the diversity of the Board. This
commitment is reflected in us signing the Government’s
Women in Finance Charter, an initiative by HM Treasury
which seeks to increase the representation of women
in financial services, particularly at senior levels. We
have set our own targets in line with the Charter to
achieve a third of women on our Board and 40% in
senior management positions by 2020. Our approach
to diversity is described on page 61.
Looking ahead, the Board plans to undertake an
externally facilitated Board effectiveness review in 2018
which will build on the progress since the last external
review in 2016. The review will look at the Board’s
membership, the focus of its work, its delegation to
Committees and to its Executive management and
its culture and the effectiveness of arrangements
between the Board and the Shareholder.
Further information on the activities of the Committee
is provided in the following report.
Iain Cornish
Chairman of the Nomination Committee
7 March 2018
Shawbrook Group plc Annual Report and Accounts 2017 Role of the Nomination Committee
The Nomination Committee’s principal function
is to keep the Board’s governance, composition,
skills, experience knowledge and independence
and succession plans under review and to make
appropriate recommendations as to appointments
to the Board.
As part of the identification and nomination process,
the Committee carries out a formal selection process
for Executive and Non-Executive Directors and
subsequently recommends to the Board any new
appointments. As set out in the Framework Agreement.
Shareholder approval is then sought. The Committee
also has oversight of the recruitment for anyone
designated as a Senior Manager under the Senior
Managers and Certification Regime.
Membership, composition and meetings
The Nomination Committee is chaired by Iain Cornish
(the Chairman of the Group) and its membership
comprises three Non-Executive Directors, a majority
of whom are Independent Non-Executive Directors
in line with provision B.2.1 of the Code.
Meetings are held at least four times per year.
The Nomination Committee met on nine occasions
during 2017 to discuss proposed appointments,
succession and development and to evaluate the
balance of skills, experience, independence and
knowledge on the Board. Meeting attendance
during 2017 is set out below.
Member
Iain Cornish
Robin Ashton
Paul Lawrence
Meetings
attended
Meetings
eligible to
attend as
a member
41
9
82
9
9
9
1 Iain Cornish did not attend meetings relating to his succession
planning. In line with provision B.2.1 of the Code, Robin Ashton,
as the Senior Independent Director chaired those meetings.
2 Paul Lawrence did not attend one meeting given it was considering
his appointment to the Remuneration Committee.
At the invitation of the Chairman of the Nomination
Committee, on occasion, other attendees included
the Chief Executive Officer and Human Resources
Director.
At the beginning of 2018 Lindsey McMurray and
Cédric Dubourdieu joined the Committee.
Appointments
The Committee ensures that 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.
During the year, a key focus for the Committee was the
succession of the Chairman. The appointment process
for the future Chairman involved Ridgeway Partners,
who were appointed to support the search. Ridgeway
Partners confirmed on appointment, that they have no
other connection with the Group. The specification for
the role was agreed by the Committee, with input from
the Chief Executive Officer, Committee members and
the institutional directors. Key attributes for the position
included extensive banking and previous Chairman
experience in addition to regulatory credibility.
Ridgeway Partners provided a shortlist of candidates
who were compared against the role profile and
candidate brief. Candidates were interviewed by
members of the Nomination Committee.
The Committee also carried out relevant reviews
and evaluations in respect of all other appointments.
For Andrew Didham, Dylan Minto and Cédric
Dubourdieu this included skills and fitness and
propriety assessments after which the Committee
recommended their appointments. All underwent
a well planned induction programme.
Diversity
The Group 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. The Group actively
supports the Women in Finance Charter, committing
to increasing the representation of women across the
business, particularly in relation to senior management.
When searching for candidates for Board
appointments, the Nomination Committee takes into
account a number of factors, including the benefits of
diversity, including gender diversity, and the balance
of the composition of the Board. The overriding
requirement is to ensure that recommendations for
appointments are made on merit against objective
criteria, and that the best candidates are put forward
for Board appointments.
61
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Report of the Nomination Committee
Succession planning
The Committee is responsible for ensuring that
appropriate succession and development plans are in
place for appointments to the Board. We are satisfied
that the succession planning structure in place is
appropriate for the size and nature of the Group.
Succession planning arrangements will be kept
under regular review in the future.
Election of Directors
Having reviewed the findings of the Board
effectiveness process, the Nomination Committee
is satisfied that the Board continues to be effective
and has recommended to the Board that each
of the Directors should stand for re-election (in line
with provision B.7.1 of the Code) at the 2018 Annual
General Meeting.
Primary areas of focus during the year
During the relevant period the Nomination Committee
considered the following principal items:
■ the appointment of a new Chairman;
Executive and Non-Executive Director
Induction
All new Directors are required to take part in an induction
process. This includes comprehensive training in line
with the Senior Managers and Certification Regime as
prescribed by the PRA and FCA. In addition, Directors
are required to undertake training in the regulatory and
compliance frameworks, and are also required to gain an
understanding of relevant legal requirements such as the
Market Abuse Directive and Money Laundering legislation.
Inductions also include sessions with the Chairman,
Directors, Executive management and external advisors
to gain insight into the organisation. Training is tailored
to the requirements of each Director’s role.
2017 Inductions
Cédric, Dylan and Andrew received inductions
tailored to their knowledge and experience, this
included:
■ understanding the role of sub-committees and
governance structures;
■ gaining an overview of Board Director duties,
■ a review of the current structure, size and
responsibilities and protocols;
composition of the Board;
■ the time commitment expected of Non-Executive
Directors leadership and succession planning;
■ reviewing past Board packs, Committee packs
and minutes;
■ gaining an understanding of current issues
■ the proposed election and re-election of Directors
relevant to the Board;
at the forthcoming Annual General Meeting;
■ the appointment of a new Non-Executive Director;
■ the appointment of a new Chief Financial Officer;
■ responsibilities under the Senior Managers and
Certification Regime;
■ Board effectiveness, and
■ understanding the strategic implementation
of the Board’s policies in relation to corporate
governance across the Group and amongst the
management team;
■ receiving a full briefing on UK Conduct
Standards, Senior Managers and Certification
Regime and Prudential Regulation;
■ the implementation of the Group’s Diversity Policy.
■ receiving a full briefing on the UK Corporate
Governance Code;
■ meeting with divisional heads to consider, in
depth, the key challenges facing their businesses;
■ meeting key external Group advisers; and
■ holding discussions with the Chairman and
Company Secretary.
In line with provision B.4 of the Code, in addition
to providing an induction when Directors join the
Board, care is taken to ensure they update and
refresh their skills and knowledge.
62
Shawbrook Group plc Annual Report and Accounts 2017 Corporate governance report
Report of the Audit Committee
“We have continued
to focus on the issues
relevant to the Group’s
financial reporting...”
I am pleased to present my report as Chairman of the
Audit Committee, a role which I assumed on 1 February
2017, having succeeded Roger Lovering, who remains
a Committee member. As a Committee, we possess
recent and relevant financial experience in line with
good governance practice across the sector and
included within the Code
We have continued to focus on the issues relevant
to the Group’s financial reporting, considering
emerging trends, and overseeing the Group’s internal
control framework to ensure it remains robust
and fit for purpose.
In the year, the Committee also undertook a formal
competitive tender process of the External Auditor,
which saw KPMG LLP reappointed.
The Committee’s annual work plan is framed around
the Group’s financial reporting cycle which ensures
that the Committee considers all matters delegated
to it by the Board and covers a review and challenge
of the significant accounting estimates and judgments,
which are set out in a table in Note 1.8 of the financial
statements. We also received reports from the Internal
Audit function, which included cyber, responsible
lending, conduct risk, financial crime and divisional
deep dives.
The roll out of the IFRS 9 implementation programme
was a key focus of the Committee with the bulk of
the testing and implementation taking place in 2017.
During the year the Committee received regular
reports on the progress of this project, and has
challenged Executive management to ensure its
implementation runs smoothly. Progress has been
made in developing our Expected Credit Loss (ECL)
models, including our Credit Grading Framework.
The IFRS 9 programme sponsored jointly by the Chief
Financial Officer and Chief Risk Officer and managed
by a single steering committee, will be implemented
in mid 2018.
Andrew Didham
Chairman of the Audit Committee
7 March 2018
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Report of the Audit Committee
Accountability
Role of the Audit Committee
The Audit Committee is responsible on behalf of
the Board, for, amongst other things:
Financial reporting process
■ the significant areas of judgement and their
application to the results of the Group;
■ reviewing the Group’s Annual Report and Accounts
and the Group’s Interim Report to ensure that, taken
as a whole, based on the information supplied to
it and challenged by the Committee and on its
judgement is fair, balanced and understandable
and advising the Board to that effect;
■ monitoring the integrity of the Annual Report and
Accounts and the Interim Report and reviewing the
critical accounting policies, disclosure obligations
and changes in accounting requirements;
■ reviewing and challenging the going concern
and viability assessment undertaken by Executive
management, further details of which can be found
on page 41; and
■ reviewing the Group’s Pillar 3 disclosures to ensure
compliance with prescribed requirements.
Internal controls and risk management
■ considering the process used to evaluate the
effectiveness of internal controls, financial reporting
and risk management;
■ considering the extent of the work undertaken by
the finance function and ensuring the finance teams
have adequate resources to ensure that the control
environment continues to operate effectively;
■ continuously considering any findings of internal
investigations into control weaknesses, fraud or
misconduct and management’s responses to any
deficiencies identified; and
■ risk management consideration and monitoring is
carried out in partnership with the Risk Committee.
External audit
■ making recommendations to the Board in relation
to the appointment, re-appointment and removal
of the External Auditor and approving the auditor’s
remuneration and terms of engagement; and
■ reviewing the findings of the External Audit and the
level of challenge produced by the External Auditor
and considering management’s responsiveness to
the findings and recommendations.
Internal audit
■ monitoring the activity, role and effectiveness of the
Internal Audit function and their audit programme;
■ approving the audit plan and budget and monitoring
the progress against it at regular intervals, confirming
that appropriate resource and capability is in place
to execute the plan effectively; and
■ considering the internal audit reports, including
thematic and routine reviews on prudential and
regulatory compliance.
Whistleblowing
■ continuously considering the Group’s whistleblowing
policies and procedures, including the protection of
whistleblowers.
Membership and meetings
The Audit Committee comprises seven members. In
line with provision C.3.1 of the Code, the majority of the
Committee are Independent Non-Executive Directors
and have recent and relevant financial experience. The
Committee meets as required and met formally six times
last year.
The attendance of Directors eligible to attend during
the period is shown below.
Member
Andrew Didham
Roger Lovering
Robin Ashton
David Gagie
Paul Lawrence
Meetings
attended
Meetings eligible
to attend as
a member
6
5
6
6
6
6
6
6
6
6
The Company Secretary acts as secretary to the
Committee. Other individuals attend at the request
of the Committee Chairman.
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 (where provision of
clarification and explanation on reports is required)
attended meetings of the Committee. The Committee
also met with the external and internal auditors without
Executive management on regular occasions in 2017.
The Board is satisfied that Andrew Didham has recent
and relevant financial experience, as referred to in
the Code. The Committee also believes it has the
competence as a whole, relevant to the sector in which
the Group operates. Biographical details can be found
on pages 50 and 51.
Lindsey McMurray and Cédric Dubourdieu joined the
Committee on 27 February 2018.
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 investors.shawbrook.co.uk.
64
Shawbrook Group plc Annual Report and Accounts 2017 Significant areas of judgement
During 2017 the following significant issues and accounting judgements were considered by the Committee
in relation to the 2017 Annual Report and Accounts:
Reporting
issue
Impairment of
loans and
advances
Effective
interest rate
How the Committee addressed the issue
The Committee received presentations from Executive management explaining the provisioning
methodology across the Group’s lending operations ahead of both the interim and full year
results. The Committee considered and challenged the provisioning methodology applied
by management, including the inputs to the statistical loan loss models prepared by the Group
Risk function. The Committee also considered the calibration of model parameters in the light
of economic indicators, including house price movements and underlying book performance.
The Committee also considered the movements in arrears balances, impairment coverage
ratios and non-performing loan ratios throughout the year and concluded that these were
appropriately monitored during the year.
The Committee concluded that the impairment provisions, including management’s
judgements, were appropriate. The disclosures relating to impairment provisions are set
out in Note 14 to the financial statements.
Interest earned on loans and receivables is recognised using the Effective Interest Rate (EIR)
method. The EIR methodology of accounting uses a discounted cash flow model to spread interest
and fee income and expenses attributable to loan assets, including costs and other premium and
discounts, over the estimated life of the asset. EIR is calculated on the initial recognition of loan
lending through a discounted cash flow model that incorporates fees, costs and other premiums
or discounts. There have been no changes to the EIR accounting policies during the year.
The Committee considered and challenged the EIR methodology applied by Executive
management, including expected future customer behaviours, redemption profiles and changes
to existing redemption profiles and concluded that the EIR methodology was appropriate as at
31 December 2017. The disclosures relating to EIR are set out in Note 3 to the financial statements.
Impairment
assessment
of goodwill
The Committee considered and challenged the annual assessment of the carrying value of
goodwill. Following the review and challenge of the Group’s value in use calculations and key
assumptions, the Committee agreed with management’s conclusion that the Group’s carrying
value of goodwill as at 31 December 2017 was reasonably stated
Conduct risk
The Group’s Consumer Lending division is exposed to risk under s.75 of the Consumer Credit Act
(CCA), in relation to any misrepresentations or breaches of contract by suppliers of goods and
services to customers where the purchase of those goods and services is financed by the Group.
While the Group would have recourse to the supplier in the event of such liability, if the supplier
becomes insolvent then that recourse would have limited value.
The Committee considered the increase in exposures to insolvent suppliers, specifically in the
case of the Group’s exposure to s.75 of the CCA relating to solar panels and in 2017, the Group’s
Consumer Lending division has seen an increase in the number of customer complaints which
relate either to the quality of the panels or to representations allegedly made by suppliers as to
the expected financial performance of the panels.
The Committee concluded that the provisioning against conduct risk exposures was appropriate
as at 31 December 2017. The disclosures relating to conduct risks are set out in Note 23 and 35 of
the financial statements.
IFRS 9
The Committee received regular updates through the year on management’s progress in
preparation for the introduction of IFRS 9 which will require provisioning methodology to take
into account future expected losses. The Committee has noted the considerable progress
made during the year while also recognising the extent of the review still required to successfully
implement this significant accounting change. As the group enters the 2018 financial year,
the Committee will continue to monitor progress closely. Further disclosure around the Group’s
progress is outlined in Note 1.10.1 of the financial statements.
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Report of the Audit Committee
Internal controls and risk management
The Audit Committee annually assesses the Risk
Management Framework and principal risks and
uncertainties on a financial control basis. Details of
the risk management systems in place and principal
risks and uncertainties are provided within the Risk
management report on pages 24 to 41. The Group’s
system of internal control has been designed to
manage risk and whilst risk cannot be eliminated,
the system assists with the provision of reasonable
assurance against material misstatement or loss.
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 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;
safeguards the Group’s assets; and, in conjunction with
the Company Secretary and the Group’s Legal and
Compliance functions, ensures compliance with legal
and regulatory requirements. It provides independent
and objective assurance on risks and controls to the
Audit Committee and Executive management.
In addition to the matters described on the previous
page, the Committee considered issues relating to
the acquisition of the Group, IFRS 9 implementation
process and the acquisition of loan books and a Jersey
based portfolio of loans and products closely aligned
to the Group’s current Business Finance offering. The
Committee was regularly updated on the progress of
the IFRS 9 programme against the programme plan.
Areas of focus include the review and interpretation
and of technical accounting opinions, policy setting
and operational changes required in the Finance
function to implement IFRS 9.
Financial reporting process
During the year, the Audit Committee reviewed and
discussed the financial disclosures made in the Annual
Report and Accounts, half-yearly financial report
and other trading statements made by the Group
up to the point of delisting, together with any related
management letters, letters of representation and
reports from the External Auditors. Significant financial
reporting issues and judgments were considered
together with any significant accounting policies
and changes proposed to them.
Going concern and long-term viability
The Committee reviewed a detailed paper presented
by management setting out the assumptions
underlying the going concern statement. The paper
covered the capital position of the Group, embedding
of the Group’s Risk Management Framework and
governance, and the work performed on the Group’s
ICAAP and ILAAP. Based on the work performed,
the Committee concluded that the Group will have
adequate resources to continue in operational
existence for the period of assessment of 12 months
from the date of signing the accounts. The Committee
reported accordingly to the Board, which also
considered Going Concern in detail.
In order to support the Board’s approval of the
statement on page 41 as to the longer term viability
of the Group, the Committee reviewed papers from
management setting out the intended approach to
the disclosures and providing details in support of the
statement based in particular on the Group’s medium
term plan and the results of stress testing.
66
Shawbrook Group plc Annual Report and Accounts 2017 Internal Audit carried out a significant number of audits
during 2017 of varying size and complexity. Thematic
audits focused on, amongst other things, responsible
lending, watchlist management, ICAAP and treasury
management. Internal Audit reports are circulated to
the Audit Committee members prior to each scheduled
meeting and the Committee monitors progress against
actions identified in these reports.
The Committee monitors and reviews Internal Audit’s
effectiveness annually, using feedback from the
Board, senior management and regular attendees.
Additionally the Committee ensures that there are
sufficient resources available to Internal Audit 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 staff is the responsibility of the Audit Committee.
Internal Audit
The Internal Audit function as the third line of defence
is outsourced to Deloitte LLP providing assurance to
the Group that the specialist nature of the Group’s
activities can be fully assessed. The role of the Internal
Audit function and the scope of its work continue
to evolve to take into account of changes within the
business and emerging best practice.
The work of Internal Audit is focused on areas of
greatest risk to the Group, as determined by a
structured risk assessment process involving
Executive management. The output from the
process is summarised in an annual audit plan,
which is approved by the Audit Committee.
On behalf of the Board, the Committee through
discharging its responsibilities under its terms
of reference undertakes regular reviews of the
effectiveness of the Group’s systems of internal control
as detailed in the section above. The Group has
outsourced the Internal Audit function to Deloitte LLP
since June 2013. The Committee is satisfied that in
2017 this continued to be the most appropriate way
of managing the delivery of internal audit services.
The terms of reference of the Internal Audit function
are set out in the Internal Audit Charter. The Audit
Committee approves the annual audit plan and audit
methodology for Internal Audit and monitors progress
against the plan during the year. The Internal Audit
Partner agrees the programme of work and reports
directly to the Committee on the outcomes. Special
reviews are carried out as required and requested by
the Committee.
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Report of the Audit Committee
External Audit
The Audit Committee oversees the relationship
with the External Auditor and considers the External
Auditor’s engagement (including remuneration),
their effectiveness, their continued independence
and their objectivity. The Committee also considers
audit and audit strategy (including the planned levels
of materiality). The External Auditor attends the
Committee meetings as appropriate and meets at
least annually with the Committee without Executive
management. The Chairman of the Committee also
meets privately with the External Auditor before each
Committee meeting.
During the year, the Committee received regular
detailed reports from the External Auditor including
formal written reports dealing with the audit objectives;
and reports on: the Auditors’ qualifications, expertise
and resources; the 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
Committee monitors the provision of non-audit
services by the External Auditor throughout the year.
The audit carried out by KPMG in respect of the
Group’s 2016 financial statements were subject to an
in depth review by the Financial Reporting Council
(FRC). The Committee reviewed the findings and
discussed them with KPMG, matters raised were
included in the planning for the year-end audit for 2017.
External Audit independence and objectivity
The Committee is responsible for reviewing the
independence of the Group’s External Auditor, KPMG
LLP and making a recommendation to the Board on
their engagement. KPMG LLP has a policy of partner
rotation which complies with regulatory standards,
and the audit partner changed from John Ellacott to
Simon Ryder with effect from June 2017, in line with this
requirement. The Committee monitors the latest ethical
guidance regarding rotation of audit partners.
Maintaining an independent relationship with the
Group’s Auditor is a critical part of assessing the
effectiveness of the audit process. The Committee has
a formal policy on the use of the Auditor for non-audit
services and ensures that work is only awarded when,
by virtue of the Auditor’s knowledge, skills or experience
are a decisive factor and when the Auditors are clearly
to be preferred over alternative suppliers.
The Committee receives and reviews each year an
analysis of all non-audit work and reviews the level
of audit and non-audit fees paid to KPMG LLP and
also ensures that significant assignments are not
awarded without first being subject to the scrutiny
of the Committee. The fees paid to KPMG for audit
and non-audit services are set out in Note 7 of the
financial statements.
Non-Audit Services Policy
The key principles of the policy on non-audit
services are:
(i) Prohibited services include services
remunerated on a success fee or participation in
activities normally undertaken by management.
(ii) The Committee approved a list of permitted
audit related reviews of the Group’s interim
results or any other review of its accounts for
regulatory purposes. (Details of the services
provided by the External Auditor can be found
in Note 7 of the financial statements).
(iii) The Committee maintains a list of prohibited
services which is aligned to the ‘blacklist’ of
services set out in the EU Audit regulations and
directives.
(iv) Pre-approved services up to £100,000 require
approval by the Chief Financial Officer/ Chief
Executive Officer or the Chairman of the
Audit Committee. All services that are not
pre-approved, or are discretional or exceed
the monetary threshold of £100,000 should be
referred to the Audit Committee for approval.
The Committee reviewed payment for non-audit
services and confirms that no prohibited services
were provided by the External Auditor and it is
satisfied that the policy on the supply of non-audit
services could not lead to audit objectivity and
independence being compromised.
During the year the Committee assessed the
effectiveness of the External Auditor. The review
included seeking the views of Audit Committee
members and Executive management. The review
concluded that the external audit process
was effective.
The Committee is satisfied with the performance
of the External Auditor in 2017 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.
68
Shawbrook Group plc Annual Report and Accounts 2017 Audit tender
The Group appointed KPMG Audit Plc as external
auditor from 2011 to 2014, and KPMG LLP thereafter.
The Group did not carry out a formal tender process
following the Initial Public Offering in 2015, seeking to
keep the audit tender under review whilst stability was
created across the Group. Further to the acquisition
of the Group in August 2017, and the recent increased
regulation the Committee made the decision to tender
the External Audit in the final quarter of 2017.
The Audit tender process was overseen by the
Committee with the support from a selection panel
comprising of the Audit Committee Chairman, the Risk
Committee Chairman, an Independent Non-Executive
Director, the Chief Financial Officer and the Head of
External Reporting. The Board resolved to re-appoint
KPMG LLP as external auditor for the Group on 21
November 2017. The Group confirms it 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. An outline of the process
which was followed is provided below.
Audit Tender Process
Stage 1
Issue of formal
tender
Stage 2
Provision of
information
to audit firms
■ An invitation to
tender was issued
to firms along
with a deadline to
submit their intent
to tender.
■ The firms also
submitted a
non-disclosure
agreement and
a declaration of
independence.
■ Two firms
responded to the
invitation to tender.
■ The Group issued
both firms with
all the relevant
information to
provide them with
an overview of the
Group’s business,
history and audit
requirements.
■ Firms were
provided with
the opportunity
to ask questions
and clarification
on the Group
to support their
understanding of
the business.
Stage 3
Meetings with key
individuals and
submissions of
final proposals
■ Firms met with key
members of the
Finance, Legal
and Compliance,
Executive
management and
Non-Executive
Directors.
■ These meetings
took place over a
number of weeks and
allowed the Group
to undertake an
informal evaluation
of the firms and
enhance their
understanding
of the Group.
Stage 4
Presentation to the
Selection Committee
and outcome
■ Both firms were
asked to submit
and present their
final proposals
to the selection
committee and
were then provided
with an opportunity
to present to
the selection
committee across
a two hour slot.
■ Following the
presentations
the selection
committee made a
recommendation
to the Committee
and the Board.
■ After careful
consideration
the Board
accepted the
recommendation
to re-appoint
KPMG as external
auditors for
the Group.
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Report 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 Committee is responsible for monitoring the
effectiveness of the Group’s whistleblowing procedures
and any notifications made. The 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 wrong
doing may be reported via telephone to an external
third party.
The Audit Committee has access to the services of
the Company Secretarial function and is authorised
to obtain independent professional advice if it
considers it necessary.
Governance
The Committee has undertaken an internal review
of its own performance in the year. The review
considered the effectiveness of the Committee
against its terms of reference and Code requirements
for Audit Committees.
Fair, balanced and understandable
The Committee considered on behalf of the Board
whether the 2017 Annual Report and Accounts taken
as a whole is fair, balanced and understandable,
and whether the disclosures are appropriate. The
Committee is satisfied that the 2017 Annual Report and
Accounts 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 and
Accounts is drafted by Executive management with
overall governance and co-ordination provided by the
Annual Report and Accounts Working Group comprising
a team of cross functional senior management.
Assurances are sought by the Audit Committee on each
section of the Annual Report in advance of final sign-off
by the Audit Committee and ultimately the Board.
Following its review, the Committee is satisfied that the
Annual Report is fair, balanced and understandable,
and provides the information necessary for the
Shareholder and other stakeholders to assess the
Group’s position and performance, business model
and strategy and has advised the Board accordingly.
Andrew Didham
Chairman of the Audit Committee
7 March 2018
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Shawbrook Group plc Annual Report and Accounts 2017 Corporate governance report
Risk Committee report
The Risk Committee keeps
under review those risks on
the horizon that could
have a material impact
on the Group in the future.
I am pleased to present the report of the Risk
Committee. The Risk Committee’s key role is to provide
oversight of and advice to the Board on the current
risk exposures and future risk strategy of the Group,
including the development and implementation of the
Group’s Risk Management Framework and for ensuring
compliance with the Group’s approved risk appetite.
The Risk Committee had a full agenda in 2017 which
involved balancing standing areas of risk management
whilst ensuring key risks which have emerged during the
course of the year are appropriately addressed.
We have continued to evolve and embed risk
frameworks, which included the continued oversight of
the stress and scenario testing undertaken to provide
comfort on the Group’s ability to mitigate potential risks,
including those considered in relation to the ICAAP and
ILAAP before making a recommendation to Board.
Proposals were also approved to implement a Group
Policy Framework under which policies, processes and
procedures are governed thereby strengthening the
overarching Risk Management Framework.
We undertook an externally facilitated Risk Culture
Survey of the Group, the outcomes of which will
be worked through to ensure we are well placed
to continue embedding an appropriate risk culture
in 2018.
The Risk Committee keeps under review those
risks on the horizon that could have a material
impact on the Group in the future. I believe we are
now well positioned to monitor the environment in
which the Group operates whilst reviewing inherent
and emerging risks and in the face of a changing
economic outlook and developments in the
regulatory environment.
Paul Lawrence
Chairman of the Risk Committee
7 March 2018
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Risk Committee report
Role of the Risk Committee
The purpose of the Committee is to assist the Board
in its oversight of risk within the Group, with particular
focus on the Group’s risk appetite, risk culture, risk
profile and the effectiveness of the Group’s Risk
Management Framework. As well as reviewing the
Group’s risk assessment processes and methodology
it identifies and manages new risks, alongside advising
on proposed transactions and reviewing reports on
any material breaches of risk limits. The 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.
Over the course of 2017, the Committee considered
a wide range of risks facing the Group both standing
and emerging, across all areas of risk management
in additional to risk appetite, conduct and culture.
On the next page is an outline of these risks with a
summary of the material factors considered by the
Committee including the conclusions which were
ultimately reached.
Committee membership
The Risk Committee comprises eight members, all
of whom are Non-Executive Directors of the Group.
The Committee meets as required, but holds at least
four meetings a year. The Committee had six scheduled
meetings last year, and two additional meetings.
The attendance of Directors, at the scheduled
meetings is shown below:
Member
Paul Lawrence
Robin Ashton
David Gagie
Sally-Ann Hibberd
Roger Lovering
Andrew Didham
Meetings
attended
Meetings
eligible to
attend as
a member
6
6
6
6
5
5
6
6
6
6
6
6
During the year, the members of the Committee were
Andrew Didham, Paul Lawrence, Robin Ashton, David
Gagie, Sally-Ann Hibberd and Roger Lovering, who
(with the exception of Sally-Ann Hibberd) also served
on the Audit Committee throughout the reporting
period. Andrew Didham was appointed to the
Committee on 1 February 2017.
At the beginning of 2018 Lindsey McMurray and
Cédric Dubourdieu joined the Committee.
The Company Secretary acts as secretary to the
Committee. Other individuals attend at the request
of the Risk Committee Chairman and during the year
the External Auditors, Chairman of the Board, Chief
Executive Officer, Chief Financial Officer, Chief Risk
Officer, staff from the Internal Audit function and other
senior managers as appropriate would usually attend
meetings to report to the Committee and provide
clarification and explanations where appropriate.
72
Shawbrook Group plc Annual Report and Accounts 2017 Significant risks
Board Risk Committee review
Enterprise risk
management
■ The Committee reviewed and recommended for the Board’s approval the
2018 Risk Plan which included the key areas of focus for the Risk function.
■ The Committee received regular summaries of the enterprise risk profile
of the Group through the Chief Risk Officer’s report.
■ The Committee reviewed the effectiveness of the Risk Management
Framework throughout the year through the Chief Risk Officer’s report.
■ The Committee received updates on the three lines of defence system and
risk culture through the Chief Risk Officer’s report and challenged the
effectiveness of the first lines of defence across the divisions.
Board risk appetite
■ The Committee received regular updates on the evolving risk appetite
framework, including the provision of a monthly risk appetite dashboard
which accompanies the Chief Risk Officers report at each meeting.
■ The Committee reviewed the appropriateness of the risk appetite framework
and statements to ensure alignment with enhancements in risk measurements
and reflect ownership changes.
Credit risk
■ The Committee received regular updates on the Group’s preparations for IFRS 9.
Operational risk
■ The Committee reviewed updates on the implementation of the improved
product management and annual review process and product approval policy.
■ The Committee received updates on a wide range of operational risks across
the year, including information security.
■ The Committee received updates the testing of the Cyber Incident
Response Plan.
Conduct, legal and
compliance risk
■ The Committee reviewed the Group’s Annual Compliance Monitoring Plan
and updates on performance.
■ The Committee received updates on various conduct risk and legal liability
risk matters, including training on the new conduct risk framework introduced
by the regulator.
Liquidity and market risk
■ The Committee reviewed and recommended to the Board approval
of the Internal Liquidity Adequacy Assessment Process (ILAAP).
■ The Committee reviewed and recommended to the Board approval
of the Contingent Liquidity Plan (CLP).
Stress testing and capital
■ The Committee reviewed the Group’s Internal Capital Adequacy Assessment
Process (ICAAP) in June 2017 and was actively engaged in the oversight of the
macroeconomic stress testing, the development of idiosyncratic stress tests
and reverse stress testing.
■ The Committee reviewed the Capital Contingency Plan (CCP) during the year.
Recovery and
resolution plan
■ The Committee reviewed the Group’s updated Recovery Plan
and Resolution Pack during the year.
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Risk Committee report
■ Review of internal controls and risk management
systems.
■ Regular review of strategic, operational and credit
risk events technology and information risk.
■ Risk Conduct and Culture; The Committee have
continued to develop and monitor training to
ensure the appropriate risk culture and conduct
is embedded and further strengthened across
the Group. This included carrying out a review
of the results of a Risk Culture survey which was
completed by staff.
■ Recovery and Resolution Plan; continued
monitoring of the preparedness and contingency
plan to respond to and manage levels of
severe stress.
Primary areas of focus during the year
■ ICAAP; The Committee was actively engaged in
the development of the Group’s ICAAP. Activities
included workshops to review and approve
recommendations of the Group’s assessment
of Pillar 2A risks and review and approval of the
macroeconomic scenarios used to assess the
Groups risks over a three to five year period. The
Committee was also involved in reviewing risks in
the Group’s business model in the assessment of
idiosyncratic scenarios and reverse stress testing.
■ ILAAP; The Group undertook a comprehensive
review of the ILAAP in 2017 with the Committee
involved throughout. This included workshops
to enhance the stress testing framework, Group
liquidity risks and ensure liquidity adequacy.
■ Risk Management Framework (RMF); The
Committee continued to challenge the embedding
of the framework with a particular focus on first
line of defence and review of enhancements to the
design to ensure that it fully supports the business.
■ Group’s Risk Appetite Framework; The Group
undertook a review of the Risk Appetite Framework
aligning it to the wider RMF and allowing for further
refinement of the Risk Appetite Statements.
■ Regulatory and legislative change; continually
assessed and monitored.
74
Shawbrook Group plc Annual Report and Accounts 2017 Other matters considered in detail
by the Committee in 2017
■ Implementation of Mortgage Credit Directive
■ Credit Grading for IFRS 9
■ Contingent Liabilities
■ Risk Culture Survey
During 2017 the Group has continued its strategy to
embed RMF across the business, with a particular
focus on first line defence and risk culture. The RMF
has provided the Group with tools to ensure that
minimum standards and requirements are met when
identifying, assessing, monitoring and reporting risk.
Throughout the year the Committee has monitored
first line defence across the divisions further to ensure
that the new RMF has been suitably embedded and
that a culture of risk has been established. Across
the year there have been events which have driven
the Committee to undertake focussed reviews into
responsible lending in the Property and Business
Finance divisions, to ensure that the risks are being
managed adequately and that first and second line
risk roles across the Group are defined appropriately.
Further to an FCA audit on the implementation of
the Mortgage Conduct of Business Rules (MCOB) the
Group has focused on ensuring that the procedures,
policies and process in place for responsible lending
are appropriate. This has included a review of
affordability processes in all divisions with a particular
focus on lending for second charge mortgages. The
Risk Committee and the Audit Committee have jointly
worked to ensure that training, procedures and policies
adequately enhanced and align with FCA expectations.
Priorities for 2018
The Group will continue to embed risk culture
during 2018 with a key priority being to focus
on divisional risk management within the Group.
During 2018 the Group will complete an update on
many of the items delivered in 2017 and deliver/
support management and effectiveness of Risk.
The implementation of IFRS 9 has provided the
Committee a chance to review the credit grading
system which had recently been rolled out to all lending
portfolios in the Group. This system will assist with the
compliance with IFRS 9 and is providing enhanced
credit management information, for reporting to the
Committee and Board.
During 2017 an emerging risk arose around contingent
liabilities, certain suppliers of goods and services to
customers of the Group’s Consumer Lending division
where such suppliers have gone into liquidation. The
Committee has kept this under review across the year
alongside the Audit Committee ensuring that the risks
and responsibilities of the Group are being monitored
and managed appropriately.
The Group undertook a Risk Culture Survey during
the year, providing valuable feedback and comfort to
the Committee surrounding on employees views and
approach to risk. The survey was completed by 60%
of participants and provided a good view of how risk
is perceived across all divisions and central functions.
Areas which have been highlighted for improvement
will be further reviewed and monitored into 2018.
The key projects which the Group Risk function
are accountable for delivering in 2018 include:
■ delivery of customer aggregation methodology;
■ delivery of Basel 4 regulations into the approach
for calculating Pillar 1 capital and phasing of
capital floors;
■ embedding IFRS 9 compliance;
■ delivery of operational risk capital assessment
enhancement including the introduction of an
ICAAP modelling tool;
■ development of credit risk authorisation workflow; and
■ delivery and embedding of regulatory change
projects, including Capital Requirements Directive
and Regulation.
Paul Lawrence
Chairman of the Risk Committee
7 March 2018
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Directors’ Remuneration Report
On behalf of the Board,
as Chairman of the
Remuneration Committee,
I am pleased to present
our 2017 Directors’
remuneration report.
This year has been one of significant change at
Shawbrook with the change of ownership and delisting
of securities which led to a number of activities for the
Remuneration Committee. Set out below are the key
areas of focus for the Committee during the year and
going forward into 2018.
The Board welcomed the appointment of Dylan Minto as
Chief Financial Officer in February 2017. His remuneration
arrangements are in line with the remuneration policy
as set out on the following pages. Stephen Johnson
stepped down as Deputy Chief Executive Officer and
Executive Director of the Company on 23 January 2018.
His termination arrangements will also be determined
in line with the Bank’s remuneration policy and disclosed
in next year’s report.
Following the change in ownership, the Committee
reviewed outstanding employee share awards and
determined the most appropriate treatment in line
with the plan rules. We determined that awards
granted under the Deferred Share Bonus Plan (DSBP)
would vest in full and, based on an assessment of
performance to date, the Performance Share Plan
(PSP) awards would also vest in full subject to time
pro-rating. In addition, all employees who held options
under the Sharesave (SAYE) plan were able to exercise
these options using their accumulated savings.
In reviewing annual bonus outcomes, the Committee
undertook a rounded assessment of the Bank’s
performance throughout the year. Having due
regard to the impact of the change in ownership,
the Committee recognised the Bank’s underlying
financial growth and strong performance in risk
management, customer and employee engagement
during the year. On that basis, the Committee
approved an annual bonus pool outcome of 80%
of maximum, before overlaying an assessment of
individual performance to determine the individual
outcomes for Executive Directors.
As we look ahead to 2018 the key priority for the
Committee will be finalising its review of the long-term
incentive framework, to ensure senior leaders of the
Bank are rewarded for the delivery of our strategy
under our new ownership structure.
Robin Ashton
Chairman of the Remuneration Committee
7 March 2018
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Shawbrook Group plc Annual Report and Accounts 2017 Deloitte LLP provided independent advice to the
Committee on all executive remuneration matters.
Deloitte LLP is a member of the Remuneration
Consultants Group and is a signatory to its Code
of Conduct. The Committee is satisfied that the
advice received from Deloitte LLP was objective
and independent.
Guiding reward principles
The Group seeks to reward its employees fairly for
their contribution and motivate them to deliver
the best outcomes for all stakeholders. This is
underpinned by the following principles:
■ Reward structures will be developed in
alignment with the Group’s strategy,
ensuring they meet appropriate regulatory
requirements.
■ Remuneration will be determined within
the Group’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.
■ There will be an appropriate mix of long term
and short term variable pay arrangements in
place, which will assist in driving the long term
security, soundness and success of the Group.
■ The long-term and short-term variable
pay plans will be subject to appropriate
performance measures, ensuring the right
balance between these elements of the
reward package.
■ Remuneration outcomes will be determined
with reference to total reward principles.
For example, when making bonus decisions,
the Group will take into account an employee’s
total aggregate remuneration.
■ Eligibility for, and payment of, any remuneration
will be communicated in a clear and
transparent way and in a timely manner.
■ Reward structures will be designed to avoid
any conflicts of interest.
Remuneration Governance
Role of the Remuneration Committee
The Remuneration Committee’s principal function is to
determine, for onward recommendation to the Board,
the terms and conditions of employment, remuneration
and benefits of each of the Chairman of the Board,
Executive Directors, members of the Executive
management, and all other material risk takers. The
Remuneration Committee exercises independent
judgement on remuneration policies and practices
and the incentives created for managing risk, capital
and liquidity.
Membership, composition and meetings
The Remuneration Committee is chaired by Robin
Ashton (the Senior Independent Director) and,
during the year, its membership comprised of four
Non-Executive Directors, one of whom is the
Chairman of the Board. The Committee is mindful
of the provisions relating to remuneration within
the Code and have continued to adhere to good
governance practice during 2017.
Meetings are held at least four times per year. The
Remuneration Committee met on eight occasions
during 2017. In addition to cyclical agenda items,
the Committee discussed the settlement of the share
schemes following the change of ownership, the
development of a new long-term incentive framework
and changes to the remuneration policy in light
of the change of ownership.
Meeting attendance during 2017 is set out below.
Member
Robin Ashton
Sally-Ann Hibberd
Paul Lawrence
Appointed on 29 March 2017
Iain Cornish
Meetings
eligible to
attend as
a member
Meetings
attended
8
8
5
6
8
8
5
8
On 27 February 2018, Lindsey McMurray and Cédric
Dubourdieu joined as members of the Committee.
At the invitation of the Chairman of the Remuneration
Committee, on occasion, other attendees included
the Chief Executive Officer, Human Resources Director
and Lindsey McMurray. No individual was present for
discussions relating to their own remuneration.
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Directors’ Remuneration Report
Directors’ Remuneration Policy
Following the change in ownership and delisting of securities, Shawbrook is no longer required to produce
a Directors’ Remuneration Report in accordance with Schedule 8 of the Large and Medium-sized Companies
and Groups (Accounts and Reports) Regulations 2008 (as amended). However, for transparency the Board
has produced the table below which summarises the key components of the Group’s reward package
and how these apply to the Executive Directors.
Element
Purpose
Operation
Salary
To provide a
competitive level of
base pay to attract
and retain talent.
Base salaries are set with reference to the size and scope of the role,
the external market as well as skills and experience of the individual.
Salaries are normally reviewed on an annual basis, with increases
typically in line with those awarded to the wider workforce.
Pension
To provide a
competitive post-
retirement benefit.
Benefits
Annual
Bonus
To provide a suite
of competitive
benefits to support
the wellbeing of
employees.
To incentivise
and reward the
achievement of
short term financial
and non-financial
objectives which are
closely linked to the
Bank’s strategy.
Deferral encourages
long-term focus and
risk alignment.
Long
Term
Incentives
To incentivise and
reward the delivery
of the Group’s
long term strategy
and growth over a
sustained period.
Executive Directors may participate in the Group’s Personal Pension
Plan or receive a cash allowance in lieu of pension contributions.
Currently, the Chief Executive Officer receives a pension allowance
of 35% of salary with other Executive Directors receiving an allowance
of 15% of salary per annum.
Executive Directors receive a range of benefits, including but not
limited to private medical cover, life assurance and permanent
health insurance.
Additional benefits may be provided as reasonably required.
Annual bonus awards are determined with reference to financial,
non-financial and individual performance measures. The Committee
considers the overall performance of the Group and the outcome of
the independent risk adjustment process before finalising individual
award levels.
The normal maximum opportunity will be 100% of salary per annum.
Awards over a threshold level (set by the Remuneration Committee
each year) are subject to deferral. Deferred awards will normally be
released in equal tranches after one, two and three years, subject to
continued employment.
Annual bonus awards are subject to the Group’s malus and clawback
provisions.
As a result of the change in ownership, the Remuneration Committee
is reviewing the long-term incentive framework to ensure it is fit-for-
purpose and continues to incentivise and reward the delivery of the
Group’s long term strategy and growth over a sustained period.
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Shawbrook Group plc Annual Report and Accounts 2017 Non-Executive Director reward
The Chairman of the Board 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 respective sub-committees
of the Board. Fee levels are normally reviewed annually.
Reasonable expenses incurred in the performance of non-executive duties may also be reimbursed
or paid directly by the Company, as appropriate.
Directors’ Remuneration in 2017
The tables below set out the remuneration received by Executive and Non-Executive Directors during 2017.
All Executive
Directors
1,185
5
303
881
2,374
1,782
–
4,156
Executive Directors
Salary (£000)
Taxable benefits (£000)
Pension (£000)
Annual bonus (£000)
Subtotal (£000)
Shares vesting upon completion of change of ownership (£000)
Recruitment award
Total (£000)
Non-Executive Directors
Fees (£000)
Notes to the tables
2017
Highest paid
Executive All Executive
Directors
Director
2016
Highest paid
Executive
Director
625
2
219
500
1,098
5
261
677
625
2
219
482
1,346
2,041
1,328
–
2,184
4,225
875
–
2,221
2017
686
–
2,184
3,512
2016
646
Pension: All three Executive Directors received their pension contributions during 2017 by way of a cash allowance.
Annual bonus: Executive Directors were eligible to participate in the annual bonus in 2017, with a maximum
opportunity of 100% of salary. The bonus pool outcome for the Bank was determined through a rounded
assessment of performance that included a review of the following key performance measures:
Financial
■ Profit before tax
■ Return on tangible equity
■ Cost to income ratio
Non-financial
■ Risk Management
■ Customer and employee
The Committee carefully reviewed performance against all of the above measures, also taking into consideration
the outcomes of the Chief Risk Officer’s independent report as part of their considerations. In particular, the
Committee recognised the Bank’s underlying financial growth and strong performance in risk management,
customer and employee engagement during the year, as well as the impact of the change in ownership.
As a result, it approved an annual bonus pool outcome of 80% of maximum.
Individual performance was also assessed to determine the individual awards for each Executive Director; the
aggregate values of which are included in the emoluments table above. In line with policy, 50% of any amount in
excess of £100,000 will be subject to deferral in cash and released in three equal tranches after one, two and three
years. However, in line with its review of the long-term incentive framework, the Committee determined that for
selected senior leaders across the Group, the 2017 award should be fully deferred into a nil cost option award
over Marlin Bidco Limited securities that become exercisable at the time of an exit event.
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Share related benefits: In 2017, three Executive Directors (including the highest paid director) received shares
in satisfaction of long-term incentive awards granted under the Performance Share Plan (PSP) vesting due to the
transaction. At the time of the transaction, the Committee reviewed the performance to date for all outstanding
PSP awards and determined that all awards should vest in full subject to time pro-rating. The aggregate value
received from these long-term awards is reflected in the emoluments table above based on a share price of £3.40.
In addition, three Executive Directors (including the highest paid director) exercised nil-cost options granted
under the Deferred Share Bonus Plan and one Executive Director, who was not the highest paid director,
exercised options granted under the SAYE.
Payments for loss of office: No payments for loss of office were made to Directors during 2017.
Recruitment award: This amount, as fully disclosed on page 94 of the Annual Report and Account 2016,
related to the remuneration forfeited by the highest paid director on leaving prior employment
Directors’ Remuneration in 2018
The Committee has determined that for 2018 the remuneration policy will be implemented as follows for
Executive Directors.
Executive Director salaries: The Remuneration Committee reviewed Executive Director salaries on an individual
basis, in line with the normal annual salary review, and determined that no increases would be awarded at this time.
Pension and benefits will continue to operate in line with the remuneration policy.
Annual bonus: The normal maximum annual bonus opportunity for Executive Directors will be 100% of salary.
When determining the annual bonus outcomes for 2018, the Committee will give consideration to performance
based on a range of key financial and non-financial measures, as outlined below, as well as the individual’s overall
performance and the outcome of the Chief Risk Officer’s independent report.
Financial measures
■ Profit before tax
■ Return on tangible equity
■ Cost to income ratio
■ Cost of risk
Non-financial measures
■ Risk Management
■ Stakeholder engagement
(including customer and employee)
Long-term incentive: The Group is intending to implement a new long-term incentive framework in 2018, to
incentivise the Executive Directors and selected members of the senior management team for the delivery
of the Group’s long-term strategy. These arrangements will be subject to malus and clawback provisions.
Non-Executive Director fees
Chairman fee1
Non-Executive Director base fee2
Senior Independent Director fee
Audit and Risk Committee Chairman fee
Remuneration Committee Chairman fee
Audit and Risk Committee membership fee
Remuneration and Nomination Committee membership fee
Fee from 1 January 2018
£190,000
£65,000
£10,000
£20,000
£5,000
£5,000
£2,500
1 The Committee intends to review the Chairman fee in line with the appointment of the new Chairman.
2 Each Director appointed to the Board by the Shareholder is paid a fee of £50k per annum as set out and agreed within the Framework Agreement.
Robin Ashton
Chairman of Remuneration Committee
7 March 2018
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Shawbrook Group plc Annual Report and Accounts 2017
Corporate governance report
Directors’ report
Corporate Governance Statement
The Strategic report and Corporate Governance
report found on pages 1 to 86 and, together with this
report fulfils section 414C of the Companies Act 2006
by including, by cross reference, details of the Group’s
position on the business model and strategy, financial
risk management objectives and policies, business
overview, future prospects and Corporate Social
Responsibility activities during 2017.
The Directors consider that the Annual Report and
Accounts for the year ended 31 December 2017 taken
as a whole are fair, balanced and understandable and
provide the information necessary for the Shareholder
and other stakeholders to assess the Group’s position
and performance, business model and strategy.
During the period, the Directors have ensured the Group
has given due regard to the provisions and principles set
out in the Code. Following the delisting of the Company
in August 2017, the Listing Rules and some areas of the
Disclosure and Transparency Rules no longer apply to
the Group.
Results for the year
Results for the Group (including reconciliation of statutory
results to underlying results) are laid out on pages 93 to 166.
Dividends
The Directors are not recommending a final dividend
(2016: 2.7p per share) in respect of the year ended
31 December 2017.
Directors
The names and biographical details of the current
Directors are shown on pages 50 and 51. Particulars of
their interests in shares are detailed in the Directors’
Remuneration Report on pages 76 to 80. Changes to
the composition of the Board since 1 January 2017 up
to the date of this report are shown in the table below:
Name
Joined the Board
Andrew Didham
1 February 2017
Dylan Minto
6 February 2017
Cédric Dubourdieu
5 September 2017
Name
Left the Board
Stephen Johnson
23 January 2018
The Company Secretary during the year was
Daniel Rushbrook.
Appointment and retirement of Directors
The Group’s Articles of Association sets out the rules
for the appointment and replacement of Directors.
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 Group’s Articles of Association.
Changes to the Group’s Articles of Association must be
approved by shareholders passing a special resolution
and must comply with the provisions of the Companies
Act 2006.
Directors’ interests
The Directors’ interests in the share capital of the Group
during the course of 2017 are set out on in Note 33 of the
financial statements.
Directors’ indemnities
The Group’s Articles of Association provide that, subject
to the provisions of the Companies Act 2006, the Group
may indemnify any director or former director of the
Group or any associated Group against any liability
and may purchase and maintain for any director or
former director of the Group or any associated Group
insurance against any liability.
The Directors of the Group have entered into individual
deeds of indemnity with the Group 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 2017.
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Share capital
Shawbrook Group plc is a public company limited
by shares. Details of the Group’s issued share capital,
together with details of the movements in the Group ’s
issued share capital during the year, are shown on
in Note 27 of the financial statements.
The Group’s share capital comprises one class of
ordinary share with a nominal value of 0.01p each.
At 31 December 2017, 253,086,879 ordinary shares
were in issue. 3,086,879 ordinary shares were issued
under a block listing in August 2017 of which 2,586,879
were allotted for the satisfaction of Shawbrook Group
Employee Share Schemes further to the terms of the
change in ownership of the Group. On 31 August 2017
all shares in Shawbrook Group Limited were transferred
to Marlin Bidco Limited.
Restrictions on the transfer of shares
According to the articles of association and prevailing
legislation there are no specific restrictions on the
transfer of shares of the Group.
Rights attaching to shares
On a show of hands, each member has the right to one
vote at general meetings of the Group. 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
Group’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.
Shareholder authority for the Group to allot shares
up to an aggregate nominal amount of £835,000 for
any purposes was granted at the 2017 Annual General
Meeting. Shares were allotted under this authority
to satisfy Shawbrook Employee Share Schemes as
detailed in the Share Capital paragraph above.
Purchase of own shares
Under section 701 of the Companies Act 2006 a Group
may make a market purchase of its own shares if the
purchase has first been authorised by a resolution of
the Group.
The Directors were granted the authority at the 2017
AGM to repurchase up to a maximum of 2,505,000
ordinary shares. No shares were purchased pursuant
to this authority during the year.
Capital redemption reserve
During 2017, the Group cancelled the capital
redemption reserve as part of a court-confirmed
reduction of capital. The entire balance of the capital
redemption reserve was cancelled and credited
to the Company’s retained earnings. Following the
cancellation of the capital redemption reserve, the
Company created additional distributable reserves of
£183.1 million. Further details can be found in Note 1.7
of the financial statements.
Significant Shareholder disclosure
Following the change in ownership of the Group, the
Company is now 100% owned by Marlin Bidco Limited.
Acceptance of bid from the Marlin
Consortium
On 31 March 2017, Marlin Bidco Limited, a company
owned jointly by funds managed and/or advised by
Pollen Street Capital Limited and funds advised by
BC Partners LLP, announced an offer to acquire the
entire issued and to be issued ordinary share capital
of the Group not already directly or indirectly owned
by the Marlin Consortium or its concert parties (as
subsequently revised on 5 June 2017, the “Offer”).
The Offer was declared unconditional in all respects
on 7 July 2017 and, on 24 August 2017, the listing of
the Group’s ordinary shares on the London Stock
Exchange was cancelled. Throughout the change of
ownership, the Marlin Consortium stated its support for
the Executive management team and strategy, while
offering its support for continued growth and continued
use of its highly disciplined approach to lending.
82
Shawbrook Group plc Annual Report and Accounts 2017 Relationship with the Shareholder
Further information on the relationship with the
Marlin Consortium can be found on page 59.
Post-balance sheet events
Details of any Post-balance sheet events can be found
in Note 38 of the financial statements.
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 4 to 41 of the Strategic report.
Branches, future developments and
financial risk management objectives
and policies
The Group operates in the United Kingdom and
has a branch in Jersey. Information about future
developments, internal control 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:
Further information on developments of the Group,
please refer to the Strategic Report (pages 4 to 41).
The Group regularly provides employees with
information of concern to them, which incorporates the
Group’s current performance and its future aims and
strategies. During the change in ownership, as required
by the Takeover Code, employees were kept up to date
with developments through circulations from the Chief
Executive Officer and Group Company Secretary.
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
Full details of the Group’s employee share schemes are
set out in Note 10 of the financial statements. There are
no Employee Share Schemes currently in place.
Slavery and human trafficking
In the financial year ended 31 December 2017, the
Group took the following steps to ensure slavery and
human trafficking did not occur within the organisation
or supply chain:
■ identifying and addressing risks: the Group has
updated its processes for evaluating prospective
suppliers and reviewing existing suppliers to
understand its suppliers’ self-assessment of slavery
and human trafficking issues;
Further information on Internal control and financial
risk management systems in relation to financial
reporting of the Group, please refer to the Corporate
Governance report (page 58).
■ developing policy: the Group has and continues
to update its compliance policies to include
consideration of slavery and human trafficking
issues (as applicable); and
■ training: the Group has made available training
to those of its staff who deal most with its suppliers.
Development of an intranet resources page is also
underway which staff will be able to access to learn
about modern slavery and human trafficking.
Political and charitable donations
The Group did not make any political donations
during the year (2016: £nil). For further information
on Charitable Donations made by the Group can be
found on page 46 as part of the Corporate Social
Responsibility report.
Further information on relation to the use of financial
instruments of the Group please refer to the Risk
management report (pages 24 to 41) and Note 31
of the financial statements.
Research and development activities
During the ordinary course of business the Group
develops new products and services within the
business units.
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.
83
Strategic reportCorporate governanceFinancial statements Auditor and Audit Tender
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.
Details of the Audit tender which was carried out during
2017 can be found in the report of the Audit Committee
on page 69.
Annual General Meeting
Shawbrook Group plc’s third Annual General Meeting
will be held on 29 March 2018.
By order of the Board
Steve Pateman
Chief Executive Officer
7 March 2018
Corporate governance report
Directors’ report
Going concern
The financial statements are prepared on a going
concern basis, the Directors are satisfied that the
Group has the resources to continue in business for
the 12 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 PRA.
Fair, balanced and understandable
Details of the governance procedures which have
been embedded to support this can be found in
the Audit Committee Report page 70.
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.
84
Shawbrook Group plc Annual Report and Accounts 2017 Statement of Directors’ responsibilities in
respect of the Annual Report & Accounts
The Directors are responsible for preparing the
Annual Report and Accounts and the Group and Parent
Company 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, relevant and reliable;
■ state whether they have been prepared in
accordance with IFRSs as adopted by the EU;
■ assess the Group and Parent Company’s ability
to continue as a going concern, disclosing as
applicable, matters relating to going concern; and
■ use the going concern basis of accounting unless
they either intend to liquidate the Group or the Parent
Company or cease operations, or have no realistic
alternative to do so.
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 its financial statements comply
with the Companies Act 2006. They are responsible for
such internal control as they determine is necessary to
enable the preparation of financial statements that are
free from material misstatement, whether due to fraud
or error, and 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.
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 50 and 51
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 Group 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 Group and the
undertakings included in the consolidation taken as
a whole, together with a description of the principal
risks and uncertainties that they face.
This responsibility statement was approved by the
Board of Directors and is signed on its behalf by:
Daniel Rushbrook
Company Secretary
7 March 2018
85
Strategic reportCorporate governanceFinancial statements Independent
auditor’s report
to the members of Shawbrook Group PLC
1. Our opinion is unmodified
We have audited the financial statements of Shawbrook Group
plc (“the Company”) for the year ended 31 December 2017
which comprise the Consolidated statement of profit and loss
and other comprehensive income, Consolidated and Company
statements of financial position, Consolidated statement of
changes in equity, Company statement of changes in equity,
Consolidated and Company statement of cash flows, and
the related notes, including the accounting policies.
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 2017 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.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable
law. Our responsibilities are described below. We believe
that the audit evidence we have obtained is a sufficient
and appropriate basis for our opinion. Our audit opinion
is consistent with our report to the audit committee.
We were appointed as auditor by the directors on June
2011. The period of total uninterrupted engagement is for
the 7 financial years ended 31 December 2017. We have
fulfilled our ethical responsibilities under, and we remain
independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied
to public interest entities. No non-audit services prohibited
by that standard were provided.
Overview
Materiality:
group financial
statements as a
whole
Coverage
£5.1m (2016: £4.2m)
4.8% (2016: 4.8%)
of normalised profit before tax
(2016: profit before tax)
100% (2016: 100%)
of group profit before tax
Risks of material misstatement vs 2016
Recurring risks
Impairment provisioning
Effective interest rate
accounting
Valuation of goodwill
Recoverability of parent
company investment
in subsidiaries
Event driven
New: Provisions for
conduct related matters
86
Shawbrook Group plc Annual Report and Accounts 2017 s
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14
8
Likelihood of material misstatement
Significant financial statement audit risks
Other areas of audit focus
Significant risk as mandated by International Standards on Auditing
1. Impairment provisioning
2. Effective interest rate
accounting
3. Valuation of goodwill
4. Conduct risk
5. Management override
of controls
6. Investment in subsidiary
(parent company risk)
7. Hedge accounting
8. Share option schemes
9. Cost capitalisation
10. Taxation
11. Financial statement disclosure
12. Valuation of financial instruments –
derivatives
13. Valuation of financial instruments –
amortised cost and level 3 fair value
14. Residual value risk
15. Loan portfolio acquisition accounting
We summarise on the following pages the key audit matters,
in decreasing order of audit significance, in arriving at our
audit opinion above, together with our key audit procedures
to address those matters and, as required for public interest
entities, our results from those procedures. These matters
were addressed, and our results are based on procedures
undertaken, in the context of, and solely for the purpose
of, our audit of the financial statements as a whole, and in
forming our opinion thereon, and consequently are incidental
to that opinion, and we do not provide a separate opinion
on these matters.
2. Key audit matters: our assessment
of risks of material misstatement
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the
financial statements and include the most significant
assessed risks of material misstatement (whether or not
due to fraud) identified by us, including those which had the
greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the
engagement team.
Our assessment of the Groups, significant risks was the
starting point for our audit. This considered both internal and
external risks to the Group’s business model and how these
have been mitigated.
The internal factors considered were:
Control environment – we considered the Group’s control
environment and in particular whether its systems were
processing transactions completely and faithfully, and
included appropriate controls designed to prevent fraud;
Capital and liquidity – we considered the strength of the
Group’s capital and liquidity position, the diversification of
assets, the flexibility and composition of its balance sheet
and the management of its cost base; and
Business activity – we assessed the risk in relation
to new and one-off transactions including newly acquired
loan portfolios and the Group’s delisting, as well as the
impact of portfolio seasoning on loan impairment and
redemption behaviour.
The external factors considered were:
Economic changes – we consider the audit risk in relation
to loan impairment and goodwill to have been affected
by the impact on the economy of the result of the EU
referendum, which introduces unpredictability of forecasting
in comparison to the previously benign market.
Political and regulatory changes – the regulatory and
tax changes in the buy-to-let market, together with greater
competition in this market, have introduced increased
uncertainty over the expected remaining lives of current
buy-to-let lending.
Market developments – increasing levels of competition in
the market, and the advancement of technological solutions,
including the upcoming changes from Open Banking.
Our assessment of key risks continued from our initial
planning throughout our interim and final audits and was
regularly updated through ongoing conversations with
management, the Board and Audit Committee. This
consideration includes conversations not only with the
Group, and ongoing knowledge gained through reading
pertinent information, but also reflected the views of the
Prudential Regulatory Authority, market analysts, specialists
within our firm, and peer comparisons.
Consistent with 2016, we are of the view that loan
impairment, recognition of revenue in relation to effective
interest rate accounting and the valuation of goodwill
carry the greatest significance. One new key audit matter
has been included this year in relation to conduct risk related
provisions. As described on page 65 these are areas that
have been focused on by the Group’s Audit Committee.
We have identified investment in subsidiary as a key audit
matter for the parent company’s separate accounts albeit
we do not consider this to be a significant risk.
87
Strategic reportCorporate governanceFinancial statements
The risk
Our response
Impairment provisioning
Subjective estimate
Our procedures included:
(£31.6 million; 2016:
£24.4 million)
Refer to page
65 (Audit Committee
Report),
Note 14 of the financial
statements.
The calculation of certain impairment
provisions for the Group is inherently
judgemental. Individual and collective
impairment provisions (identified and
unidentified) may not reflect recent
developments in credit quality, arrears
experience, or emerging macroeconomic
risks. The most significant areas are:
Individual provisions
For the modelled individual provisions
(consumer finance and second charge
mortgages) the key judgements are
the probabilities of default (PDs). These
judgements are particularly subjective
because the Group has limited historical
experience to support the assumptions
made due to the relatively unseasoned
nature of its loan portfolios underwritten
during a relatively benign economic period.
Business Finance and Commercial loans
are monitored and placed on a watch list
if they are considered to exhibit evidence
of impairment. Provisioning judgements
are then made for these loans based on
the individual circumstances of each case
and expectations of future cash flows.
These individually assessed provisions are
particularly judgemental for these portfolios
where the nature of collateral and exit
strategy selected can significantly impact
the timing and value of cash flows.
Collective provisions
The key judgements in the collective
provisioning model are the emergence
period, probability of default and loss given
default. The emergence period is the most
difficult judgement to estimate due to the
difficulty of obtaining historical data.
Alongside the above, another area of
focus is post modelling adjustments and
management overlays as they have the
potential to be significant, judgemental
and may be difficult to corroborate.
— Control testing: We tested the design,
implementation and operating effectiveness
of key controls over the monitoring
and reporting of loans and advances to
customers;
— Sensitivity analysis: We assessed and
challenged the reasonableness of the
Group’s key assumptions, being the
propensity to default, loss given default and
emergence periods, performing stress tests;
— Assessing transparency: Considering
the adequacy of the Group’s disclosures
in respect of the sensitivity of impairment
provisions to these assumptions.
For loans assessed for individual provisions:
— Our credit experience: We examined a
risk based sample of business finance and
commercial mortgage exposures including
impaired and unimpaired loans and formed
our own judgement, based on the individual
facts and circumstances, as to whether
impairment was required. This included
an assessment of the supporting evidence
for collateral valuations;
— Independent re-performance: We
reperformed a sample of calculations of
impairment and agreed the key data inputs
to source documentation; and
— Our sector experience: We challenged
and assessed the reasonableness of the key
judgemental areas of the calculation, being
forecast sale value of the collateral through
benchmarking, and back testing to historical
experience.
For loans assessed collectively for impairment:
— Our sector experience: We challenged and
assessed the reasonableness of the key
judgemental areas of the calculation, being
forecast sale value of the collateral through
benchmarking and back-testing to historical
experience; and
— Management overlay: We critically
assessed the rationale for quantum of
overlay maintained with reference to our
own knowledge of the industry and findings
from our audit of the models.
Our results
— We found the resulting estimate for
impairment provisioning to be acceptable.
88
Shawbrook Group plc Annual Report and Accounts 2017 The risk
Our response
Valuation of goodwill
Forecast-based valuation
Our procedures included:
(£44.8 million; 2016:
£44.8 million)
Refer to page 65 (Audit
Committee Report),
Note 17 of the financial
statements.
The carrying value of goodwill is tested
for impairment on the occurrence of an
impairment trigger or otherwise annually.
The estimated recoverable amount is
subjective due to the inherent uncertainty
involved in forecasting future cash flows
and selecting an appropriate discount rate.
£34.7 million of the total goodwill balance
relates to Business Finance, being the area
of most significant judgement in light of
the size of the balance and weaker than
expected financial performance in the year.
— Our sector experience: Evaluating
assumptions used, in particular those relating
to forecast revenue growth, discount rate
and incremental capital requirements in
Business Finance;
— Benchmarking assumptions: Comparing
the Group’s assumptions to external
comparable data in relation to key inputs
such as projected economic growth and
discount rates;
— Sensitivity analysis: Performing breakeven
analysis on the assumptions noted above
using our data analytic capabilities; and
— Assessing transparency: Assessing
whether the Group’s disclosures about the
sensitivity of the outcome of the impairment
assessment to changes in key assumptions
reflected the risks inherent in the valuation of
goodwill.
Our results
— We found the resulting estimate of the
carrying value of goodwill to be acceptable.
Provisions for conduct
related matters
(£2.5 million; 2016: £nil)
Refer to page
65 (Audit Committee
Report)
Note 23 and 35 of
the financial statements.
Estimation of exposure
Our procedures included:
Certain of the Group’s lending activities
give rise to ongoing exposure under
Section 75 Consumer Credit Act.
During the year, the Group saw an increase
in customer complaints relating to its solar
lending product where the original supplier
is no longer solvent.
The application of accounting standards
to determine the amount, if any, to be
provided as a liability and the associated
disclosure, is inherently subjective.
— Enquiry of management: We enquired of
the Directors and key members of legal,
risk and compliance to obtain their view
on the status of all significant litigation and
regulatory matters and the completeness
of their assessment in respect of these
provisions;
— Independent evaluation: inspecting internal
papers and regulatory correspondence we
challenged the timing of the recognition of
provisions where there is potential exposure
but it is not clear whether an obligation
exists or where the Group have determined
a reliable estimate is not possible. We
independently evaluated the provision
estimated including a re-performance of
management’s calculations; and
— Assessing transparency: Assessing
whether the group’s disclosures detailing
significant conduct related matters
adequately disclose the potential liabilities
of the Group.
Our results
— We found the liability recognised, and the
associated disclosure, to be acceptable.
89
Strategic reportCorporate governanceFinancial statements The risk
Our response
Effective interest rate
accounting (‘EIR’)
Interest paid by customers
£307.1 million (2016:
£279.0 million);
Refer to page
65 (Audit Committee
Report)
Note 3 of the financial
statements.
Subjective estimate
Interest and fees, including early
redemption charges, earned on loans are
recognised using the effective interest rate
method which spreads directly attributable
cash flows over the expected lives of
the loans, The Group apply judgement in
deciding which cash flows are spread on
an EIR basis and assessing the redemption
profiles used to spread those cash flows.
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.
Parent company risk:
Recoverability of parent
company’s investment in
subsidiaries
(£409.5 million; 2016:
£277.0 million)
Refer to Note 20 of the
financial statements
Impairment assessment
The carrying amount of the parent
company’s investments in subsidiaries
represents 84% (2016: 78%) of
the company’s total assets. Their
recoverability is not at a high risk of
significant misstatement or subject to
significant judgement. However, due
to their materiality in the context of the
parent company financial statements,
this is considered to be the area that had
the greatest effect on our overall parent
company audit.
Our procedures included:
— Methodology choice: We tested the
accuracy of data inputs from the mortgage
systems into the effective interest rate
models and the consistency of methodology
and application across the Group’s loan
portfolios;
— Independent re-performance: We
evaluated the mathematical accuracy of
models through re-performance of the model
calculations;
— Sensitivity analysis: We assessed and
challenged the reasonableness of the
models’ key assumptions, expected lives
and forecast future cash flows, by comparing
these to historical trends within the Group
and performing stress tests; and
— Assessing transparency: Considering the
adequacy of the Group’s disclosures in
respect of the sensitivity of the revenue
to these assumptions.
Our results
— We found the amount of Interest paid
by customers recognised in the year to
be acceptable.
Our procedures included:
— Tests of detail: Comparing the carrying
amount of 100% of investments with the
relevant subsidiaries’ financial statements
to identify whether their net assets, being
an approximation of their minimum
recoverable amount, were in excess
of their carrying amount and assessing
whether those subsidiaries have historically
been profit-making.
Our results
— We found the Group’s assessment of
the recoverability of the investment in
subsidiaries to be acceptable.
90
Shawbrook Group plc Annual Report and Accounts 2017 The risk
Our response
Effective interest rate
Subjective estimate
Our procedures included:
accounting (‘EIR’)
Interest and fees, including early
Interest paid by customers
£307.1 million (2016:
£279.0 million);
Refer to page
65 (Audit Committee
Report)
statements.
redemption charges, earned on loans are
recognised using the effective interest rate
method which spreads directly attributable
cash flows over the expected lives of
the loans, The Group apply judgement in
deciding which cash flows are spread on
an EIR basis and assessing the redemption
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.
Note 3 of the financial
profiles used to spread those cash flows.
Parent company risk:
Impairment assessment
Our procedures included:
Recoverability of parent
The carrying amount of the parent
company’s investment in
company’s investments in subsidiaries
subsidiaries
(£409.5 million; 2016:
£277.0 million)
Refer to Note 20 of the
financial statements
represents 84% (2016: 78%) of
the company’s total assets. Their
recoverability is not at a high risk of
significant misstatement or subject to
significant judgement. However, due
to their materiality in the context of the
parent company financial statements,
this is considered to be the area that had
the greatest effect on our overall parent
company audit.
— Methodology choice: We tested the
accuracy of data inputs from the mortgage
systems into the effective interest rate
models and the consistency of methodology
and application across the Group’s loan
portfolios;
— Independent re-performance: We
evaluated the mathematical accuracy of
models through re-performance of the model
calculations;
— Sensitivity analysis: We assessed and
challenged the reasonableness of the
models’ key assumptions, expected lives
and forecast future cash flows, by comparing
these to historical trends within the Group
and performing stress tests; and
— Assessing transparency: Considering the
adequacy of the Group’s disclosures in
respect of the sensitivity of the revenue
to these assumptions.
Our results
— We found the amount of Interest paid
by customers recognised in the year to
be acceptable.
— Tests of detail: Comparing the carrying
amount of 100% of investments with the
relevant subsidiaries’ financial statements
to identify whether their net assets, being
an approximation of their minimum
recoverable amount, were in excess
of their carrying amount and assessing
whether those subsidiaries have historically
been profit-making.
Our results
— We found the Group’s assessment of
the recoverability of the investment in
subsidiaries to be acceptable.
3. Our application of materiality and
an overview of the scope of our audit
Materiality
Materiality for the group financial statements as a whole
was set at £5.1m (2016: £4.2m), determined with reference
to a benchmark of group profit before tax, normalised to
exclude this year’s costs in relation to the acquisition of the
Group as disclosed in note 6 and the accelerated IFRS2
charge totalling £19.1m (of which it represents 4.8%
(2016: 4.8%).
We agreed to report to the Audit Committee any corrected
or uncorrected identified misstatements exceeding £0.3m,
in addition to other identified misstatements that warranted
reporting on qualitative grounds.
Materiality for the parent company financial statements as
a whole was set at £5.1m (2016: £4.2m), determined with
reference to a benchmark of company net assets, of which
it represents 1.2% (2016: 1.5%).
Team structure
The Group 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 level set
out above.
Scope – disclosure of IFRS 9 effect
The Group is adopting IFRS 9 Financial Instruments from
1 January 2018 and has included an estimate of the financial
impact of the change in accounting standard in accordance
with IAS 8 Changes in Accounting Estimates and Errors as
set out in Note 1.10. This disclosure notes that the estimate
has been prepared under an interim control environment
with models that continue to undergo validation. While
further testing of the financial impact will be performed
as part of our 2018 year end audit, we have performed
sufficient audit procedures for the purposes of assessing
the disclosures made in accordance with IAS 8.
Specifically we have:
— considered key classification and measurement
decisions, including business model assessments and
solely payment of principal and interest outcomes;
— considered the appropriateness of key technical
decisions, judgements, assumptions and elections
made in determining the estimate;
Profit before tax
£86.5m (2016: £88.2m)
Group Materiality
£5.1m (2016: £4.2m)
£5.1m
Whole financial
statements materiality
(2016: £4.2m)
Profit before tax
Group materiality
£0.3m
Misstatements reported to the
audit committee (2016: £0.2m)
4. We have nothing to report on going concern
We are required to report to you if we have concluded
that the use of the going concern basis of accounting is
inappropriate or there is an undisclosed material uncertainty
that may cast significant doubt over the use of that basis for
a period of at least twelve months from the date of approval
of the financial statements. We have nothing to report in
these respects.
5. We have nothing to report on the
other information in the Annual Report
The directors are responsible for the other information in the
Annual Report. Our opinion on the financial statements does
not cover those reports and we do not express an audit
opinion thereon.
Our responsibility is to read the other information and,
in doing so, consider whether, based on our financial
statements audit work, the information therein is materially
misstated or inconsistent with the financial statements or
our audit knowledge. Based solely on that work:
— we have not identified material misstatements
in the strategic report and the directors’ report;
— in our opinion the information given in those reports
for the financial year is consistent with the financial
statements; and
— in our opinion those reports have been prepared
in accordance with the Companies Act 2006.
— involved credit risk modelling and economic specialists
in the consideration of credit risk modelling decisions
and macroeconomic variables, including forward
economic guidance and generation of multiple economic
scenarios, for a sample of models used in determining
the estimate; and
6. We have nothing to report on the other
matters on which we are required to
report by exception
Under the Companies Act 2006, we are required to report
to you if, in our opinion
— considered interim controls and governance processes
related to the calculation and approval of the estimated
transitional impact.
— adequate accounting records have not been kept by the
parent Company, or returns adequate for our audit have
not been received from branches not visited by us; or
— the parent Company financial statements are not in
agreement with the accounting records and returns; 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.
We have nothing to report in these respects.
91
Strategic reportCorporate governanceFinancial statements 7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page
85, the Directors are responsible for: the preparation of
the financial statements including being satisfied that
they give a true and fair view; such internal control as
they determine is necessary to enable the preparation
of financial statements that are free from material
misstatement, whether due to fraud or error; assessing
the Group and parent Company’s ability to continue as a
going concern, disclosing, as applicable, matters related
to going concern; and using the going concern basis of
accounting unless they either intend to liquidate the Group
or the parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or other
irregularities (see below), or error, and to issue our opinion in
an auditor’s report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise
from fraud, other irregularities or error and are considered
material if, individually or in aggregate, they could reasonably
be expected to influence the economic decisions of users
taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could
reasonably be expected to have a material effect on the
financial statements from our sector experience, through
discussion with the directors and other management (as
required by auditing standards), and from inspection of the
group’s regulatory and legal correspondence. We had regard
to laws and regulations in areas that directly affect the
financial statements including financial reporting (including
related company legislation) and taxation legislation. We
considered the extent of compliance with those laws and
regulations as part of our procedures on the related annual
accounts items.
In addition we considered the impact of laws and
regulations in the specific areas of regulatory capital and
liquidity, conduct, money laundering, and financial crime
and certain aspects of company legislation recognising the
regulated nature of the group’s activities. With the exception
of any known or possible non-compliance, and as required
by auditing standards, our work in respect of these was
limited to enquiry of the directors and other management
and inspection of regulatory and legal correspondence.
We considered the effect of any known or possible non-
compliance in these areas as part of our procedures on the
related annual accounts items. Further detail in respect of
conduct related matters is set out in the key audit matter
disclosures in section 2 of this report.
We communicated identified laws and regulations
throughout our team and remained alert to any indications
of non-compliance throughout the audit.
As with any audit, there remained a higher risk of
nondetection of non-compliance with relevant laws and
regulations (irregularities), as these may involve collusion,
forgery, intentional omissions, misrepresentations, or the
override of internal controls.
8. The purpose of our audit work and
to whom we owe our responsibilities
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s
members, as a body, for our audit work, for this report,
or for the opinions we have formed.
Simon Ryder (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
7 March 2018
92
Shawbrook Group plc Annual Report and Accounts 2017 Financial statements
94
Consolidated statement of profit and loss
and other comprehensive income
95
96
97
98
Consolidated and Company statement
of financial position
Consolidated statement of changes in equity
Company statement of changes in equity
Consolidated and Company statement
of cash flows
99
Notes to the financial statements
167 Glossary
Financial
statements
93
93
Strategic reportCorporate governanceFinancial statements Consolidated statement of profit and
loss and other comprehensive income
For the year ended 31 December 2017
Interest 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 (expense)/income
Fair value gains on financial instruments
Net operating income
Administrative expenses
Impairment losses on loans and advances to customers
Provisions for liabilities and charges
Total operating expenses
Profit before taxation
Income tax charge
Notes
3
4
Restated1
2016
£m
2017
£m
313.3
284.4
(76.0)
(83.1)
237.3
201.3
12.3
–
13.5
0.1
16
(10.6 )
(11.3 )
5
15
6
14
23
1.7
12.3
2.3
11.2
(12.8 )
(5.7 )
(0.5 )
0.2
5.5
0.5
238.7
209.6
(126.8 )
(96.0 )
(23.3 )
(24.3 )
(2.1 )
(1.1 )
(152.2 )
(121.4 )
86.5
88.2
12
(25.3)
(23.4 )
Profit after taxation, being total comprehensive income, attributable to owners
61.2
64.8
1 Refer to Note 1.8 for details of the reclassification.
The notes on pages 99 to 166 are an integral part of these financial statements.
94
Shawbrook Group plc Annual Report and Accounts 2017
Consolidated and Company
statement of financial position
As at 31 December 2017
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Derivative financial assets
Property, plant and equipment
Intangible assets
Deferred tax assets
Other assets
Investment in subsidiaries
Subordinated debt receivable
Total assets
Liabilities
Customer deposits
Amounts due to banks
Provisions for liabilities and charges
Derivative financial liabilities
Current tax liabilities
Other liabilities
Subordinated debt liability
Total liabilities
Equity
Share capital
Capital securities
Share premium account
Capital redemption reserve1
Retained earnings
Total equity
Group Company
2017
£m
2017
£m
Group Company
2016
£m
2016
£m
Notes
13
15
16
17
18
19
20
26
21
22
23
15
24
26
27
28
752.5
28.8
4,844.3
1.8
39.6
65.7
15.7
10.3
–
–
–
–
–
–
–
–
–
1.5
409.5
76.1
429.9
24.1
4,050.4
5.2
42.6
59.9
17.9
16.6
–
–
–
–
–
–
–
–
–
2.2
277.0
76.1
5,758.7
487.1
4,646.6
355.3
4,376.2
607.3
2.8
3.4
7.7
62.8
75.4
–
–
–
–
–
0.4
75.4
3,943.5
147.7
1.3
0.4
14.2
27.0
75.3
5,135.6
75.8
4,209.4
2.5
2.5
124.0
124.0
2.5
–
–
–
–
–
–
–
75.3
75.3
2.5
–
87.3
87.3
87.3
87.3
–
–
183.1
183.1
409.3
197.5
164.3
7.1
623.1
411.3
437.2
280.0
Total equity and liabilities
5,758.7
487.1
4,646.6
355.3
1 Refer to Note 1.7 for details of the cancellation of the capital redemption reserve.
The notes on pages 99 to 166 are an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 7 March 2018 and were signed on its behalf by:
Steve Pateman
Chief Executive Officer
Registered number 07240248
Dylan Minto
Chief Financial Officer
95
Strategic reportCorporate governanceFinancial statements
Consolidated statement of changes in equity
For the year ended 31 December 2017
Share
capital
£m
Capital
securities
£m
Share
Capital
premium redemption Retained
earnings
reserve
account
£m
£m
£m
Total
equity
£m
Balance as at 1 January 2016
Total comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Share-based payments
Balance as at 31 December 2016
Balance as at 1 January 2017
Total comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Transactions with owners recorded directly in equity
Dividend paid
Total contributions by and distributions to owners
Cancellation of capital redemption reserve1
Transactions with non-controlling entities
Issue of capital securities
Cost of issuance of capital securities
Total contributions by non-controlling entities
Share-based payments
2.5
–
–
–
2.5
2.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
125.0
(1.0 )
124.0
–
87.3
183.1
94.7
367.6
–
–
–
–
–
–
64.8
64.8
4.8
64.8
64.8
4.8
87.3
183.1
164.3
437.2
87.3
183.1
164.3
437.2
–
–
–
–
–
–
–
–
–
–
–
–
–
61.2
61.2
(6.8 )
(6.8 )
61.2
61.2
(6.8 )
(6.8 )
(183.1 )
183.1
–
–
–
–
–
–
–
–
–
125.0
(1.0 )
124.0
7.5
7.5
409.3
623.1
Balance as at 31 December 2017
2.5
124.0
87.3
1 Refer to Note 1.7 for details of the cancellation of the capital redemption reserve.
The notes on pages 99 to 166 are an integral part of these financial statements.
96
Shawbrook Group plc Annual Report and Accounts 2017
Company statement of changes in equity
For the year ended 31 December 2017
Share
capital
£m
Capital
securities
£m
Share
Capital
premium redemption Retained
earnings
reserve
account
£m
£m
£m
Total
equity
£m
Balance as at 1 January 2016
Total comprehensive income for the year
Loss for the year
Total comprehensive income for the year
Share-based payments
Balance as at 31 December 2016
Balance as at 1 January 2017
Total comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Transactions with owners recorded directly in equity
Dividend paid
Total contributions by and distributions to owners
Cancellation of capital redemption reserve1
Transactions with non-controlling entities
Issue of capital securities
Cost of issuance of capital securities
Total contributions by non-controlling entities
Share-based payments
2.5
–
–
–
2.5
2.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
125.0
(1.0 )
124.0
–
–
–
–
–
–
–
–
–
–
Balance as at 31 December 2017
2.5
124.0
87.3
1 Refer to Note 1.7 for details of the cancellation of the capital redemption reserve.
The notes on pages 99 to 166 are an integral part of these financial statements.
87.3
183.1
3.2
276.1
–
–
–
–
–
–
87.3
183.1
(0.9 )
(0.9 )
4.8
7.1
(0.9 )
(0.9 )
4.8
280.0
87.3
183.1
7.1
280.0
–
–
–
–
6.6
6.6
(6.8 )
(6.8 )
6.6
6.6
(6.8 )
(6.8 )
(183.1 )
183.1
–
–
–
–
–
–
–
–
–
125.0
(1.0 )
124.0
7.5
7.5
197.5
411.3
97
Strategic reportCorporate governanceFinancial statements
Consolidated and Company
statement of cash flows
For the year ended 31 December 2017
Cash flows 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
Increase in operating lease assets
Decrease/(increase) in derivatives
Decrease/(increase) in other assets
Increase in subordinated debt receivable
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)/received
Group Company
2017
£m
2017
£m
Group Company
2016
£m
2016
£m
Notes
86.5
54.5
6.6
6.5
88.2
51.8
(0.9 )
6.5
29
141.0
13.1
140.0
5.6
(0.3 )
(817.2 )
(8.6 )
6.4
6.3
–
432.7
1.5
35.8
(343.4 )
(29.6 )
–
–
–
–
0.7
–
–
–
0.4
1.1
–
(1.7 )
(755.6 )
(7.5 )
(2.0 )
(8.7 )
–
757.1
0.4
(296.8 )
(314.8 )
(20.4 )
(0.2 )
0.2
(7.9 )
–
(7.9 )
(11.4 )
(125.0 )
459.6
–
107.8
–
–
–
–
2.0
(1.1 )
–
–
(1.4 )
(0.5 )
0.1
5.2
–
–
–
–
–
–
Net cash flow (used by)/generated from operating activities
(232.0 )
14.2
(195.2 )
Cash flows from investing activities
Purchase of property, plant and equipment
Sale of property, plant and equipment
Purchase of intangible assets
16
17
(1.6 )
–
(9.8 )
–
–
–
Investment in subsidiaries net of cash and cash equivalents acquired
–
(125.0 )
Net cash used by investing activities
Cash flows from financing activities
Increase in amounts due to banks
Payment of subordinated debt interest
(6.4 )
(6.4 )
(5.2 )
(5.2 )
Net proceeds from the issue of capital securities
Dividends paid to Shareholders
124.0
124.0
(6.8 )
(6.8 )
–
–
–
–
Net cash generated from/(used by) financing activities
570.4
110.8
102.6
(5.2 )
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
327.0
450.0
777.0
–
–
–
(100.5 )
550.5
450.0
–
–
–
The notes on pages 99 to 166 are an integral part of these financial statements.
98
Shawbrook Group plc Annual Report and Accounts 2017
Notes to the financial statements
For the year ended 31 December 2017
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, The Drive, Great Warley, Brentwood, Essex, CM13 3BE. The consolidated financial statements
of Shawbrook Group plc, for the year ended 31 December 2017, 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 statement of profit and loss 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 Company and its
subsidiaries’ 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 statement of financial position reporting date. Foreign exchange gains and losses resulting
from the restatement and settlement of such transactions are recognised in the statement of profit and 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) denominated in foreign currencies are translated
at the exchange rate at the date of the transaction.
1.4 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 statement of financial position, 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 suggest 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 in a range of stressed scenarios, assuming
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 (PRA).
1.5 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. Intercompany
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. Accounting policies are
applied consistently across the Group.
These financial statements consolidate the results of the subsidiary companies set out in Note 32.
99
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
1. Basis of preparation continued
1.6 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 ultimately differ 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
Impairment of loans and advances
Impairment assessment of goodwill
Customer remediation and conduct issues
3
14
17
23
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.
1.7 Other reserves
Capital redemption reserve
This is a statutory, non-distributable reserve into which amounts are transferred following the redemption or
purchase of a company’s own shares. The provisions relating to the capital redemption reserve are set out in
section 733 of the Companies Act 2006. During 2017, the Company cancelled the capital redemption reserve
as part of a court confirmed reduction of capital. The entire balance of the capital redemption reserve was
cancelled and credited to the Company’s retained earnings. Following the cancellation of the capital redemption
reserve, the Company created additional distributable reserves of £183.1m.
1.8 Reclassification of fee income
£4.2 million of fee income has been reclassified from fee and commission income to interest and similar income in
order to accurately reflect the nature of the revenue. The reclassification has no effect on either the net operating
income, profit before tax or the net assets of the Group.
1.9 Adoption of new and revised standards and interpretations
Minor amendments to IAS 12 ‘Income Taxes’ and IAS 7 ‘Statement of Cash Flows’ were adopted with effect from
1 January 2017. The adoption of these amendments had no significant impact for the Group. In all other respects,
the accounting policies adopted are consistent with those of the previous financial year.
1.10 New and revised standards and interpretations not yet adopted
A number of new standards have been issued by the International Accounting Standards Board (IASB) and
endorsed for use in the EU but are not effective for this financial year. The Group has not early adopted any
of the new standards in preparing these consolidated financial statements.
The new standards considered to be the most relevant to the Group are as follows:
1.10.1 IFRS 9 ‘Financial Instruments’
IFRS 9 contains new requirements for the classification and measurement, impairment and hedge accounting
of financial assets and liabilities.
In July 2014, the IASB issued the final version of IFRS 9 ‘Financial Instruments’. IFRS 9 is effective for annual periods
beginning on or after 1 January 2018, with early adoption permitted. It replaces IAS 39 ‘Financial Instruments:
Recognition and Measurement’.
100
Shawbrook Group plc Annual Report and Accounts 2017 In October 2017, the IASB issued ‘Prepayment Features with Negative Compensation’ (Amendments to IFRS 9).
The amendments are effective for annual periods beginning on or after 1 January 2019, with early adoption
permitted. The Group is not an early adopter of the amendments to IFRS 9.
The Group will apply IFRS 9 as issued in July 2014 initially on 1 January 2018. Based on assessments undertaken
to date, the total estimated adjustment (net of tax) of the adoption of IFRS 9 on the opening balance of the
Group’s equity at 1 January 2018 is a reduction of approximately £12.1 million, representing:
■ a reduction of approximately £16.4 million related to impairment requirements (see 1.10.1.2); and
■ an increase of approximately £4.3 million related to deferred tax impacts.
The above assessment is preliminary because not all transition work has been finalised. The actual impact
of adopting IFRS 9 on 1 January 2018 may change because:
■ IFRS 9 will require the Group to revise its accounting processes and internal controls and these changes
are not yet complete;
■ although parallel runs were carried out in the second half of 2017, the new systems and associated controls
in place have not been operational for a more extended period;
■ the Group has not finalised the testing and assessment of controls over its new IT systems and changes
to its governance framework;
■ the Group is refining and finalising its models for expected credit loss (ECL) calculations and further validations
will continue into 2018; and
■ the new accounting policies, assumptions, judgements and estimation techniques employed are subject
to change until the Group finalises its first financial statements that include the date of initial application.
1.10.1.1 Classification and measurement – financial assets
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business
model in which assets are managed and their cash flow characteristics.
IFRS 9 includes three principal classification categories for financial assets: measured at amortised cost,
fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL).
It eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated
as at FVTPL:
■ it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
■ its contractual terms give rise on specified dates to cash flows that are solely payments of principal and
interest (SPPI) on the principal amount outstanding.
A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated
as at FVTPL:
■ it is held within a business model whose objective is achieved by both collecting contractual cash flows
and selling financial assets; and
■ its contractual terms give rise on specified dates to cash flows that are SPPI on the principal amount outstanding.
The Group assessed the objective of the business model in which the financial assets are held at a portfolio
level and concluded that, for all portfolios reviewed, Management’s strategy focusses on earning contractual
interest revenue from the portfolios, rather than holding the portfolios for trading. For portfolios that have been
sold in the past, Management concluded that the sale of the portfolios were for the purposes of managing credit
risk. All financial assets will be classified as amortised cost, except derivatives which will be FVTPL.
For the purposes of assessing whether contractual cash flows are SPPI, ‘principal’ is defined as the fair value
of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money
for the credit risk associated with the principal amount outstanding during a particular period of time and for
other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a reasonable profit
margin. The Group considered the contractual terms on a portfolio basis and concluded that the contractual
cash flows of the portfolios are SPPI.
101
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
1. Basis of preparation continued
Impact assessment:
The Group has considered the changes in the classification and measurement criteria and has concluded that
there are no significant changes in the classification and measurement of the financial assets and estimated
that, on the adoption of IFRS 9 at 1 January 2018, the impact of these changes is immaterial.
1.10.1.2 Impairment
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward looking ECL model. Under IFRS 9 the measurement
of the ECLs depends on the staging of the financial assets. Entities are required to recognise a 12-month ECL on
initial recognition (Stage 1) and a lifetime ECL where there has been a significant increase in credit risk (Stage 2).
Where there is objective evidence of impairment and the financial asset is considered to be in default, or
otherwise credit impaired, then it is in Stage 3.
Key accounting judgements relating to impairment
Inputs into measurement of the ECLs
The following are the key inputs into the measurement of ECLs:
■ Probability of default (PD);
■ Loss given default (LGD); and
■ Exposure at default (EAD).
Probability of default
The Group has developed a credit grading system for all its asset classes and has aligned these to a common
master grading scale that has been aligned to the Standard and Poor grading scale. The Group operates both
a model based PD for its high volume portfolios such as Consumer Lending and Secured and has developed and
implemented a ‘slotting approach’ for the low volume and high value obligors in Development Finance, Business
Finance and large ticket Commercial property cases. Both processes deliver a measure of a point-in-time
measure of default.
For the model based portfolios the measure of PD is based on information available to the Group from credit
reference agencies and internal product performance data. For the slotted portfolios, the measure of PD relates
to attributes relating to financial strength, political and legal environment, asset/transaction characteristics,
strength of sponsor and security.
For each asset class, the Group has a proprietary approach to extrapolate its best estimate of the point-in-time
PD from 12 months to behavioural maturity, using economic response models that have been developed
specifically to forecast the sensitivity of PD to key macroeconomic variables. The Group has used three scenarios
to support its assessment of ECL. For its assessment of day one impact this includes a central view that has been
used for the 2018 budget, an alternative downside base case and an alternative upside base case. These
alternative base cases have been chosen to deliver a non-linearity in the final ECL number.
Loss given default
For Property portfolios, the LGD is generally broken down into two parts. These include the Group’s estimate
of the probability of possession given default, combined with the loss given possession. The Group has continued
to focus on the proportion of accounts that have not cured over an emergence period, rather than the proportion
of accounts that enter possession. The LGD is based on the Group’s estimate of a shortfall, based on the
difference between the property value after the impact of a market value decline and sale costs, and the loan
balance with the addition of unpaid interest and fees.
For Asset Finance, the LGD is based on the experience of losses on repossessed assets. The LGD on Block and
Wholesale portfolios is based on experience of losses supported by key judgements.
For the Consumer portfolio, the Group uses an estimate of the probability of charge-off, defined as six or more
payments in arrears, combined with an estimate of the expected write-off based on established contractual
forward flow arrangements for the sale of charge-off debt.
In all cases the LGD or its components are tested against recent experience to ensure that they remain current.
102
Shawbrook Group plc Annual Report and Accounts 2017 Exposure at default
EAD is designed to address increases in utilisation of committed limits and unpaid interest and fees that the Group
would ordinarily expect to observe to the point of default, or through to the point of realisation of the collateral.
ECL is measured on either a 12-month or lifetime basis depending on whether a significant increase in credit risk
has occurred since initial recognition, or whether the asset meets the definition of default.
Significant increase in credit risk (movement from Stage 1 to Stage 2)
The Group has identified a series of quantitative, qualitative and backstop criteria that will be used to determine
if an account has demonstrated a significant increase in credit risk, and therefore should move from Stage 1 to
Stage 2:
■ quantitative measures consider the increase in an account’s remaining lifetime PD at the reporting date
compared to the expected residual lifetime PD when the account was originated. The Group will segment
its credit portfolios into PD bands and has determined a relevant threshold for each PD band, where a
movement in excess of threshold is considered to be significant. These thresholds have been determined
separately for each portfolio based on historical evidence of delinquency;
■ qualitative measures include the observation of specific events such as short-term forbearance, payment
cancellation, historical arrears or extension to customer terms; and
■ IFRS 9 includes a rebuttable presumption that 30 days past due is an indicator of a significant increase in
credit risk. The Group considers 30 days past due to be an appropriate backstop measure and will not rebut
this presumption.
Default (movement to Stage 3)
The Group has identified a series of quantitative and qualitative criteria that will be used to determine if an
account meets the definition of default, and therefore should move to Stage 3:
■ when the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group
to actions such as realising security (if any is held);
■ when the borrower is more than 90 days past due on any material credit obligation to the Group; and
■ when a material credit obligation to the Group has gone past maturity or there is a degree of doubt that
the exit strategy for the obligation is likely.
In assessing whether a borrower is in default, the Group will consider indicators that are:
■ qualitative: e.g. breaches of covenant;
■ quantitative: e.g. overdue status and non-payment of another obligation of the same issuer to the Group; and
■ based on data developed internally and obtained from external sources.
The definition of default is aligned with the definition of ‘credit impaired’ and the regulatory definition of default.
Inputs into the assessment of whether a financial instrument is in default and their significance may vary over
time to reflect changes in circumstances.
Forward looking information
The Group incorporates forward looking information into the assessment of significant increase in credit risk
and the calculation of ECLs. The Group has identified the most significant macroeconomic factors including
house price inflation, unemployment rate and bank base rate.
These variables and their associated impact on PD, EAD and LGD have been factored into the ECL models.
The Group has determined an approach to the selection and application of multiple scenarios. The Group
does not have an in-house economics function and will therefore source economic scenarios from a third
party source to form the basis of the economic scenarios used.
The ECL model will require considerable judgement over how changes in economic factors affect ECLs,
which will be determined on a probability-weighted basis. The Group will consider three forward looking
scenarios on a probability-weighted approach.
103
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
1. Basis of preparation continued
Impact assessment
The most significant impact on the Group’s financial statements from the implementation of IFRS 9 is expected
to result from the new impairment requirements. Impairment losses will increase and become more volatile for
financial instruments in the scope of the IFRS 9 impairment model.
The Group has estimated that, on the adoption of IFRS 9 at 1 January 2018, the impact of the increase in loss
allowances (before tax) will be approximately £16.4 million.
1.10.1.3 Classification – financial liabilities
The classification of financial liabilities under IFRS 9 largely retains the existing requirements in IAS 39 except for
the presentation of changes in fair value due to own credit risk under other comprehensive income for liabilities
designated at FVTPL. The impact for the Group is immaterial.
1.10.1.4 Hedge accounting
When initially applying IFRS 9, the Group may choose to continue to apply the hedge accounting requirements
of IAS 39 instead of the requirements in Chapter 6 of IFRS 9.
The Group has elected to continue to apply IAS 39. However, the Group will provide the expanded disclosures
on hedge accounting introduced by IFRS 9’s amendments to IFRS 7 ‘Financial Instruments: Disclosures’ because
the accounting policy election does not provide an exemption from these new disclosure requirements.
1.10.1.5 Disclosures
IFRS 9 will require extensive new disclosures, in particular about credit risk, ECLs and hedge accounting.
1.10.1.6 Impact on capital planning
The Group’s regulator has issued guidelines on transition requirements for the implementation of IFRS 9. The
guidelines allow a choice of two approaches regarding recognition of the impact of adoption of the standard
on regulatory capital:
1. phasing in the full impact on a phased basis using transitional factors published in the amended regulation
EU No 575/2013; or
2. recognising the full impact on the day of adoption.
The Group has decided to adopt the first approach.
The principal impact on the Group’s regulatory capital of the implementation of IFRS 9 will arise from the new
impairment requirements.
Under current regulatory requirements, impairment provisions are dealt with under the standardised approach.
The capital requirement is calculated based on the gross exposures net of specific provisions – i.e. net exposure.
IFRS 9 is expected to increase the loss allowances associated with individual assets, and therefore the resulting
net exposure and the capital requirement will fall. However, this reduction in the capital requirement will be offset
by a scalar that has been published by the EU in its amended regulation EU No 575/2013 that aims to ensure
that firms do not benefit from this impact.
The Group’s assessment indicates that the impact on capital resources of the implementation of IFRS 9 for
the standardised portfolios will be a reduction in Common Equity Tier 1 (CET1) capital and total capital of
approximately £12.1 million before adjustments for phasing in, and a reduction in CET1 capital and total
capital is negligible as at 1 January 2018 after adjustments for phasing in.
1.10.1.7 Transition
The Group will record an adjustment to its opening 1 January 2018 retained earnings to reflect the application
of the new requirements of IFRS 9 and will not restate comparative periods. The Group estimates the transition
to IFRS 9 will reduce Shareholders’ equity by approximately £12.1 million after deferred tax as at 1 January 2018.
The impact on the Group’s CET1 capital ratio will reflect the recently published capital transitional arrangements.
This adjustment arises from the increase in the Group’s statement of financial position loan loss allowances
as a result of the application of IFRS 9 requirements.
104
Shawbrook Group plc Annual Report and Accounts 2017 The Group continues to refine, monitor and validate certain elements of the impairment models and related
controls ahead of full reporting of IFRS 9 impacts later in 2018.
1.10.2 IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 establishes the principles to apply when reporting information about the nature, amount, timing and
uncertainty of revenue and cash flows from a contract with a customer. The standard introduces a five step
revenue recognition model to be applied to all contracts with customers to determine whether, how much,
and when revenue is recognised.
The new standard is effective from 1 January 2018, and replaces IAS 11 ‘Construction Contracts’, IAS 18 ‘Revenue’,
IFRIC 13 ‘Customer Loyalty Programmes’, IFRIC 15 ‘Agreements for the Construction of Real Estate’, IFRIC 18
‘Transfers of Assets from Customers’ and SIC 31 ‘Revenue – Barter Transactions Involving Advertising Services’.
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 in the same line of
business exchange non-monetary assets to facilitate sales to other parties.
Assessments performed to date by the Group indicate adoption of IFRS 15 will not have a material impact on the
Group due to the nature of the products and services provided to clients. Assessments are ongoing to determine
the impact that IFRS 15 adoption will have on a continuing basis.
Early adoption of IFRS 15 is permitted, however the Group does not intend to adopt the standard until the date
it becomes effective.
1.10.3 IFRS 16 ‘Leases’
IFRS 16 introduces a single lessee accounting model that requires a lessee to recognise all leases (subject to
certain exemptions) on-balance sheet. A lessee recognises a right-of-use asset representing its right to use the
underlying asset and a lease liability representing its obligation to make lease payments. There are optional
exemptions for short-term leases and leases of low value items. Lessor accounting is largely unchanged.
The new standard is effective from 1 January 2019 and replaces IAS 17 ‘Leases’, IFRIC 4 ‘Determining whether an
Arrangement Contains a Lease’, SIC-15 ‘Operating Leases – Incentives’ and SIC-27 ‘Evaluating the Substance of
Transactions Involving the Legal Form of a Lease’. It applies to all leasing arrangements.
The Group is considering the potential impact on its consolidated financial statements. Initial assessments
indicate IFRS 16 will not have a material impact as the Group is mainly a lessor of assets. Further assessments
will be made to evaluate the impact that IFRS 16 adoption will have on a continuing basis. The Group has not yet
decided whether it will use the optional exemptions.
Early adoption of IFRS 16 is permitted if IFRS 15 ‘Revenue from Contracts with Customers’ has also been applied,
however the Group does not intend to adopt the standard until the date it becomes effective.
1.10.4 IFRS 2 amendment ‘Classification and Measurement of Share-based Payment Transactions’
In June 2016 amendments to IFRS 2 were issued in relation to the classification and measurement of share-based
payment transactions. The amendments specifically relate to: effects of vesting conditions on the measurement
of a cash-settled share-based payment transaction; classification of a share-based payment transaction with net
settlement features for withholding tax obligations; accounting where a modification to the terms and conditions
of a share-based payment transaction changes its classification from cash-settled to equity-settled.
The amendments are effective from 1 January 2018.
105
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
2. Operating segments
Accounting policy
The Group determines operating segments according to similar economic characteristics and the nature of
its products and services in accordance with IFRS 8 ‘Operating Segments’. Management reviews the Group’s
internal reporting based around these segments in order to assess performance and allocate resources.
Segment performance is evaluated based on the underlying profit or loss and is measured consistently with
underlying profit or loss in the consolidated financial statements. Segment results are regularly reviewed and
reported to the Board of Directors to allocate resources to segments and to assess their performance.
Operating segments are reported in a manner consistent with the internal reporting provided to the Board.
The Group Executive Committee has been determined to be the Chief Operating Decision Maker for the Group.
The Group has four reportable operating segments as described below which are based on the Group’s three
lending divisions plus a central segment which represents the savings business, central functions and shared
central costs.
The following summary describes the operations in each of the Group’s reportable segments:
Property Finance
Provides mortgages for investors, businesses and personal customers. It serves professional landlords and
property traders in residential and commercial asset classes across long-term and shorter-term finance.
It lends to trading businesses to fund the acquisition and refinancing of business premises. The division serves
the needs of personal customers through the provision of loans secured by second charge on the main residence
and increasingly through specialist areas of first charge lending.
Business Finance
Provides the following propositions
■ the Regional Business Centres provides finance solutions to established businesses in UK SME markets,
principally through a direct product offering. The Centres primarily provide leasing finance for business
critical assets operated by established UK SME businesses, and working capital solutions in the form of
invoice discounting and asset-based lending;
■ the Structured Finance proposition includes lending to SME finance companies with security against
receivables within their portfolios. The Structured Finance product set provides wholesale finance and block
discounting to smaller UK financial institutions to allow customers to release cash and grow their businesses.
Loans are secured against receivables within the customers’ portfolios, with the security given by the ultimate
borrower taking the form of a hard asset or a pool of loan receivables;
■ the Specialist Asset Finance proposition includes leasing and hire purchase finance solutions in specialist
UK SME market segments such as marine and aviation, healthcare and taxis; and
■ Shawbrook International Limited provides finance solutions to consumers and SMEs in Jersey,
with a growing range of products designed to address a breadth of needs in the Jersey market.
Consumer Lending
Provides unsecured loans for a variety of purposes, primarily focused on home improvements, holiday ownership,
personal loans and certain retailers.
Central
As well as common costs, Central includes the Group’s Treasury function and Consumer Savings business
which are responsible for raising finance on behalf of the lending segments.
106
Shawbrook Group plc Annual Report and Accounts 2017 Information regarding the results of each reportable segment and their reconciliation to the total results of the
Group is 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.
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 table below includes a reconciliation
between the statutory results and the underlying basis.
Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to segments as they
are managed on a Group basis.
Year ended 31 December 2017
Interest and similar income
Interest expense and similar charges
Net interest income/(expense)
Operating lease rentals
Depreciation on operating leases
Net income from operating leases
Fee and commission income
Fee and commission expense
Net fee and commission (expense)/income
Fair value gains/(losses) on financial instruments
Property
Finance
£m
Business Consumer
Lending
Finance
£m
£m
Central
£m
Total
£m
178.4
76.5
(41.1 )
(13.2 )
51.8
(8.2 )
6.6
313.3
(13.5 )
(76.0 )
137.3
–
–
–
0.4
(3.3 )
(2.9 )
0.1
63.3
12.3
(10.6 )
1.7
11.2
(0.7 )
10.5
–
43.6
(6.9 )
237.3
–
–
–
0.7
(8.5 )
(7.8 )
0.5
–
–
–
–
(0.3 )
(0.3 )
(0.4 )
12.3
(10.6 )
1.7
12.3
(12.8 )
(0.5 )
0.2
Net operating income/(expense)
134.5
75.5
36.3
(7.6 )
238.7
Administrative expenses
(17.1 )
(16.7 )
(13.0 )
(80.0 )
(126.8 )
Impairment losses on loans and advances to customers
(2.4 )
(8.5 )
(12.4 )
Provisions for liabilities and charges
–
–
(2.5 )
–
0.4
(23.3 )
(2.1 )
Total operating expenses
(19.5 )
(25.2 )
(27.9 )
(79.6 )
(152.2)
Statutory profit/(loss) before taxation
115.0
50.3
8.4
(87.2 )
Underlying adjustments
0.4
–
–
19.1
86.5
19.5
Profit/(loss) before taxation on an underlying basis
115.4
50.3
8.4
(68.1 )
106.0
Income tax charge on an underlying basis
Profit after taxation on an underlying basis
Assets
Liabilities
(26.8 )
79.2
3,187.0
1,076.0
617.4
878.3
5,758.7
–
–
–
(5,135.6)
(5,135.6)
Net assets/(liabilities)
3,187.0
1,076.0
617.4
(4,257.3 )
623.1
107
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
2. Operating segments continued
Restated1
Year ended 31 December 2016
Interest 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/(expense)
Fair value gains on financial instruments
Net operating income
Administrative expenses
Property
Finance
£m
Business Consumer
Finance1
Lending
£m
£m
Central
£m
154.9
79.3
(52.8)
(21.2 )
102.1
58.1
–
–
–
–
0.4
(2.7 )
(2.3)
–
13.5
0.1
(11.3 )
2.3
10.5
(0.6 )
9.9
–
44.7
(9.9 )
34.8
–
–
–
–
0.3
(2.0 )
(1.7 )
–
99.8
70.3
33.1
5.5
0.8
6.3
–
–
–
–
–
(0.4 )
(0.4 )
0.5
6.4
Total1
£m
284.4
(83.1)
201.3
13.5
0.1
(11.3 )
2.3
11.2
(5.7 )
5.5
0.5
209.6
(15.2 )
(16.3)
(10.8 )
(53.7 )
(96.0 )
Impairment losses on loans and advances to customers
(2.1 )
(14.5 )
(7.7)
Provisions for liabilities and charges
–
–
–
–
(1.1 )
(24.3 )
(1.1 )
Total operating expenses
(17.3 )
(30.8)
(18.5)
(54.8 )
(121.4 )
Statutory profit/(loss) before taxation
82.5
39.5
14.6
(48.4 )
Underlying adjustments
–
–
–
3.2
Profit/(loss) before taxation on an underlying basis
82.5
39.5
14.6
(45.2 )
88.2
3.2
91.4
(24.3 )
67.1
Income tax charge on an underlying basis
Profit after taxation on an underlying basis
Assets
Liabilities
2,519.1
1,104.4
465.0
558.1
4,646.6
–
–
–
(4,209.4)
(4,209.4 )
Net assets/(liabilities)
2,519.1
1,104.4
465.0
(3,651.3)
437.2
1 Refer to Note 1.8 for details of the reclassification.
108
Shawbrook Group plc Annual Report and Accounts 2017
3. Interest and similar income
Accounting policy
Revenue represents income derived from loans and advances to customers, operating lease rentals and fees
and commissions receivable.
Interest income and expense are recognised in the statement of profit and loss 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 EIR, 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 EIR, 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 ‘Financial Instruments: Recognition and Measurement’ 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 exhibit homogenous
behavioural attributes.
The key assumptions applied by Management in the EIR methodology are the 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. The EIR behavioural models are 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.
Management continues to perform sensitivity analyses on the EIR models applied. A decrease in the
redemption curve of a loan by 10% would result in a net decrease in the statement of profit and loss of
£2.6 million. The movement in the sensitivity can be attributed to Property Finance and Consumer Lending.
Property Finance is expected to show an income of £1.4 million mainly due to income received from early
settlement fees. Consumer Lending is expected to show an expense of £3.7 million mainly attributable to
the acceleration of the amortisation of broker fees.
Interest paid by customers
Interest received from derivative financial instruments
Interest on loans and advances to banks
Interest and similar income
1 Refer to Note 1.8 for details of the reclassification.
Restated1
2016
£m
2017
£m
307.1
279.0
4.4
1.8
3.7
1.7
313.3
284.4
The interest income recognised during the year on loans impaired was £2.7 million (2016: £2.1 million). The Group
did not capitalise any interest during the year.
109
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
4. Interest expense and similar charges
Interest paid to depositors
Interest on amounts due to banks
Interest on subordinated debt liability
Other interest
Interest expense and similar charges
5. Fee and commission income
Fee income on loans and advances to customers
Credit facility related fees
Fee and commission income
1 Refer to Note 1.8 for details of the reclassification.
6. Administrative expenses
Accounting policy
2017
£m
67.3
1.8
6.5
0.4
2016
£m
73.0
1.2
6.5
2.4
76.0
83.1
Restated1
2016
£m
9.0
2.2
11.2
2017
£m
10.4
1.9
12.3
Payroll costs
Staff costs include salaries and social security costs and are recognised over the period in which the payments
relate. Cash bonus awards are recognised to the extent that the Group has a present obligation to its employees
that can be measured reliably and are recognised over the period of service that employees are required to
work to qualify for the payment.
The accounting policies for employee share-based payments are set out in Note 10.
Leases
If a lease agreement in which the Group is a lessee transfers the risks and rewards of the asset, the lease is
recorded as a finance lease and the related asset is capitalised. At inception, the asset is recorded at the lower
of the present value of the minimum lease payments or fair value and is depreciated over the estimated useful
life. The lease obligations are recorded as borrowings.
If the lease does not transfer the risks and rewards of ownership of the asset, the lease is recorded as an
operating lease.
Operating lease payments are charged to the statement of profit and loss on a straight-line basis over the lease
term unless a different systematic basis is more appropriate. Where an operating lease is terminated before
the lease period has expired, any payment required to be made to the lessor in compensation is charged to
the statement of profit and loss in the period in which termination is made.
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Shawbrook Group plc Annual Report and Accounts 2017
Payroll costs
Depreciation (excluding operating lease assets)
Amortisation of intangible assets
Operating lease rentals – land and buildings
Other administrative expenses1
Administrative expenses
Notes
8
16
17
2017
£m
66.1
2.6
4.0
1.6
52.5
126.8
2016
£m
54.1
2.2
2.7
1.8
35.2
96.0
1 Other administrative expenses include £13.2m (2016: £nil) legal and consultancy costs relating to the Marlin Bidco Limited acquisition of
the Company.
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
All other services
Total Auditor’s remuneration
2017
£000
2016
£000
100
100
466
–
4
135
129
58
892
423
28
101
133
39
106
930
8. Employees
The average number of persons employed by the Group (including Directors) during the year was as follows:
Property Finance
Business Finance
Consumer Lending
Central
Average number of employees on a full-time equivalent basis
2017
No.
2016
No.
143
133
43
352
671
122
139
44
264
569
111
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
8. Employees continued
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Social security costs
Pension costs
Total payroll costs
2017
£m
58.0
5.6
2.5
2016
£m
46.9
5.0
2.2
66.1
54.1
9. Employee retirement obligations
Accounting policy
The Group does not operate a defined benefit pension scheme. Pension contributions are paid to staff
members’ and Directors’ group personal pension arrangements. The costs of the Group’s contributions
to such arrangements are recognised as an employee benefit expense when they are due.
The Group made contributions of £2.5 million (2016: £2.2 million) during the year.
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
‘Share-based Payment’. 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 is adjusted to reflect the actual number of awards for which the related
services and non-market vesting conditions are expected to be met such that the amount ultimately
recognised as an expense is based on the number of awards that do meet the related service and non-market
performance conditions at the vesting date.
For share-based payment awards with market performance conditions or non-vesting conditions the grant
date fair value of the award is measured to reflect such conditions and there is no true-up for differences
between expected and actual outcomes.
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.
Expected volatility is determined by reviewing the share price volatility for the expected life of each option/
scheme up to the date of the grant.
Cancellations of share-based payments during the vesting period are accounted for as accelerated vesting.
The share-based payment is recognised immediately at the amount that would have been recognised for
services received over the remainder of the vesting period, as if the service and the non-market performance
conditions were met for the cancelled awards.
Critical accounting estimates and judgements
Critical accounting estimates and judgements have been discussed below within the various categories
of share-based payments.
112
Shawbrook Group plc Annual Report and Accounts 2017
The employee share-based payment charge comprises:
Save-as-you-earn schemes (SAYE)
Performance share plan (PSP) – 2015
Performance share plan (PSP) – 2016
Performance share plan (PSP) – 2017
Deferred share bonus plan (DSBP) – 2017
Share-based payments
2017
£m
2016
£m
0.8
1.4
1.7
2.4
1.2
7.5
0.1
1.6
3.1
–
–
4.8
Movements in the number of share-based awards are as follows:
No. of shares
At 1 January 2017
Granted
Vested
Lapsed
At 31 December 2017
DSBP
2017
SAYE
2016
SAYE
2015
PSP
2017
PSP
2016
PSP
2015
Total
–
1,298,794
160,095
–
1,792,612
1,277,471
4,528,972
301,615
–
–
1,547,183
–
–
1,848,798
(301,615 )
(245,361 )
(123,108 )
(269,706 ) (1,089,905 )
(962,750 ) (2,992,445 )
–
–
(1,053,433 )
(36,987 )
(1,277,477 )
(702,707 )
(314,721 ) (3,385,325 )
–
–
–
–
–
–
Accelerated vesting of the schemes
Subsequent to the acquisition of the Group by Marlin Bidco Limited, there was an issue of 2,586,879 £0.01 shares
and the vesting of all share option schemes was accelerated. The acceleration of the share options is recognised
as if the service and the non-market performance conditions of all schemes were met. Subsequent to vesting,
all shares were repurchased by Marlin Bidco Limited at the offer price of £3.40. The total acceleration charge
of £5.9m is included in the total charge of £7.5m.
Prior to the acquisition, the following schemes were granted (and subsequently accelerated):
Deferred share bonus plan (DSBP) – 2017 plan
During March 2017, 301,615 awards were granted to selected members of Senior Management of which the share
price at grant date was £3.14. The scheme was 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. Each
award was structured as a nil cost option with no performance conditions attached, although the individuals were
subject to continued employment until March 2020.
Save-as-you-earn schemes (SAYE) – 2015 and 2016
In October 2015, the SAYE scheme was introduced for all employees. The scheme provided 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 had no restrictions, save those restrictions applying
as a matter of law, regulation and the Company’s dealing code. The SAYE scheme was governed by the
Company’s Articles of Association. The scheme was 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. The fair value of the call options was calculated as £0.71. The awards generally required
employees to remain in employment over the vesting period but were not subject to performance conditions after
the grant date. The awards vested over a period of three years.
In October 2016, a further SAYE scheme was introduced for all employees. The scheme’s terms and conditions were
the same as those of the 2015 scheme. The fair value of the call options for this scheme was calculated as £0.66.
The awards vested over a period of three years.
113
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
10. Employee share-based payment transactions continued
The call options were valued using the Black-Scholes valuation model. The assumptions used were as follows:
Assumptions
Share price at grant date
Expected volatility
Dividend yield
Risk-free rate of return
Weighted average contractual life (years) at grant date
Exercise price
2016
Scheme
2015
Scheme
£2.48
£3.10
30.80%
25.90%
3.31%
0.19%
3.17
£1.87
2.08%
0.74%
3.17
£2.60
Performance Share Plan (PSP) – 2017 plan
During 2017, 1,547,183 share awards were granted to a set of individuals. These individuals were entitled to acquire
ordinary shares in Shawbrook Group plc, subject to performance conditions. The scheme was 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 performance conditions for the 2017 tranche related to the growth in total Shareholder return (TSR) over the
vesting period for 20% of each award, the customer and employee performance condition at the date of vesting
for 20% of each award, the risk performance over the vesting period for 20% of each award and the annual
compound growth in the earnings per share (EPS) over the vesting period for 40% of each award. The outcome
of the performance conditions, as assessed by the Remuneration Committee, determined the vesting outcome
of the awards and the shares available for exercise.
The performance condition relating to the TSR element was measured in relation to the ranking of the Group’s
TSR within a comparator group of companies selected by the Remuneration Committee.
The fair value of the shares in the EPS, customer and employee performance condition and risk performance
elements of the awards was based on the share price at the date of the grant. The fair value of these awards
was £2.94.
The fair value of the shares in the TSR award was calculated using a Monte Carlo model. Set out below is a
summary of the key data and assumptions used to calculate the fair value of the TSR award:
Assumptions
Share price at grant date
Expected volatility
Dividend yield
Risk-free rate of return
£3.14
35% p.a.
2.50% p.a.
0.16% p.a.
The fair value of the shares in the TSR award was £1.89.
Performance Share Plan (PSP) – 2016 plan
During 2016, 2,181,165 share awards were granted to a set of individuals. These individuals were entitled to acquire
ordinary shares in Shawbrook Group plc, subject to performance conditions. The scheme was 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. This amount included a number of options related to new hires as
discussed in ‘New hires – 2016’.
The performance conditions for the 2016 tranche related to the growth in TSR over the vesting period for 20%
of each award, the net promoter score at the date of vesting for 20% of each award, the risk performance over
the vesting period for 20% of each award and the annual compound growth in the EPS over the vesting period for
40% of each award. The outcome of the performance conditions, as assessed by the Remuneration Committee,
determined the vesting outcome of the awards and the shares available for exercise.
114
Shawbrook Group plc Annual Report and Accounts 2017
The performance condition relating to the TSR element was measured in relation to the ranking of the Group’s
TSR within a comparator group of companies selected by the Remuneration Committee.
The fair value of the shares in the EPS, net promoter score and risk performance elements of the awards was
based on the share price at the date of the grant discounted for any expected dividends over the vesting period.
The dividend adjusted fair value of these awards was £2.63.
The fair value of the shares in the TSR award was calculated using a Monte Carlo model with 100,000 simulations.
Set out below is a summary of the key data and assumptions used to calculate the fair value of the TSR award:
Assumptions
Share price at grant date
Expected volatility
Dividend yield
Risk-free rate of return
£2.87
30% p.a.
2.83% p.a.
0.51% p.a.
The fair value of the shares in the TSR award was £1.46.
Performance Share Plan (PSP) – 2015 plan
During 2015, a number of share awards were granted to a set of individuals other than Directors. These individuals
were entitled to receive an award to acquire a specific number of ordinary shares in Shawbrook Group plc, subject
to performance conditions. The scheme was 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 were subject to performance conditions, namely the Group earning a defined underlying profit before
tax in 2017, and subject to the Group maintaining its threshold capital and liquidity requirements.
The fair value of the shares was 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 was £3.25.
New hires – 2016
During 2016, a number of senior hires were, under the terms of their employment with the Group, granted options
over shares of £0.01 in the Company, in accordance with the ‘Performance Share Plan – 2016 plan’ discussed
above, in order to compensate them for forfeited awards from previous employment. A total of 897,403 options
were granted that vested over the following two years.
11. Directors’ remuneration
Directors’ emoluments
Contributions to money purchase scheme
Directors’ remuneration
2017
£000
2016
£000
5,285.3
3,328.9
–
13.0
5,285.3
3,341.9
Included in the current year Directors’ emoluments is £nil (2016: £1.1 million) relating to new hires (refer to Note 10
for more information) and £nil (2016: £228,000) relating to termination payments.
115
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
12. Taxation
Accounting policy
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the statement
of profit and loss 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 statement of financial position reporting date, and any adjustment to
tax payable in respect of previous years.
Recognised in the statement of profit and loss
Current tax:
Current year
Adjustment in respect of prior years
Total current tax
Deferred tax:
Origination and reversal of temporary differences
Adjustment in respect of prior years
Total deferred tax
Total tax charge
Tax reconciliation
Profit before tax
Implied tax charge thereon at 19.25% (2016: 20%)
Adjustments:
Banking surcharge
Prior year adjustment
Disallowable expenses and other permanent differences
2017
£m
2016
£m
24.2
(1.1 )
23.1
1.3
0.9
2.2
27.4
(0.2 )
27.2
(4.0 )
0.2
(3.8 )
25.3
23.4
2017
£m
86.5
16.7
4.9
(0.2 )
3.9
2016
£m
88.2
17.6
5.4
–
0.4
Total tax charge
25.3
23.4
Reduction in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) and further reductions to
17% (effective 1 April 2020) were substantively enacted on 16 March 2016. This will reduce the Company’s future
current tax charge accordingly.
The deferred tax asset at 31 December 2017 has been calculated based on an aggregation of a rate of 18%
substantively enacted at the statement of financial position reporting date and the additional 8% of tax suffered
in relation to the banking surcharge that will unwind over the remaining life of the underlying assets with which
they are associated.
116
Shawbrook Group plc Annual Report and Accounts 2017
13. Loans and advances to customers
Accounting policy
Loans and advances
The Group’s loans and advances to banks and customers are classified as loans and receivables. Loans and
receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in
an active market, whose recoverability is based solely on the credit risk of the customer and where the Group
has no intention of trading the loan or receivable. Loans and receivables are initially recognised at fair value
including direct and incremental transaction costs. Subsequent recognition is at amortised cost using the
EIRM, less any provision for impairment.
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
statement of profit and loss. 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 statement of profit and loss, 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
Fair value adjustments for hedged risk
Total loans and advances to customers
2017
£m
2016
£m
4,418.7
3,639.5
79.8
93.6
348.0
316.9
(2.2 )
0.4
4,844.3
4,050.4
At 31 December 2017, loans and advances to customers of £1,081.7 million (2016: £695.2 million) were positioned
with the Bank of England for use as collateral under its funding schemes.
Loan receivables
Gross loan receivables
Less: allowances for impairment losses
Net loan receivables
2017
£m
2016
£m
4,438.4
3,653.1
(19.7 )
(13.6)
4,418.7
3,639.5
The Group provides finance lease and instalment credit agreements to customers for a variety of assets including
plant and machinery, taxis, aviation and marine vessels. These assets provide security against the gross
receivables. Included within instalment credit receivables are block discounting facilities of £106.6 million
(2016: £107.5 million).
117
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
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
118
2017
£m
47.0
49.5
3.0
99.5
(10.6 )
(9.1 )
79.8
37.5
39.7
2.6
79.8
2016
£m
59.5
55.2
1.5
116.2
(14.1 )
(8.5 )
93.6
47.1
45.2
1.3
93.6
2017
£m
2016
£m
162.5
204.9
18.1
165.9
182.6
6.6
385.5
355.1
(34.7 )
(35.9 )
(2.8 )
(2.3 )
348.0
316.9
143.3
186.8
17.9
348.0
2017
£m
40.1
161.5
201.6
143.3
167.3
6.3
316.9
2016
£m
43.9
128.7
172.6
Shawbrook Group plc Annual Report and Accounts 2017
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 an 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;
■ initiation of bankruptcy proceedings;
■ the customer being granted a concession that would otherwise not be considered; and
■ observable data indicating that there is a measurable decrease in the estimated future cash flows from
a portfolio of assets since the initial recognition of those assets, although the decrease cannot yet be
identified with the individual financial assets in the portfolio.
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 EIR. 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 statement
of profit and loss. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is
the current EIR 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 a collective provision is applied.
When a loan or receivable is not economic to recover, it is written off against the related provision for loan
impairments. Such loans are written off after all the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent recoveries of amounts previously written off are
recognised directly in the statement of profit and loss through the impairment line as post write-off recoveries.
If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognised (such as an improvement in the
customer’s credit rating), the previously recognised impairment loss is reversed by adjusting the impairment
allowance. The amount of reversal is recognised in statement of profit and loss.
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 are 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 in Note 31.1.1.
119
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
14. Impairment provisions on loans and advances to customers continued
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 individual provisions, statistical models are used for consumer and
second charge loans, whilst provisions for first charge loans, asset finance and business finance are assessed
on a loan-by-loan basis. Where models are used for individual provisions, score cards are used to calculate PDs
based on the recent performance of the portfolios. LGDs are calculated taking into account the valuations of
available collateral, and the experienced forced sale discounts when collateral has been realised. These factors
are applied to all the aged portfolios of debt at each statement of financial position reporting date to derive
the individual impairment requirement.
For the purpose of collective impairment, financial assets are grouped on the basis of similar risk characteristics.
For some portfolios the collective impairment requirement is based on the forecast cost of risk, being the
annualised percentage loss per monetary unit of loan across the loan portfolios. These loss rates are multiplied
by emergence periods, currently six months for all portfolios (2016: six months), for each class of loan to
calculate the amount of loss which is incurred at the statement of financial position reporting date but not
yet individually identified.
The key assumptions, being the emergence periods, forced sale discount on the Residential portfolio,
cost of risk and PD of the Residential and Consumer portfolios, 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 example, for loans and advances:
■ change of one month in the emergence period across all portfolios, would change the collective provision
by £1.5 million (2016: £0.9 million);
■ a change in the cost of risk rate of 10 basis points, would change the collective provision by £2.2 million
(2016: £1.7 million);
■ an increase in the forced sale discount on the Residential portfolio of 5%, would increase the individual
provisions by £0.8 million (2016: £0.5 million); and
■ an increase in the PD on the Residential and an increase in the cost of risk on the Consumer portfolios
of 10%, would increase the individual provisions by £2.4 million (2016: £1.1 million).
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
Amounts written off in the year
Amounts recovered in the year
At 31 December
Analysis of impairment type:
Loan receivables
Finance lease receivables
Instalment credit receivables
At 31 December
120
2017
£m
24.4
23.3
2016
£m
13.5
24.3
(18.6 )
(15.2 )
2.5
31.6
19.7
9.1
2.8
31.6
1.8
24.4
13.6
8.5
2.3
24.4
Shawbrook Group plc Annual Report and Accounts 2017
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 and foreign exchange in the Group’s assets and liabilities. Derivatives which are not
designated as hedging instruments in qualifying hedge relationships are used to manage the Bank’s exposure
to interest rate and foreign exchange risk.
The Group uses interest rate swaps and options 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.
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 (at a benchmark interest rate, typically
overnight indexed swap or its equivalent) 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 applies the exemption under IFRS 9 ‘Financial Instruments’ to continue to apply the hedge
accounting rules as per IAS 39 ‘Financial Instruments: Recognition and Measurement’, and as such all hedge
relationships must be clearly and formally documented at inception and the derivative must be expected to
be highly effective at mitigating the hedged risk.
The Group undertakes transactions denominated in foreign currencies; consequently exposures to exchange
rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising
forward foreign exchange contracts.
Fair value hedge
The change in the fair value of a hedging instrument is recognised in the statement of profit and 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. Where hedging gains/losses
are recognised in the statement of profit and loss they are recognised on the same line as the hedged item.
The Group discontinues hedge accounting only when the relationship (or a part thereof) ceases to meet the
qualifying criteria. This includes when the hedging instrument is sold or expires. The fair value adjustment to the
carrying amount of the hedged item, for which the EIR method is used, arising from the hedged risk is amortised
to the statement of profit and loss commencing no later than the date when hedge accounting is discontinued.
Unobservable valuation differences on initial recognition
The transaction price in the market in which derivative transactions are undertaken may be different from the
fair value of the derivative transaction. On initial recognition the fair value will be adjusted to bring it in line with
the transaction price (i.e. day 1 profit or loss will be deferred by including it in the initial carrying amount of the
asset or liability).
121
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
15. Derivative financial instruments continued
Derivatives held for risk management
The Group uses derivatives to reduce exposure to market risks, and not for trading purposes. The Group uses
the International Swaps and Derivatives Association Master Agreement to document these transactions in
conjunction with a Credit Support Annex. The following table, prepared under IAS 39, analyses derivatives
held for risk management purposes by type of instrument:
Interest rate swaps:
Assets
Liabilities
Interest rate options:
Liabilities
Foreign exchange swaps:
Liabilities
At 31 December 2017
Interest rate swaps:
Assets
Liabilities
Foreign exchange swaps:
Liabilities
At 31 December 2016
Gains and losses from derivatives and hedge accounting are as follows:
Fair value gain on financial instruments
Fair value loss on hedged risk
Fair value gain on financial instruments
Notional
Amount
£m
Fair
Value
£m
389.0
189.0
1.8
(0.3 )
500.0
(2.8 )
33.3
1,111.3
485.0
39.0
16.4
540.4
2017
£m
3.9
(3.7 )
0.2
(0.3 )
(1.6 )
5.2
(0.4 )
–
4.8
2016
£m
2.0
(1.5 )
0.5
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
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 payable
by one party to the other and the agreements terminated.
Under 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.
122
Shawbrook Group plc Annual Report and Accounts 2017
The Group’s property loan portfolio includes loans whose interest rate terms are referenced to the three-month
LIBOR index, but with a minimum reference rate of 0.75%. On 29 March 2017, the Group sold interest rate options
with a nominal value of £500 million into the wholesale market in order to hedge the Group’s interest rate position
against possible increases in the reference rate.
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 those that are subject to collateral arrangements only (e.g. loans and advances).
Amounts subject to enforceable netting arrangements
Effect of offsetting on
statement of financial position
Related amounts
not offset
Net amount
reported on
statement of
financial
position
£m
Gross
amount
£m
Amount
offset
%
Cash
collateral
£m
Net
amount
£m
Amount not
subject to
enforceable
netting
arrangements
£m
At 31 December 2017
Derivative financial instruments – assets
Derivative financial instruments – liabilities
Total financial instruments
At 31 December 2016
Derivative financial instruments – assets
Derivative financial instruments – liabilities
Total financial instruments
1.8
(3.4 )
(1.6 )
5.2
(0.4 )
4.8
–
–
–
–
–
–
1.8
(3.4 )
(1.6 )
5.2
(0.4 )
4.8
1.8
(3.4 )
(1.6 )
5.2
(0.4 )
4.8
–
–
–
–
–
–
–
–
–
–
–
–
Collateral amounts (cash and non-cash financial collateral) are reflected at their fair value; however, this amount
is limited to the net statement of financial position exposure in order not to include any over-collateralisation.
Details of derivatives designated as hedging instruments in qualifying hedging relationships are provided under
‘Hedge accounting’ below.
Hedge accounting
Fair value hedges of interest rate risk and foreign currency risk
The Group uses interest rate swaps and cross currency swaps to hedge its exposure to changes in the fair values
of fixed rate loans and advances to customers in respect of a benchmark interest rate (mainly three-month LIBOR)
and foreign currency risks (mainly Euro and US Dollar). Interest rate swaps are matched to specific issuances of
fixed rate loans.
The Group’s approach to managing market risk, including interest rate risk and foreign currency risk, is discussed
in Note 31. The Group hedges interest rate risk only to the extent of benchmark interest rates. The benchmark
interest rate is a component of interest rate risk that is observable in the relevant environments. Hedge accounting
is applied where economic hedge relationships meet the hedge accounting criteria.
The Group does not apply a credit valuation adjustment or debit valuation adjustment as the Group’s portfolio
is fully collateralised. The Group does not apply funding fair value adjustment to its derivative exposures as it
deems the adjustment to be immaterial.
When fair value hedge accounting is applied by the Group, the Group assesses whether the derivative designated
in each hedge relationship is expected to be and has been highly effective in offsetting the changes in fair value
of the hedged item using linear regression.
123
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
15. Derivative financial instruments continued
Under the Group policy, in order to conclude that a hedge relationship is effective, all of the following criteria
should be met:
■ There is a formal designation and written documentation at the inception of the hedge.
■ The effectiveness of the hedging relationship can be measured reliably. This requires the fair value of the
hedging instrument, and the fair value of the hedged item with respect to the risk being hedged, to be reliably
measurable.
■ The hedge is expected to be highly effective in achieving fair value offsets in accordance with the original
documented risk management strategy.
■ The hedge is assessed and determined to be highly effective if changes in the fair value of the hedging
instrument, and changes in the fair value or expected cash flows of the hedged item attributable to the hedged
risk, offset within the range of 80-125%.
In these hedge relationships, the main sources of ineffectiveness relates to the modelled prepayment behaviour
and the assumptions that are used in modelling this behaviour. There were no other sources of ineffectiveness in
these hedge relationships.
Fair value gains on derivatives held in qualifying fair value hedging relationships and the hedging gain or loss
on the hedged items are included in net interest income.
At 31 December 2017, the Group held the following interest rate swaps as hedging instruments in fair value hedges:
At 31 December 2017
Interest rate risk:
Nominal amount (£m)
Average fixed interest rate
Maturity
Less than
1 month
1-3
months
3 months
– 1 year
1-5 More than
5 years
years
–
–
–
–
307.0
740.0
31.0
1.17%
1.16%
0.94%
Fair value hedges
The amounts relating to items designated as hedging instruments and hedge ineffectiveness were as follows:
Nominal
amount
£m
Carrying amount
Assets
£m
Liabilities
£m
Statement
of financial
position
line item
Change in fair
value used for
calculating
hedge
ineffectiveness
£m
Ineffectiveness
recognised
in statement
of profit
and loss
£m
Statement
of profit
and loss
line item
£m
At 31 December 2017
Interest rate risk:
Interest rate swaps
389.0
1.8
–
Derivative
financial
assets
–
–
–
Interest rate swaps
189.0
–
(0.3 )
Interest rate options
500.0
–
(2.8 )
Derivative
financial
liabilities
Derivative
financial
liabilities
(0.7 )
4.6
Fair value
gains on
financial
0.1 instruments
Fair value
gains on
financial
0.1 instruments
124
Shawbrook Group plc Annual Report and Accounts 2017
The amounts relating to items designated as hedged items were as follows:
Accumulated amount
of fair value hedge
adjustments on the
hedged item included
in the carrying amount
of the hedged item
Carrying amount
At 31 December 2017
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Loans and advances
to customers
1,227.1
–
4.1
–
Customers deposits
–
407.0
–
(1.9 )
Change in
value used for
calculating
hedge
ineffectiveness
£m
Accumulated
amount of
fair value
hedge
adjustments
£m
(3.7)
(3.7)
–
0.5
Statement
of financial
position
line item
Loans and
advances to
customers
Customer
deposits
16. Property, plant and equipment
Accounting policy
Operating leases
Included within property, plant and equipment are assets leased to customers under operating leases.
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 statement of profit and loss on a straight-line basis over the estimated
useful lives of each part of an item of plant and equipment as follows:
■ office equipment
3/5 years
■ freehold property
50 years
■ fixtures and fittings
10 years
■ motor vehicles
4 years
■ leasehold costs
life of the lease
■ operating leases1
life of the lease
1 Operating leases are assets leased to customers.
Depreciation methods, useful lives and residual values are reviewed at each statement of financial position
reporting date.
Assets acquired in exchange for operating leases
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 statement of profit and loss. Any subsequent increase in the fair value less costs
to sell, to the extent it does not exceed the cumulative write-down, is also recognised in the statement of profit
and loss, 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 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 statement of profit and loss.
125
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
16. Property, plant and equipment continued
Fixtures, Assets on
Freehold Leasehold fittings & operating
leases
property equipment
property
£m
£m
£m
£m
Total
£m
0.2
–
(0.2 )
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.1
–
–
–
0.1
0.7
–
–
0.8
0.1
–
–
–
0.1
0.4
–
–
0.5
–
0.3
10.2
0.2
–
–
10.4
0.9
(0.1 )
–
11.2
3.7
2.2
–
–
5.9
2.2
(0.1 )
–
8.0
4.5
3.2
67.3
11.1
77.8
11.3
(11.2 )
(11.4 )
(10.6 )
(10.6 )
56.6
11.7
(7.8 )
(8.7 )
51.8
25.4
11.3
(9.9 )
(8.3 )
18.5
10.6
(6.3 )
(7.1 )
15.7
38.1
36.1
67.1
13.3
(7.9 )
(8.7 )
63.8
29.2
13.5
(9.9 )
(8.3 )
24.5
13.2
(6.4 )
(7.1)
24.2
42.6
39.6
Cost
At 1 January 2016
Additions
Disposals
Transfer to finance leases
At 31 December 2016
Additions
Disposals
Transfer to finance leases
At 31 December 2017
Depreciation
At 1 January 2016
Depreciation charge for the year
Disposals
Transfer to finance leases
At 31 December 2016
Depreciation charge for the year
Disposals
Transfer to finance leases
At 31 December 2017
Net book value
At 31 December 2016
At 31 December 2017
126
Shawbrook Group plc Annual Report and Accounts 2017
17. Intangible assets
Accounting policy
Goodwill
Goodwill may arise on the acquisition of subsidiaries and represents the excess of the aggregate of the fair value
of consideration transferred and the fair value of any non-controlling interest over the fair value of identifiable
net assets at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses.
Goodwill is not amortised but is tested annually for impairment and additionally whenever there is an indication
that impairment may exist. For the purpose of impairment testing, goodwill is allocated to cash generating units
(CGUs). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. An impairment loss is recognised if the
carrying amount of a CGU exceeds its recoverable amount. Recoverable amount is the greater of the CGUs
value in use and fair value less costs to sell. Value in use is based on estimated future cash flows less a residual
value, discounted at a risk-adjusted discount rate appropriate to the CGU. Where impairment is required, the
amount is recognised in the statement of profit and loss and cannot subsequently be reversed.
Computer software
Computer software acquired by the Group is stated at cost less accumulated amortisation and any
accumulated impairment losses.
Internally developed computer software is recognised as an asset only when the Group is able to demonstrate
that the following conditions have been met: expenditure can be reliably measured, the product or process is
technically and commercially feasible, future economic benefits are probable, and the Group has the intention
and ability to complete development and subsequently use or sell the asset. If these conditions are not met,
expenditure is recognised in the statement of profit and loss as incurred. Capitalised costs include all costs
directly attributable to developing the computer software. Internally developed computer software is stated
at capitalised cost less accumulated amortisation and any accumulated impairment losses.
Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits
embodied in the specific asset to which it relates. All other expenditure is recognised in the statement of profit
and loss as incurred.
Computer software is amortised on a straight-line basis over its estimated useful life from the date it is available
for use. The estimated useful life of computer software is between three and seven years. Amortisation is
recognised in the statement of profit and loss. The amortisation method, useful lives and residual values are
reviewed at each reporting date and adjusted if appropriate.
Critical accounting estimates and judgements
The review of goodwill for impairment reflects Management’s best estimate of future cash flows of the CGUs and
the rates used to discount these cash flows, both of which are subject to judgement and uncertainty as follows:
■ the future cash flows of the CGUs 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 price-to-book ratio method which incorporates inputs reflecting a number of variables.
These variables are subject to uncertainty and require the exercise of significant judgement.
127
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
17. Intangible assets continued
The factors and inputs are described in more detail below.
Goodwill
£m
Computer
software
£m
At 1 January 2016
Additions
Amortisation
At 31 December 2016
At 1 January 2017
Additions
Amortisation
At 31 December 2017
Total
£m
54.7
7.9
(2.7 )
59.9
59.9
9.8
9.9
7.9
(2.7 )
15.1
15.1
9.8
44.8
–
–
44.8
44.8
–
–
(4.0 )
(4.0 )
44.8
20.9
65.7
Total cost of computer software amounted to £29.1 million (2016: £19.3 million) while accumulated amortisation
amounted to £8.2 million (2016: £4.2 million). Additions of £9.8 million included £8.5 million of internally
generated assets.
Impairment testing for CGUs containing goodwill
For the purposes of impairment testing, goodwill is allocated to the Group’s CGUs as follows:
Property Finance
Business Finance
Consumer Lending
At 31 December
2017
£m
9.0
34.7
1.1
44.8
2016
£m
9.0
34.7
1.1
44.8
No impairment losses were recognised in 2017 (2016: £nil) because the recoverable amounts of the CGUs were
higher than their carrying values.
128
Shawbrook Group plc Annual Report and Accounts 2017
The recoverable amounts of the CGUs were calculated based on their value in use, determined by discounting
the future cash flows (post-tax profits) to be generated from the continuing use of the CGU. Forecast cash flows
were reduced by any earnings retained to support the growth in the underlying CGUs loan books through higher
regulatory capital requirements. Forecast post-tax profits were based on expectations of future outcomes taking
into account past experience and adjusted for anticipated revenue growth.
The key assumptions used in the calculation of value in use were as follows:
Discount rate:
Property Finance
Business Finance
Consumer Lending
Cash flow period (Years)
Terminal value growth rate
Post-tax
Pre-tax1
12.0%
16.6%
12.5%
16.3%
13.0%
16.8%
4
4
2.0%
2.0%
1 Management applies post-tax discount rates to post-tax cash flows when testing the CGU for impairment. The pre-tax discount rate is
disclosed in accordance with IAS 36.
The post-tax 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 amount, timing and risk profile equivalent to those that the entity
expects to derive from the asset. Subsequent to the Group’s delisting from the stock exchange, calculation of
the discount rate based on the capital asset pricing model used in 2016 was no longer appropriate. As such,
the price-to-book ratio method was adopted as an alternative method incorporating target return on equity,
growth rate and price-to-book ratio. The discount rate for each CGU was adjusted to reflect the risks inherent
to the individual CGU.
Four years of cash flows were included in the discounted cash flow model based on a Board approved plan.
A terminal value growth rate was than applied into perpetuity to extrapolate cash flows beyond the cash flow
period. The terminal value growth rate was estimated by Management taking into account rates disclosed by
comparable institutions. Sensitivity analysis on the cash flows identified that a decrease of the cash flows of
20.0% will not result in any impairment of the goodwill balance.
The key assumptions described above may change in response to changes in economic and market conditions.
However the value in use of all CGUs was significantly greater than their carrying values and sensitivity analysis
identified that an increase of 3.0% in each of the individual CGU discount rates will not result in any impairment
of the goodwill balance.
129
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
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 statement
of financial position reporting 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.
Deferred tax assets are attributable as follows:
Accelerated tax depreciation
Share-based payments
Bad debt provision
Other
Deferred tax assets
At 1 January
Current period movement – recognised in income
Prior year adjustment
Share-based payments
Bad debt provision
At 31 December
2017
£m
13.6
–
2.0
0.1
15.7
17.9
(0.4 )
(0.9 )
(1.1 )
0.2
15.7
2016
£m
14.9
1.1
1.8
0.1
17.9
14.1
1.8
(0.2 )
0.9
1.3
17.9
The Group had a deferred tax asset of £15.7 million at 31 December 2017 (2016: £17.9 million) resulting primarily
from decelerated capital allowances. The business plan projects profits in future years sufficient to recognise
the £15.7 million deferred tax asset. The tax assets will unwind over the remaining life of the underlying leased
assets with which they are associated.
A reduction in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) and further reductions
to 17% (effective 1 April 2020) were substantively enacted on 16 March 2016. The deferred tax asset at
31 December 2017 has been calculated based on an aggregation of a rate of 18% substantively enacted
at the statement of financial position reporting date and the additional 8% of tax suffered in relation to
the banking surcharge that will unwind over the remaining life of the underlying assets with which they
are associated.
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Shawbrook Group plc Annual Report and Accounts 2017
19. Other assets
Other debtors
Prepayments
Total other assets
20. Investment in subsidiaries
At 1 January
Issue of capital securities in Shawbrook Bank Limited
Share-based payments
At 31 December
21. Customer deposits
Instant access
Term deposits and notice accounts
Fair value adjustments for hedged risk
Total customer deposits
2017
£m
0.5
9.8
10.3
2016
£m
1.9
14.7
16.6
Company Company
2016
£m
2017
£m
277.0
272.2
125.0
7.5
–
4.8
409.5
277.0
2017
£m
2016
£m
878.2
636.6
3,496.0
3,301.9
2.0
5.0
4,376.2
3,943.5
22. Amounts due to banks
Total amounts due to banks of £607.3 million at 31 December 2017 (2016: £147.7 million) includes £nil (2016:
£24.8 million) which are monies arising from the sale and repurchase of Treasury Bills drawn under the Bank
of England’s Funding for Lending Scheme (FLS). Also included is £605.0 million (2016: £118.0 million) of deposits
received from the Bank of England under the Term Funding Scheme (TFS) which fall due for repayment in
2020 and 2021. The TFS deposits are collateralised by loan assets of £902.2 million (2016: £160.8 million).
131
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
23. Provisions for liabilities and charges
At 1 January
Provisions utilised
Provisions made during the year
At 31 December
2017
£m
1.3
(0.6 )
2.1
2.8
2016
£m
0.9
(0.7 )
1.1
1.3
Financial Services Compensation Scheme (FSCS)
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, via annual management levies on members, including the Group, over this period.
The loan for the compensation levy has been repaid in full.
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 2016/17. This amount was calculated on the basis
of the Group’s current share of protected deposits taking into account the FSCS’s estimate of total management
expense levies for the scheme year.
Critical accounting estimates and judgements
Customer remediation and conduct issues
Provisions have been made in respect of various potential customer claims and represent Management’s
best estimate of the likely costs. A provision of £2.5 million relates to potential instances of misrepresentation
or breaches of contract by suppliers where the suppliers have become insolvent (and therefore the Group
having limited recourse to those suppliers). The provision is calculated using Management’s estimate of
complaints volumes, referral levels to the Financial Ombudsman Service, claim rates upheld internally
and by the Financial Ombudsman Service, redress payments and complaint handling costs.
132
Shawbrook Group plc Annual Report and Accounts 2017
24. Other liabilities
Other creditors
Accruals
Total other liabilities
2017
£m
46.2
16.6
62.8
2016
£m
12.8
14.2
27.0
Included in other creditors are amounts relating to sundry creditors, deferred incomes and other taxes.
Other creditors have increased to £46.2 million in 2017 (2016: £12.8 million). This is primarily due to amounts owing
to a bank in relation to the purchase of a loan book.
25. Operating leases
Accounting policy
Operating lease income is recognised in the statement of profit and loss on a straight-line basis over the lease
term unless a different systematic basis is more appropriate. Where an operating lease is terminated before
the lease period has expired, any payment required to be made to the lessor in compensation is charged to
the statement of profit and loss in the period in which termination is made.
Leases as lessee
Non-cancellable operating lease rentals on land and buildings are payable as follows:
Leases as lessee
Less than 1 year
Between 1 and 5 years
More than 5 years
Total leases as lessee
2017
£m
2016
£m
2.0
5.8
1.8
9.6
1.5
3.4
–
4.9
Leases as lessor
Operating lease rentals receivable from agreements classified as property, plant and equipment, as disclosed
in Note 16, are receivable as follows:
Leases as lessor
Less than 1 year
Between 1 and 5 years
More than 5 years
Total leases as lessor
2017
£m
8.6
16.7
1.5
26.8
2016
£m
10.4
16.0
1.0
27.4
133
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
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 EIR basis.
Subordinated debt liability:
In 2015, the Group issued £75.0 million fixed rate reset callable subordinated notes due 2025 with an initial semi-
annual coupon of 8.5%. The notes were listed for trading on the London Stock Exchange on 28 October 2015.
Fees of £1.0 million were incurred on issuance.
At 1 January
Interest expense
Repayment of interest
At 31 December
2017
£m
75.3
6.5
(6.4 )
75.4
2016
£m
74.0
6.5
(5.2 )
75.3
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
Ordinary shares of £0.01 each: issued and fully paid
Ordinary £0.01 shares
On issue at 1 January
Issued during the year
On issue at 31 December
2017
No.
2016
No.
253,086,879
250,500,000
2017
No.
2017
£
2016
No.
2016
£
250,500,000
2,505,000
250,500,000
2,505,000
2,586,879
25,869
–
–
253,086,879
2,530,869
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,
but does not have any rights of redemption. Par value is £0.01 per share. Ordinary shares were removed from
the Official List and trading cancelled on the London Stock Exchange on 24 August 2017.
134
Shawbrook Group plc Annual Report and Accounts 2017
28. Capital securities
Accounting policy
In accordance with IAS 32 ‘Financial instruments: Presentation’, the capital securities are classified as equity
instruments based on the characteristics associated with its redemption and interest payments discussed fully
below. No embedded derivative features were identified. Accordingly, the capital securities have been included
in equity at the fair value of the proceeds received less any costs directly attributable to their issue, net of tax
relief thereon. Any interest paid on the capital securities, net of tax relief thereon, is a distribution to holders of
equity instruments and is recognised directly in equity on the payment date.
Issue of capital securities
Cost of issuance of capital securities
Capital securities
2017
£m
125.0
(1.0 )
124.0
2016
£m
–
–
–
During the year the Company issued £125.0 million Fixed Rate Reset Perpetual Additional Tier 1 Write Down Capital
Securities which were listed on the Irish Stock Exchange on 8 December 2017.
The capital securities are perpetual securities in respect of which there is no fixed redemption date. The capital
securities may only be redeemed or repurchased by the Company for certain regulatory or tax reasons. Any
optional redemption requires the prior consent of the PRA.
The capital securities bear interest on their principal amount at an initial rate of 7.875% per annum until the first
reset date of 8 December 2022. The reset rate of interest will be determined on the first reset date and on each
fifth anniversary thereafter. Interest is payable on the capital securities semi-annually in arrears commencing
8 June 2018 and is non-cumulative. Interest is fully discretionary and the Company may elect to cancel (in whole
or in part) the interest otherwise scheduled to be paid.
There are a number of additional terms relating to events such as acquisition and wind up, however there are no
circumstances in which the Group has an unavoidable obligation to issue a variable number of its own shares.
In the event of the Group’s CET1 capital ratio falling below 7.00%, a ‘Trigger Event’, an ‘Automatic Write Down’ shall
occur on the next business day, resulting in the irrevocable and automatic reduction of the full principal amount
of capital securities to zero and the cancellation of all accrued and unpaid interest and any other amounts arising
under or in connection with the capital securities.
Following the listing of the capital securities to the market, capital securities were issued from Shawbrook Bank
Limited to Shawbrook Group plc on consistent terms as the listed capital securities.
135
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
29. Notes to the cash flow statement
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 three 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
Notes
Capitalisation of subordinated debt interest
Depreciation
Amortisation of intangible assets
Provisions against loans and advances to customers
Amortisation of share scheme fair value
Total non-cash items
26
16
17
14
10
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
Group Company
2017
£m
2017
£m
Group Company
2016
£m
2016
£m
6.5
13.2
4.0
23.3
7.5
54.5
6.5
–
–
–
–
6.5
6.5
13.5
2.7
24.3
4.8
51.8
6.5
–
–
–
–
6.5
Group Company
2017
£m
2017
£m
Group Company
2016
£m
2016
£m
752.5
28.8
(4.3 )
777.0
–
–
–
–
429.9
24.1
(4.0 )
450.0
–
–
–
–
Mandatory deposits are not available for use in the Group or Bank’s day-to-day business and are non-interest bearing.
136
Shawbrook Group plc Annual Report and Accounts 2017
30. Financial instruments
Accounting policy
Financial assets and financial liabilities are recognised in the Group statement of financial position when the
Group becomes a party to the contract provisions of the instrument.
Recognised financial assets and financial liabilities are initially measured at fair value. Transaction costs that
are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than
financial assets and financial liabilities at FVTPL) are added to or deducted from the fair value of the financial
assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the
financial asset or financial liabilities at FVTPL are recognised immediately in the statement of profit and loss.
If the transaction price differs from the fair value at initial recognition, the Group will account for such
differences as follows:
■ if fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on
a valuation technique that uses only data from observable markets, then the difference is recognised in the
statement of profit and loss on initial recognition (i.e. day 1 profit or loss);
■ in all other cases, the fair value will be adjusted to bring it in line with the transaction price (i.e. day 1 profit
or loss will be deferred by including it in the initial carrying amount of the asset or liability).
After initial recognition, the deferred gain or loss will be released to the statement of profit and loss on a rational
basis, only to the extent that it arises from a change in a factor (including time) that market participants would
take into account when pricing the asset or liability.
Financial assets
All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial
asset is under contract whose terms require delivery of the financial asset within the timeframe established by
the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial
assets classified as FVTPL. Transaction costs directly attributable to the acquisition of financial assets classified
as FVTPL are recognised immediately in the statement of profit and loss.
The Group classifies its financial assets in the following two categories:
■ FVTPL; and
■ loan receivables.
Derivative financial instruments
The Group enters into a variety of derivative financial instruments some of which are held for trading while
others are held to manage its exposure to interest rate risk and foreign exchange risk. Derivatives held include
foreign exchange forward contracts, interest rate swaps and cross currency interest rate swaps. Further details
of derivative financial instruments are disclosed in Note 15.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are
subsequently remeasured to their fair value at each statement of financial position reporting date. The resulting
gain or loss is recognised in the statement of profit and loss immediately unless the derivative is designated and
effective as a hedging instrument, in which event the timing of the recognition in the statement of profit and loss
depends on the nature of the hedge relationship. A derivative with a positive fair value is recognised as a
financial asset whereas a derivative with a negative fair value is recognised as a financial liability. A derivative
is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more
than 12 months and it is not expected to be realised or settled within 12 months.
The Group has not classified any assets or liabilities as held to maturity or as available for sale.
137
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
30. Financial instruments continued
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. In cases where there is a modification of a financial asset (i.e. the
contractual terms governing the cash flows of the financial asset are renegotiated or modified), the Group
assesses whether this modification results in derecognition. A modification results in derecognition when it
gives rise to substantially different terms such as:
■ Qualitative factors, such as contractual cash flows after modification are no longer payments of principal
and interest, for example a change in the currency or change of counterparty, extensive change in interest
rates, maturity, covenants. If these do not clearly indicate a substantial modification then;
■ A quantitative assessment is performed to compare the present value of the remaining contractual cash
flows under the original terms with the contractual cash flows under the revised terms discounted using the
original EIR. If the difference in present value is greater than 10% then the Group deems
the arrangement is substantially different leading to derecognition.
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 EIRM.
Derecognition of financial assets and liabilities
Derecognition is the point at which an asset or liability is removed from the statement of financial position.
The Group’s policy is to derecognise financial assets when the contractual rights to the cash flows from the
financial asset have expired or when 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 is
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 EIR of the existing financial asset; and
■ 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 then discounted from the expected date of derecognition to the reporting date using the
original EIR of the existing financial asset.
138
Shawbrook Group plc Annual Report and Accounts 2017 Fair value of financial assets and liabilities
The Group measures fair values in accordance with IFRS 13 ‘Fair Value Measurement’, which defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The Group also uses a fair value hierarchy that categorises into three levels
the inputs to valuation techniques used to measure fair value which gives highest priority to quoted prices.
Level 1: Quoted prices in active markets for identical assets or liabilities, for identical assets or liabilities that the
entity can access at the measurement date;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from prices). A Level 2 input must be observable
for substantially the full term of the instrument. Level 2 inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable for the asset or liability, such as interest
rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads.
Assets and liabilities classified as Level 2 have been valued using models whose inputs are observable in
an active market; and
Level 3: 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 holds financial assets and liabilities for which quoted prices
are not available, such as over-the-counter derivatives (interest rate swaps, options and foreign currency
derivatives). For these financial instruments, the Group uses valuation techniques to estimate fair value. The
valuation techniques used include discounted cash flow models and Black-Scholes option pricing. These valuation
techniques use as their basis independently sourced market parameters, such as interest rate yield curves, option
volatilities and currency rates.
The Group uses generally accepted valuation models to determine the fair value of simple and liquid financial
instruments, such as interest rate and currency swaps, which involve minimum judgement. The use of observable
market prices and model inputs when available reduces the need for Management judgement and estimation,
as well as the uncertainty related with the estimated fair value. The availability of observable market prices and
inputs varies depending on the products and markets and is prone to changes based on general conditions and
specific events in the financial markets.
The consideration of factors such as the scale and frequency of trading activity, the availability of prices and the
size of bid/offer spreads assists in the assessment of whether a market is active. If, in the opinion of Management,
a significant proportion of an 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).
The Group does not adjust fair value estimates derived from models for any factors such as credit risk, liquidity
risk or model uncertainties. For measuring derivatives that might change classification from being an asset to a
liability or vice versa fair values do not take into consideration either the credit valuation adjustment or the debit
valuation adjustment as it is deemed to be immaterial.
Cash and balances at central banks
Fair value approximates to carrying value as cash and balances at central banks have minimal credit losses and
are either short-term in nature or re-price frequently.
Loans and advances to banks, customer deposits, amounts due to banks and derivatives
Fair value is estimated by using discounted cash flows applying either market rates where practicable or rates
offered with similar characteristics by other financial institutions. 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.
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.
139
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
30. Financial instruments continued
Loans and advances to customers
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 statement of financial position reporting date, and adjusted for future credit losses
if considered material.
Subordinated debt
Fair values are based on quoted prices where available or by discounting cash flows using market rates.
Fair value hierarchy
The table below analyses the Group’s financial instruments measured at amortised cost into a fair value hierarchy:
2017
Level 3
£m
2017
Level 2
£m
2017
Level 1
£m
2016
Level 3
£m
2016
Level 2
£m
2016
Level 1
£m
Financial assets
Cash and balances at central banks
Loans and advances to banks
–
–
Loans and advances to customers
4,844.3
–
Financial liabilities
Customer deposits
Amounts due to banks
Subordinated debt liability
–
–
–
4,376.2
607.3
75.4
–
752.5
–
429.9
28.8
24.1
–
–
–
–
–
–
–
4,050.4
–
–
–
–
3,943.5
147.7
75.3
–
–
–
–
–
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the
year (2016: £nil).
The table below analyses the Group’s financial instruments measured at fair value into a fair value hierarchy:
Financial assets
Derivative financial instruments
Financial liabilities
Derivative financial instruments
2017
Level 3
£m
2017
Level 2
£m
2017
Level 1
£m
2016
Level 3
£m
2016
Level 2
£m
2016
Level 1
£m
–
–
1.8
(3.4 )
–
–
–
–
5.2
(0.4 )
–
–
140
Shawbrook Group plc Annual Report and Accounts 2017
The fair values of all financial assets and financial liabilities by class together with their carrying amounts shown
in the statement of financial position are shown in the following table:
Other
liabilities at
amortised
cost
£m
Loans and
receivables
£m
Total
carrying
amount
£m
At 31 December 2017
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Total financial assets
Customer deposits
Amounts due to banks
Subordinated debt liability
Total financial liabilities
At 31 December 2016
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Total financial assets
Customer deposits
Amounts due to banks
Subordinated debt liability
Total financial liabilities
752.5
28.8
4,844.3
5,625.6
–
–
–
–
429.9
24.1
4,050.4
4,504.4
–
–
–
–
Fair
value
£m
752.5
28.8
–
–
–
–
752.5
28.8
4,844.3
5,045.9
5,625.6
5,827.2
4,376.2
4,376.2
4,369.3
607.3
75.4
607.3
75.4
594.5
81.0
5,058.9
5,058.9
5,044.8
–
–
–
–
429.9
24.1
429.9
24.1
4,050.4
4,100.5
4,504.4
4,554.5
3,943.5
3,943.5
3,963.8
147.7
75.3
147.7
75.3
147.7
76.0
4,166.5
4,166.5
4,187.5
141
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management
The main areas of risk that the business is exposed to are:
■ credit risk (see 31.1);
■ liquidity risk (see 31.2);
■ market risk (see 31.3);
■ capital risk and management (see 31.4);
■ operational risk; and
■ conduct risk.
31.1 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 the Asset and Liability
Committee. This risk has two main components:
■ customer risk (individual and business lending) (see 31.1.1); and
■ treasury risk (see 31.1.2).
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 commitments, which represent agreements entered into but not
advanced as at 31 December 2017.
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
2017
£m
2016
£m
752.5
429.9
28.8
24.1
4,844.3
4,050.4
1.8
5.2
5,627.4
4,509.6
623.0
459.2
6,250.4
4,968.8
The contractual commitments are a combination of loan commitments and committed undrawn facilities.
The amount of collateral held at 31 December 2017 is £4,250.9 million (2016: £3,603.0 million) of which £3,197.8
million (2016: £2,524.3 million) is in the form of residential and commercial property and £1,053.1 million (2016:
£1,078.7 million) 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.
142
Shawbrook Group plc Annual Report and Accounts 2017
Credit quality of assets
Loans and receivables
During the year the Group developed and implemented a credit grading scorecard. The credit scoring scale
is used to determine an individual internal credit score based on the point-in-time PDs of the individual
agreements. The point-in-time PD is an internal parameter used within the Group’s advanced internal risk
based capital models which aims to estimate the PD over the next 12 months based on account characteristics
and customer behavioural data. Exposures are categorised as follows:
Low risk: where assets are not past due and have a point-in-time PD less than or equal to 0.38%;
Medium risk: where assets are not past due and have a point-in-time PD greater than 0.38%
and less than or equal to 1.76%;
High risk: where assets are not past due and have a point-in-time PD greater than 1.76%.
The credit grading scorecard cannot retrospectively be applied to the FY 2016 results, and therefore the
FY 2017 results are not directly comparable to the FY 2016 results.
The credit quality of assets that are neither past due nor impaired are as follows:
Property Finance
Business Finance
Consumer Lending
Total
At 31 December 2017
£m
%
£m
1,700.7
1,270.8
54.6
40.8
119.9
421.5
143.3
4.6
474.3
46.7
%
11.8
41.5
£m
%
£m
125.3
20.5
1,945.9
411.4
74.6
67.3
2,103.7
12.2
692.2
%
41.0
44.4
14.6
Low risk
Medium risk
Higher risk
Total neither past
due nor impaired
3,114.8
100.0
1,015.7
100.0
611.3
100.0
4,741.8
100.0
In 2016 the Group defined three classifications of credit quality (low risk, medium risk and higher risk) for all credit
exposures. These were based on the following criteria:
Property Finance: For the residential mortgage portfolio, a risk rating scale is applied to the individual loans and
weighs the propensity of non-performance and write-offs. The provisioning methodology within the residential
portfolio was amended during the year to utilise credit scoring to drive loan level PDs. The combined propensity
scores are scaled into low risk, medium risk and higher risk. In the Commercial Mortgages portfolio loans are
classified as low risk, medium risk and higher risk on a case by case basis based on the circumstances of every
case.
Business Finance: Loans are classified as low risk, medium risk and higher risk on a case by case basis.
Classification is based on Management’s review of the individual circumstances of every case.
Consumer Lending: Any loans that are 90 days or more past due are deemed to be impaired. Loans that
are neither past due nor impaired are considered by Management to be low risk.
At 31 December 2016
£m
%
£m
%
£m
%
£m
Property Finance
Business Finance
Consumer Lending
Total
2,397.5
98.1
986.5
95.1
460.8
100.0
3,844.8
38.5
7.9
1.6
0.3
50.3
0.1
4.9
–
–
–
–
–
88.8
8.0
%
97.5
2.3
0.2
Low risk
Medium risk
Higher risk
Total neither past
due nor impaired
2,443.9
100.0
1,036.9
100.0
460.8
100.0
3,941.6
100.0
143
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
31.1.1 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 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;
■ 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.
Details of the forbearance arrangements in place are set out in the tables below:
Capital
Forbearance at 31 December 2017
Property Finance
Business Finance
Consumer Lending
Total
Forbearance at 31 December 2016
Property Finance
Business Finance
Consumer Lending
Total
Number
balances Provisions Coverage
%
£m
£m
1.0
5.3
2.8
9.1
6.2%
14.8%
52.8%
15.9%
239
361
830
1,430
16.2
35.8
5.3
57.3
Capital
Number
balances Provisions Coverage
%
£m
£m
191
237
273
701
13.6
30.1
1.8
45.5
0.7
3.3
0.6
4.6
5.1%
11.0%
33.3%
10.1%
There were seven property repossessions during the year (2016: six). The total carrying value of these assets was
£1.1 million (2016: £2.1 million). Of the seven repossessions, four were disposed of by 31 December 2017 and the
remaining three are currently on the market.
144
Shawbrook Group plc Annual Report and Accounts 2017
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
Description
Individual impairment
Where specific circumstances indicate that a loss is likely to be incurred.
Collective impairment
Impairment allowances are calculated for each portfolio on a collective
basis, given the homogenous nature of the assets in the portfolio.
Risk categorisation
Description
Neither past due nor impaired
Past due but not impaired
Impaired assets
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 past due but not impaired consist predominantly of loans in
Property Finance and Business Finance that are past due and individually
assessed as not being impaired. This definition also includes unsecured
loans in the Consumer Lending division that are past due by not more
than 90 days.
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. This definition also includes unsecured
loans in the Consumer Lending division that are more than 90 days in
arrears and carry identified impairment.
The Group enters into agreements with customers and where appropriate takes security. Loan receivables include
amounts secured against property (commercial and residential), or 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 profile of the loan receivable book is shown below:
Loan receivables
Finance lease receivables
Instalment credit receivables
Fair value adjustments for hedged risk
Total loans and advances to customers
2017
£m
2016
£m
4,418.7
3,639.5
79.8
93.6
348.0
316.9
(2.2 )
0.4
4,844.3
4,050.4
145
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
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
Total past due but not impaired
Impaired assets
Less: allowances for impairment losses
Net loan receivables
Fair value adjustments for hedged risk
2017
£m
2016
£m
4,329.4
3,548.7
12.8
40.1
10.4
18.4
81.7
27.3
18.3
40.2
15.5
15.8
89.8
14.6
4,438.4
3,653.1
(19.7 )
(13.6 )
4,418.7
3,639.5
(2.2 )
0.4
4,416.5
3,639.9
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:
Secured on commercial and residential property
Secured on debt receivables
Secured by finance lease and instalment credit assets
Secured on other assets
Total secured receivables
Unsecured
Gross loans and advances to customers
2017
£m
2016
£m
3,197.6
2,524.3
456.6
545.4
439.7
421.3
68.3
49.3
4,162.2
3,540.3
715.9
534.5
4,878.1
4,074.8
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.
146
Shawbrook Group plc Annual Report and Accounts 2017
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
Total past due but not impaired
Impaired assets
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
Total past due but not impaired
Impaired assets
Less: allowances for impairment losses
Net instalment credit receivables
2017
£m
72.0
2.9
1.9
0.9
0.9
6.6
10.3
2016
£m
82.3
4.6
1.1
0.4
2.3
8.4
11.4
88.9
102.1
(9.1 )
79.8
(8.5 )
93.6
2017
£m
2016
£m
340.4
310.6
4.9
2.2
0.3
0.9
8.3
2.1
3.6
0.9
0.6
1.3
6.4
2.2
350.8
319.2
(2.8 )
(2.3 )
348.0
316.9
147
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
31 December 2017
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 assets
Fair value adjustments for hedged risk
Less: allowances for impairment losses
Property Business Consumer
Lending
Finance
Finance
£m
£m
£m
Total
£m
3,114.8
1,015.7
611.3
4,741.8
9.2
32.8
7.8
18.1
67.9
13.3
10.4
4.0
1.2
2.1
17.7
21.5
1.0
7.4
2.6
–
11.0
4.9
20.6
44.2
11.6
20.2
96.6
39.7
3,196.0
1,054.9
627.2
4,878.1
(2.7 )
(6.3 )
–
0.5
(2.2 )
(15.0 )
(10.3 )
(31.6 )
Net loans and advances to customers
3,187.0
1,039.9
617.4
4,844.3
31 December 2016
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 assets
Property
Finance
£m
Business Consumer
Lending
Finance
£m
£m
Total
£m
2,443.9
1,036.9
460.8
3,941.6
13.8
33.6
10.7
12.2
70.3
10.1
12.0
4.3
4.2
7.2
27.7
14.1
0.7
4.3
1.6
–
6.6
4.0
26.5
42.2
16.5
19.4
104.6
28.2
2,524.3
1,078.7
471.4
4,074.4
Fair value adjustments for hedged risk
–
–
0.4
0.4
Less: allowances for impairment losses
(5.2 )
(12.4 )
(6.8 )
(24.4 )
Net loans and advances to customers
2,519.1
1,066.3
465.0
4,050.4
148
Shawbrook Group plc Annual Report and Accounts 2017
The Group’s lending portfolio is geographically diversified across the UK as shown below:
31 December 2017
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
Property
Finance
£m
Business Consumer
Lending
Finance
£m
£m
Total
£m
99.0
100.5
75.3
34.7
25.6
199.9
48.6
183.8
1,233.8
169.8
64.9
1,468.5
18.6
45.5
47.0
16.4
264.5
159.9
13.6
183.0
2.8
71.0
0.1
29.9
75.4
1.7
65.7
91.8
499.8
18.1
76.9
330.9
648.3
169.3
109.9
927.5
239.5
69.4
125.0
155.3
89.7
84.8
74.8
59.4
48.3
24.4
62.0
59.5
377.5
178.6
261.8
274.2
Gross loans and advances to customers
3,196.0
1,054.9
627.2
4,878.1
31 December 2016
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
Property
Finance
£m
Business Consumer
Lending
Finance
£m
£m
84.3
75.2
71.1
26.9
21.1
36.8
Total
£m
176.5
138.9
911.6
214.7
48.3
1,174.6
6.1
38.5
0.6
11.3
0.1
23.7
6.8
73.5
221.0
151.8
55.9
428.7
10.6
3.7
157.5
96.9
539.8
191.6
0.8
60.9
80.1
15.1
315.3
811.5
198.3
107.5
36.8
342.6
57.1
104.1
120.2
70.1
64.1
68.4
17.9
47.2
41.8
145.1
215.4
230.4
Gross loans and advances to customers
2,524.3
1,078.7
471.4
4,074.4
149
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
The Group’s lending portfolio falls into the following concentrations by loan size:
31 December 2017
0 – £50k
£50k – £100k
£100k – £250k
£250k – £500k
£500k – £1 million
£1 million – £2.5 million
£2.5 million – £5 million
£5 million – £10 million
£10 million – £25 million
Property Business Consumer
Lending
Finance
Finance
£m
£m
£m
Total
£m
246.1
164.6
627.0
1,037.7
369.2
79.7
0.2
449.1
784.9
113.3
657.0
80.3
478.1
106.1
379.2
153.7
167.1
61.8
52.6
80.2
77.4
199.6
–
–
–
–
–
–
–
898.2
737.3
584.2
532.9
247.3
139.2
252.2
Gross loans and advances to customers
3,196.0
1,054.9
627.2
4,878.1
31 December 2016
0 – £50k
£50k – £100k
£100k – £250k
£250k – £500k
£500k – £1 million
£1 million – £2.5 million
£2.5 million – £5 million
£5 million – £10 million
£10 million – £25 million
Property
Finance
£m
Business Consumer
Lending
Finance
£m
£m
Total
£m
249.6
170.3
471.3
891.2
312.6
80.2
0.1
392.9
622.5
106.3
495.8
93.2
371.8
100.0
283.2
118.6
110.1
67.2
11.5
81.2
91.2
237.7
–
–
–
–
–
–
–
728.8
589.0
471.8
401.8
191.3
158.4
249.2
Gross loans and advances to customers
2,524.3
1,078.7
471.4
4,074.4
150
Shawbrook Group plc Annual Report and Accounts 2017
31.1.2 Treasury risk
Treasury 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
2017, based on Moody’s long-term ratings.
Loans and advances to banks
Aa3
A1
A2
A3
Total credit risk
2017
£m
12.2
2.5
–
14.1
28.8
2016
£m
–
15.6
1.1
7.4
24.1
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:
Cash and balances at central banks
Aa1
Aa2
2017
£m
2016
£m
–
429.9
752.5
–
Credit risk derived from derivative transactions is mitigated by collateralising the exposures. Such collateral
is subject to the standard industry Credit Support Annex and is paid or received on a regular basis. At 31
December 2017, cash collateral of £3.9 million had been received by the Group (2016: £4.8 million).
151
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
31.2 Liquidity risk
Accounting policy
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 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 function personnel independent of the Treasury function. Additionally, a combined liquidity stress test
is performed daily and a series of other liquidity stress tests are performed monthly by the Risk function and
formally reported to Asset and Liability Committee and the Board to ensure that the Group maintains adequate
liquidity for business purposes even under stressed conditions.
The Group reports its liquidity position against its liquidity coverage ratio, net stable funding ratio and other
key regulatory ratios for regulatory purposes
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 statement of profit and loss.
The Treasury bills are not recorded on the Group’s statement of financial position as ownership remains with
the Bank of England. The risks and rewards of the collateral provided remains with the Group and continue
to be recognised in the Group’s financial statements.
Term Funding Scheme (TFS)
The TFS was announced by the Bank of England on 4 August 2016 and became effective from 19 September 2016.
The TFS is designed to reinforce the transmission of reductions in the Bank of England’s official interest rate
(Bank Rate) to those interest rates actually faced by households and businesses by providing term funding to
banks at rates close to Bank Rate. It is a monetary policy tool of the Monetary Policy Committee and will be
operated as part of the Asset Purchase Facility.
The TFS allows participants to borrow central bank reserves in exchange for eligible collateral. The Group had
drawn £605.0 million as at 31 December 2017 (2016: £118.0 million). This is included within ‘Amounts due to banks’
on the statement of financial position as detailed in Note 22.
152
Shawbrook Group plc Annual Report and Accounts 2017 The table below analyses the Group’s contractual undiscounted cash flows of its financial assets and liabilities:
Gross
nominal
inflow/
(outflow)
£m
Carrying
amount
£m
Less
than 1
month
£m
1-3
months
£m
3 months
to 1 year
£m
1-2
years
£m
2-5 More than
5 years
£m
years
£m
752.5
752.5
748.2
28.8
28.8
28.8
–
–
–
–
–
–
–
–
4.3
–
4,844.3
4,989.8
211.8
218.7
646.3
690.8
1,222.7
1,999.5
5,625.6
5,771.1
988.8
218.7
646.3
690.8
1,222.7
2,003.8
At 31 December 2017
Financial assets
Cash and balances
at central banks
Loans and advances
to banks
Loans and advances
to customers
Financial liabilities
Customer deposits
(4,376.2 )
(4,448.7 )
(1,026.3 )
(317.1 )
(1,818.7 )
(837.3 )
(440.1 )
(9.2 )
Amounts due to banks
(607.3 )
(612.4 )
(2.4 )
Subordinated debt liability
(75.4 )
(127.1 )
–
–
–
–
–
(610.0 )
–
(7.5 )
(6.4 )
(19.1 )
(94.1 )
(5,058.9 )
(5,188.2)
(1,028.7 )
(317.1 )
(1,826.2 )
(843.7 )
(1,069.2 )
(103.3 )
Gross
nominal
inflow/
(outflow)
£m
Carrying
amount
£m
Less
than 1
month
£m
1-3
months
£m
3 months
to 1 year
£m
1-2
years
£m
2-5 More than
5 years
£m
years
£m
429.9
429.9
425.9
24.1
24.1
24.1
–
–
–
–
–
–
–
–
4.0
–
4,050.4
4,174.9
115.4
137.6
561.0
649.9
1,213.3
1,497.7
4,504.4
4,628.9
565.4
137.6
561.0
649.9
1,213.3
1,501.7
At 31 December 2016
Financial assets
Cash and balances
at central banks
Loans and advances
to banks
Loans and advances
to customers
Financial liabilities
Customer deposits
(3,943.5 )
(3,887.9 )
(791.9 )
(250.3 )
(1,705.4 )
(634.1 )
(506.2 )
Amounts due to banks
(147.7 )
(148.9 )
(5.3 )
(0.1 )
(24.6 )
(0.3 )
(118.6 )
–
–
Subordinated debt liability
(75.3 )
(133.5 )
–
–
(7.5 )
(6.4 )
(19.1 )
(100.5 )
(4,166.5 )
(4,170.3 )
(797.2 )
(250.4 )
(1,737.5 )
(640.8 )
(643.9 )
(100.5 )
153
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
The following table sets out the components of the Group’s liquidity reserve:
Cash and balances at central banks
Less: mandatory deposits with central banks
Loans and advances to banks
Debt securities
Total liquidity reserve
2017
Carrying
amount
£m
2016
Carrying
amount
£m
752.5
429.9
(4.3 )
28.8
100.9
877.9
(4.0 )
24.1
213.8
663.8
The total liquidity reserve includes £100.9 million (2016: £213.8 million) of securities issued by the Bank of England
through FLS participation which are not recognised on the statement of financial position.
The average liquidity reserve throughout the year was £708.4 million (2016: £745.1 million).
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:
Loans and advances to customers
1,081.7
3,762.6
Encumbered Unencumbered
(pledged as
collateral)
£m
as collateral)
£m
(available Unencumbered
other
£m
4.3
–
–
28.8
–
–
–
–
36.1
–
Total
£m
752.5
28.8
4,844.3
1.8
39.6
91.7
748.2
–
–
1.8
3.5
91.7
1,086.0
3,827.5
845.2
5,758.7
Asset encumbrance 2017
Cash and balances at central banks
Loans and advances to banks
Derivative financial assets
Property, plant and equipment
Non-financial assets
Total assets
154
Shawbrook Group plc Annual Report and Accounts 2017
Asset encumbrance 2016
Cash and balances at central banks
Loans and advances to banks
Derivative financial assets
Property, plant and equipment
Non-financial assets
Total assets
Encumbered Unencumbered
(pledged as
collateral)
£m
as collateral)
£m
(available Unencumbered
other
£m
4.0
–
–
24.1
–
–
–
–
38.1
–
425.9
–
–
5.2
4.5
94.4
Total
£m
429.9
24.1
4,050.4
5.2
42.6
94.4
699.2
3,417.4
530.0
4,646.6
Loans and advances to customers
695.2
3,355.2
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 statement of financial position
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 Asset and Liability Committee who use the results to decide whether
to amend the Group’s risk appetite and liquidity limits.
31.3 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’s objective is to manage and control market risk exposures while maintaining a market profile
consistent with the Group’s risk appetite.
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 Asset and Liability Committee approves
the Group’s treasury policies and receives regular reports on all aspects of market risk exposure, including interest
rate risk.
The Group has minimal foreign currency exposure and does not engage in any treasury trading operations.
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 the Group offers. 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 the Bank of England base rate). This is monitored closely and
regularly reported to the Asset and Liability Committee. 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.
155
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. 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
natural hedging and appropriate financial instruments including derivatives. The table below sets out the Group’s
exposure to foreign exchange risk:
Assets and liabilities in foreign currencies at Sterling carrying values
2017
Loans and advances to banks
Loans and advances to customers
Net position
Assets and liabilities in foreign currencies at Sterling carrying values
2016
Loans and advances to banks
Loans and advances to customers
Net position
Euros
£m
US Australian
Dollars
£m
Dollars
£m
1.9
(0.8 )
(0.1 )
24.4
26.3
7.7
6.9
0.1
–
Euros
£m
0.4
12.9
13.3
US Australian
Dollars
£m
Dollars
£m
(0.9 )
6.6
5.7
–
–
–
Foreign exchange sensitivity
The Group estimates that a 5% movement in exchange rates would have no greater impact on the 2017 profit than
an increase or decrease of £1.7 million.
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 – £10.5 million negative (2016: £9.5 million positive)
–200 bps – £41.0 million positive (2016: £12.1 million positive)
In addition, the effect of the same two interest rate shocks are applied to the statement of financial position
at year end, to determine how net interest income may change on an annualised basis for one year, as follows:
+200 bps – £20.8 million positive (2016: £20.0 million positive)
–200 bps – £4.0 million positive (2016: £1.9 million 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 statement of financial position items. The results also include the impact of hedge transactions.
156
Shawbrook Group plc Annual Report and Accounts 2017
The following table summarises the re-pricing periods for the Group’s assets and liabilities at 31 December 2017.
Items are allocated to time bands by reference to the earlier of the next contractual interest rate change and
the maturity date.
3 months
but less
than
6 months
£m
6 months
but
less than
1 year
£m
1 year
but
less than More than
5 years
£m
5 years
£m
Non-
interest
bearing
£m
Within
3 months
£m
Total
£m
31 December 2017
Assets
Cash and balances at central banks
Loans and advances to banks
748.2
28.8
–
–
–
–
–
–
–
–
4.3
752.5
–
28.8
Loans and advances to customers
2,495.5
210.1
363.6
1,533.5
296.4
(54.8 )
4,844.3
Derivative financial assets
Property, plant and equipment
Other non-financial assets
–
3.6
–
–
2.1
–
–
4.1
–
–
22.2
–
–
4.8
–
1.8
2.8
91.7
1.8
39.6
91.7
Total assets
3,276.1
212.2
367.7
1,555.7
301.2
45.8
5,758.7
Equity and liabilities
Customer deposits
1,412.4
787.7
955.6
1,212.6
7.9
Amounts due to banks
607.3
Derivative financial liabilities
Other non-financial liabilities
Subordinated debt liability
Total equity
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3.4
73.3
4,376.2
607.3
3.4
73.3
75.4
75.4
–
–
623.1
623.1
Total equity and liabilities
2,019.7
787.7
955.6
1,212.6
83.3
699.8
5,758.7
Notional values of derivatives
578.0
(25.0 )
(282.0 )
(240.0 )
(31.0 )
–
Interest rate sensitivity gap
1,834.4
(600.5 )
(869.9 )
103.1
186.9
(654.0)
Cumulative gap
1,834.4
1,233.9
364.0
467.1
654.0
–
–
–
–
157
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
The following table summarises the re-pricing periods for the Group’s assets and liabilities at 31 December 2016.
Items are allocated to time bands by reference to the earlier of the next contractual interest rate change and the
maturity date.
3 months
but less
than
6 months
£m
6 months
but
less than
1 year
£m
1 year
but
less than More than
5 years
£m
5 years
£m
Non-
interest
bearing
£m
Within
3 months
£m
Total
£m
31 December 2016
Assets
Cash and balances at central banks
Loans and advances to banks
425.9
24.1
–
–
–
–
–
–
–
–
4.0
429.9
–
24.1
Loans and advances to customers
2,812.3
117.8
201.1
714.1
254.9
(49.8 )
4,050.4
Derivative financial assets
Property, plant and equipment
Other non-financial assets
–
2.9
–
–
2.9
–
–
5.3
–
–
23.1
–
–
4.2
–
5.2
4.2
94.4
5.2
42.6
94.4
3,265.2
120.7
206.4
737.2
259.1
58.0
4,646.6
Total assets
Equity and liabilities
Customer deposits
1,191.2
954.8
630.7
1,166.8
Amounts due to banks
123.3
Derivative financial liabilities
Other non-financial liabilities
Subordinated debt liability
Total equity
–
–
–
–
–
–
–
–
–
24.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.4
42.5
75.3
–
3,943.5
147.7
0.4
42.5
75.3
–
437.2
437.2
Total equity and liabilities
1,314.5
954.8
655.1
1,166.8
75.3
480.1
4,646.6
Notional values of derivatives
524.0
–
(340.0 )
(145.0 )
(39.0 )
–
Interest rate sensitivity gap
2,474.7
(834.1 )
(788.7 )
(574.6 )
144.8
(422.1 )
Cumulative gap
2,474.7
1,640.6
851.9
277.3
422.1
–
–
–
–
31.4 Capital risk and management
Capital risk is the risk that the Group has insufficient capital to cover regulatory requirements and/or to support
its own growth plans. Liquidity risk is the risk that the Group is not able to meet its financial obligations as they fall
due, or can do so only at excessive cost.
The Group’s objective in managing Group capital is to maintain appropriate levels of capital to support the
Group’s business strategy and meet regulatory requirements.
158
Shawbrook Group plc Annual Report and Accounts 2017
Policies and processes for managing the Group’s capital
The Group’s approach to capital management is driven by strategic and organisational requirements, while also
taking into account the regulatory and commercial environments in which it operates.
The Group’s principal objectives when managing capital are to:
■ address the expectation of the Shareholders and optimise business activities to ensure return on capital targets
are achieved though efficient capital management;
■ ensure that the Group and Bank hold sufficient risk capital. Risk capital caters for unexpected losses that may
arise, protects Shareholders and depositors and thereby supports the sustainability of the Group and Bank
through the business cycles; and
■ comply with capital supervisory requirements and related regulations.
The PRA supervises the Group on a consolidated basis and receives information on the capital adequacy of,
and sets capital requirements for, the Group as a whole. In addition, a number of subsidiaries are regulated for
prudential purposes by either the PRA or the Financial Conduct Authority. The aim of the capital adequacy regime
is to promote safety and soundness in the financial system and embed the requirements of Pillar 3 on market
discipline. Under Pillar 2, the Group completes an annual self-assessment of risks known as the Internal Capital
Adequacy Assessment Process (ICAAP). The ICAAP is reviewed by the PRA which culminates in the PRA setting
’Individual Capital Guidance‘ (ICG) on the level of capital the Group and its regulated subsidiaries are required to
hold. Pillar 3 requires firms to publish a set of disclosures which allow market participants to assess information on
that firm’s capital, risk exposures and risk assessment process. The Group’s Pillar 3 disclosures can be found on the
Group’s website.
The Group maintains a strong capital base with the aim of supporting the development of the business and to
ensure it meets the Pillar 1 capital requirements and ICG at all times. As a result, the Group maintains capital
adequacy ratios above minimum regulatory requirements. The Group’s individual regulated entities complied
with all of the externally imposed capital requirements to which they are subject for the years ended 2017 and 2016.
Regulation
Capital Requirements Directive IV (CRD IV) requires the Group to hold CET1 capital to account for capital
conservation, countercyclical and systemic risk buffers. A capital conservation buffer of 0.625% was introduced
on 1 January 2016 and will increase each year to 2019 in line with regulations. The Bank’s capital conservation
buffer is currently set at 1.25%.
CRD IV also introduced a new leverage ratio requirement. The leverage calculation determines a ratio based
on the relationship between Tier 1 capital and total consolidated exposure, being the sum of on-balance sheet
exposures, derivative exposures, securities financing transaction exposures and off-balance sheet exposures. This
leverage ratio is a risk-based measure that is designed to act as a supplement to risk-based capital requirements.
Minimum Requirements for Eligible Liabilities (MREL) are applicable from 1 January 2016 and will be phased in fully
by 1 January 2020. Prior to 31 December 2019, MREL will be equal to an institution’s minimum regulatory capital
requirements. The Bank of England has provided MREL guidance to the Group, as well as guidance on the
transitional arrangements until 1 January 2020.
The CET1 capital ratio for the Group was 12.9% as at 31 December 2017 (31 December 2016: 13.3%), compared
with a regulatory minimum of 4.5%. The Total Tier 1 capital ratio for the Group was 16.6% as at 31 December 2017
(31 December 2016: 13.3%), compared with a regulatory minimum of 6.0%.
The leverage ratio for the Group (based on the Basel III definition of January 2014, and the CRD IV definition of
October 2014) is 9.4% (2016: 7.8%), compared to the minimum requirement of 3.0%. The Group is not required to
comply with the PRA leverage ratio framework until its retail deposits exceed the £50 billion threshold; however,
the Group maintains a prudent risk appetite for leverage.
The Bank has a Pillar 2A requirement of 2.50% of risk-weighted assets.
159
Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
The following shows the regulatory capital resources managed by the Group and Bank:
Share capital
Share premium account
Capital redemption reserve
Merger reserve
Retained earnings
Intangible assets
Foreseeable dividend1
Common Equity Tier 1 capital
Capital securities
Additional Tier 1 capital
Total Tier 1 capital
Subordinated debt liability2
Collective impairment allowance
Tier 2 capital
Total regulatory capital
Group
2017
£m
Bank
2017
£m
Group
2016
£m
2.5
175.5
87.3
–
–
81.0
16.7
1.6
2.5
87.3
183.1
-
Bank
2016
£m
175.5
81.0
9.2
1.6
409.3
201.2
164.3
145.8
(65.7 )
(44.6 )
(59.9 )
(38.8 )
–
–
(6.7 )
(6.7 )
433.4
431.4
370.6
367.6
124.0
125.0
124.0
125.0
–
–
–
–
557.4
556.4
370.6
367.6
74.2
11.1
85.3
75.0
11.0
86.0
75.3
8.7
84.0
76.1
8.7
84.8
642.7
642.4
454.6
452.4
1 As required by Article 26(2) of the Capital Requirements Regulation, a deduction was made for foreseeable dividends from the 2016 profit.
2 Excludes capitalised interest of £1.2 million for Group (2016: £nil) and £1.1 million for Bank (2016: £nil). Accrued interest is payable semi-annually
and is therefore excluded from capital reserves.
Risk-weighted assets1
Property Finance
Business Finance
Consumer Lending
Other
Operational risk
Group
2017
£m
Bank
2017
£m
Group
2016
£m
Bank
2016
£m
1,529.1
1,529.1
1,107.1
1,107.1
967.2
945.3
1,019.7
1,019.7
489.8
489.8
372.9
372.9
71.6
66.7
66.9
66.9
304.0
304.5
212.0
212.0
Total risk-weighted assets
3,361.7
3,335.4
2,778.6
2,778.6
1 Risk-weighted assets are not covered by the External Auditor’s opinion.
160
Shawbrook Group plc Annual Report and Accounts 2017
The regulatory capital reconciles to the total capital in the Group’s consolidated statement of financial position
as follows:
Total regulatory capital
Subordinated debt liability1
Collective impairment allowance
Intangible assets
Foreseeable dividend2
Total equity
Group
2017
£m
Bank
2017
£m
Group
2016
£m
Bank
2016
£m
642.7
642.4
454.6
452.4
(74.2)
(75.0)
(75.3 )
(76.1 )
(11.1 )
65.7
–
(11.0 )
44.6
–
(8.7 )
59.9
6.7
(8.7 )
38.8
6.7
623.1
601.0
437.2
413.1
1 Excludes capitalised interest of £1.2 million for Group (2016: £nil) and £1.1 million for Bank (2016: £nil). Accrued interest is payable semi-annually
and is therefore excluded from capital reserves.
2 As required by Article 26(2) of the Capital Requirements Regulation, a deduction was made for foreseeable dividends from the 2016 profit.
The key capital ratios for the Group are presented below1:
Common Equity Tier 1 capital ratio
Total Tier 1 capital ratio
Total capital ratio
Leverage ratio
Group
2017
Bank
2017
Group
2016
12.9%
12.9%
13.3%
16.6%
16.7%
13.3%
19.1%
19.3%
16.4%
9.4%
9.5%
7.8%
Bank
2016
13.2%
13.2%
16.3%
7.7%
1 The Group’s capital ratios are not covered by the External Auditor’s opinion.
The following table shows the movement in Total Tier 1 capital during the year:
Total Tier 1 capital at 1 January
370.6
367.6
312.9
308.6
Movement in Common Equity Tier 1 capital:
(Decrease)/increase in capital redemption reserve
(183.1 )
7.5
–
4.8
Group
2017
£m
Bank
2017
£m
Group
2016
£m
Bank
2016
£m
Movement in retained earnings:
Profit for the year
Dividend paid
Cancellation of capital redemption reserve
Share-based payments
Increase in intangible assets
Decrease/(increase) in foreseeable dividend1
Movement in Additional Tier 1 capital:
Increase in capital securities
Total Tier 1 capital at 31 December
61.2
(6.8 )
183.1
7.5
(5.8 )
6.7
74.9
64.8
66.1
(19.5 )
–
–
(5.8 )
6.7
–
–
4.8
(5.2 )
(6.7 )
–
–
–
(5.2 )
(6.7 )
124.0
125.0
–
–
557.4
556.4
370.6
367.6
1 As required by Article 26(2) of the Capital Requirements Regulation, a deduction was made for foreseeable dividends from the 2016 profit.
161
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
31. Risk management continued
Leverage ratio1
Total Tier 1 capital
Exposure measure:
Group
2017
£m
Bank
2017
£m
Group
2016
£m
Bank
2016
£m
557.4
556.4
370.6
367.6
Total regulatory statement of financial position assets (excluding derivatives)
5,756.9
5,699.6
4,641.4
4,619.8
Exposure value for securities financing transactions
–
–
0.6
Off-balance sheet items
Exposure value for derivatives
Other regulatory adjustments
Total exposures
Leverage ratio
0.6
171.6
1.3
224.7
224.7
171.6
2.2
2.2
1.3
(65.7 )
(44.6 )
(59.9 )
(38.8 )
5,918.1
5,881.9
4,755.0
4,754.5
9.4%
9.5%
7.8%
7.7%
1 The Group’s leverage ratio is not covered by the External Auditor’s opinion.
Exposure values associated with derivatives and securities financing transactions have been reported in compliance
with CRD IV rules. For purposes of the leverage ratio, the derivative measure is calculated as the replacement cost
for the current exposure plus an add-on for future exposure and is not reduced for any collateral received or
grossed up for collateral provided.
Off-balance sheet exposure comprises pipeline and committed facilities balances which have a credit conversion
factor of medium risk attached to them.
Other regulatory adjustments comprise net replacement costs of derivatives and securities financing transactions
to the leverage ratio exposure.
162
Shawbrook Group plc Annual Report and Accounts 2017
32. Subsidiary companies
Accounting policy
Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of the 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
%
Principal
activity
Shawbrook Bank Limited
and its subsidiaries:
England and Wales
Ordinary
Shawbrook International Limited
Jersey
Ordinary
Shawbrook Buildings and Protection Limited
England and Wales
Ordinary
Singers Corporate Asset Finance Limited
England and Wales
Ordinary
Singers Healthcare Finance Limited
England and Wales
Ordinary
Coachlease Limited
Hermes Group Limited
England and Wales
Ordinary
England and Wales
Ordinary
Singer & Friedlander Commercial Finance Limited
Scotland
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
Banking
Banking
FCA authorised
introducer
of insurance
Dormant
Dormant
Dormant
Dormant
Dormant
Link Loans Limited
England and Wales
Ordinary
100%
Non-trading
Centric Group Holdings Limited
and its subsidiaries:
England and Wales
Ordinary
100%
Dormant
Centric Group Finance 2 Limited
England and Wales
Ordinary
Centric Group Finance Limited
and its subsidiaries:
England and Wales
Ordinary
Centric Commercial Finance Limited
England and Wales
Ordinary
Centric SPV 1 Limited
Centric SPV 2 Limited
England and Wales
Ordinary
England and Wales
Ordinary
Resource Partners SPV Limited
England and Wales
Ordinary
100%
100%
100%
100%
100%
100%
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
All entities have the same registered address as the Company, except the following:
■ Shawbrook International Limited – 1st Floor Kensington Chambers, Kensington Place, St Helier, JE4 0ZE, Jersey;
and
■ Singer & Friedlander Commercial Finance Limited – 8 Nelson Mandela Place, Glasgow, Scotland, G2 1BT.
163
Strategic reportCorporate governanceFinancial statements
Notes to the financial statements continued
For the year ended 31 December 2017
33. Related party transactions
Related parties of the Group include Directors, key management personnel, or their close family members and
entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power
is held, by Directors, key management personnel or their close family members.
Company
Movement in amounts owed by Group companies:
Balance at 1 January
Issue of capital securities
Investment in subsidiaries
Dividend received from Shawbrook Bank Limited
Professional fees and other costs
Transfer of funds
Balance at 31 December
2017
£m
1.7
125.0
(125.0 )
19.2
(17.8 )
(2.4 )
1.0
2016
£m
2.6
–
–
–
0.3
(1.2 )
1.7
In 2015, Shawbrook Group plc entered into a £75.0 million subordinated debt with its 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).
During 2017, Shawbrook Bank Limited issued £125.0 million Fixed Rate Reset Perpetual Additional Tier 1 Write
Down Capital Securities. Following listing of the capital securities on the Irish Stock Exchange on 8 December 2017,
Shawbrook Bank Limited issued the capital securities to Shawbrook Group plc on consistent terms as the listed
capital securities (see Note 28).
Pollen Street Capital Limited is a private equity firm who, in conjunction with BC Partners LLP, are the ultimate
controlling entities of the Company (see Note 36). Both Pollen Street Capital Limited and BC Partners LLP hold
equal shareholdings in Marlin Bidco, the Parent of Shawbrook Group plc.
During 2017, the Group extended a €20.0 million revolving credit facility to Capitalflow (Asset Finance) DAC,
which is 100% owned by PSC Nominee 3 Limited, a Pollen Street Capital Limited company. As of 31 December 2017,
the balance outstanding was £5.8 million.
During 2017, the Group extended a senior revolving facility to 1st Stop Funding Limited, whose ultimate parent
is 1st Stop Holdings Limited. 1st Stop Holdings Limited is 100% owned by PSC Nominee 3 Limited, a Pollen Street
Capital Limited company. The balance outstanding at 31 December 2017 was £20.0 million (2016: £21.0 million).
Transactions with Directors
The Directors of the Group declared and sold shares as part of the acquisition of the Group by Marlin Bidco
which totalled 4,447,746 shares of four Directors and two closely associated persons. Lindsey McMurray and
Cédric Durbourdieu are Directors of Marlin Bidco Limited the Group’s 100% Shareholder.
Transactions with key management personnel
Key management personnel are defined as the Executive Management team of Shawbrook Group plc
excluding the Executive and Non-Executive Directors. The total remuneration which included short-term
benefits and employer pension contributions totalled £5.0 million (2016: £2.4 million). Six members of the
Executive Management team and two persons closely associated also declared and sold shares as part
of the acquisition of the Group by Marlin Bidco which totalled 2,098,741 shares.
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34. Capital commitments
The Group had capital commitments totalling £nil at 31 December 2017 (2016: £0.3 million).
35. 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 the 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 the Group.
Alternatively, they 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.
Financial guarantee contracts
In 2015, the Group entered into a financial guarantee contract to an amount of £2.5 million. 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 fixed charge over a blocked deposit account to an amount of £2.5 million.
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.
The Group’s Consumer Lending division is exposed to risk under Section 75 CCA, in relation to any misrepresentations
or breaches of contract by suppliers of goods and services to customers where the purchase of those goods and
services is financed by the Group. While the Group would have recourse to the supplier in the event of such liability,
if the supplier becomes insolvent then that recourse would have limited value.
In 2017, the Group’s Consumer Lending division has seen an increase in the number of customer complaints
relating to the provision of solar panels by certain suppliers. These complaints relate either to the quality of
the panels or to representations allegedly made by suppliers as to the expected financial performance of the
panels and the Group investigates each complaint on its individual merits.
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Strategic reportCorporate governanceFinancial statements Notes to the financial statements continued
For the year ended 31 December 2017
36. Ultimate parent company
The Company was acquired by Marlin Bidco Limited on 31 August 2017 and was removed from the Official List
and trading cancelled on the London Stock Exchange on 24 August 2017. Marlin Bidco Limited is a company jointly
owned by PSCM Pooling LP and Marlinbass Limited which are investment vehicles of Pollen Street Capital Limited
and BC Partners LLP respectively.
The largest company in which the results of the Group are consolidated is that headed by Shawbrook Group plc,
incorporated in England and Wales. No other financial statements include the results of the Group.
37. Country-by-country reporting
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 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 or Channel Island registered entities, the activities of which
are disclosed in Note 32.
The Group’s net operating income, profit before taxation, income tax charge, tax paid and number of full-time
equivalent employees were:
Net operating income (£m)
Profit before tax (£m)
Income tax charge (£m)
Tax paid (£m)
Average number of employees on a full-time equivalent basis
The Group did not receive any public subsidies.
2017
2016
238.7
209.6
86.5
25.3
29.6
671
88.2
23.4
20.4
569
38. Post-balance sheet events
On 23 February 2018, the Group received confirmation of an interim payment of £4.95 million relating to the
Group’s insurance claim in respect of the controls breach identified in the Business Finance division in H1 2016,
which will be paid subject to verification of the quantum of the claimed losses. The Group’s insurers confirmed
that the Group’s insurance claim is covered in principle under the policy, but insurers are still considering certain
aspects of the Group’s claim before the final settlement amount can be determined.
There have been no other significant events between 31 December 2017 and the date of approval of the financial
statements which would require a change to or additional disclosure in the financial statements.
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Shawbrook Group plc Annual Report and Accounts 2017
Glossary
Average principal employed
Basel III
Calculated as the average of monthly closing loans and advances
to customers, net of impairment provision, from the Group’s
financial reporting and management information systems,
including operating leases, which are classified as property,
plant and equipment in the Group’s financial statements.
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.
Basis point (bps)
One hundredth of a percent (0.01%). 100 basis points is 1%.
It is used in quoting interest rates or yields on securities.
Board
The Board of Directors of Shawbrook Group plc.
Buy-to-let (BTL) mortgages
BTL mortgages are those mortgages offered to customers
purchasing residential property as a rental investment.
Capital Requirements Regulation (CRR)
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.
CCA
CGU
Code
Common Equity Tier 1 (CET1) capital
Consumer Credit Act.
Cash generating unit.
The FRC’s UK Corporate Governance Code (2016 edition).
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.
Common Equity Tier 1 (CET1)
capital ratio
The CET 1 capital ratio is calculated as CET1 capital divided by
risk-weighted assets.
Cost of risk
Cost to income ratio
CRD
CRD IV
Cost of risk is calculated as impairment losses on financial assets
divided by average principal employed.
Cost to income ratio is calculated as administrative expenses
plus provisions for liabilities and charges, divided by net
operating income.
Capital Requirements Directive.
In June 2013, the European Commission published legislation for
a CRD and 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 from 1 January 2014, with certain sections subject
to transitional phase in.
CSR
Corporate Social Responsibility.
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Strategic reportCorporate governanceFinancial statements Glossary continued
Customer deposits
Customer loans
Deferred tax assets
Monies deposited by individuals and companies that are not credit
institutions. Such funds are recorded as liabilities in the Group’s
statement of financial position.
Loans and advances to customers, net of impairment provision and
including operating leases, which are classified as property, plant
and equipment in the Group’s financial statements.
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.
ECL
Expected credit loss.
Effective interest rate (EIR)
Effective interest rate method (EIRM)
The EIRM calculates the amortised cost of a financial asset or
financial liability, and allocates the interest income over the
relevant period. The EIR is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial asset
or financial liability. Calculation of the EIR 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.
Encumbrance
The use of assets to secure liabilities, such as by way of a lien
or charge.
EPS
Earnings per share.
Exposure at default
Fair value
Financial Services
Compensation Scheme
(FSCS)
Forbearance
An estimate of the amount expected to be owed by a customer
at the time of a customer’s default.
The amount for which an asset could be exchanged, or a liability
settled, between willing parties in an arm’s length transaction.
The FSCS 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 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.
FRC
Financial Reporting Council.
Full-time employee
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.
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Shawbrook Group plc Annual Report and Accounts 2017 Funding for Lending Scheme (FLS)
FVOCI
FVTPL
Gross asset yield
Group
HIL
HOL
IAS
IASB
ICG
IFRS
Impaired assets
Impairment allowance
Instalment credit agreement
Interest rate risk
Internal Capital Adequacy
Assessment Process (ICAAP)
The Bank of England launched the FLS 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.
Fair value through other comprehensive income.
Fair value through profit or loss.
Gross asset yield is calculated as the sum of interest and similar
income, net income from operating leases, net fee and commission
income and fair value gains/(losses) on financial instruments
divided by average principal employed.
The Company and its subsidiaries.
Home Improvement Loan.
Holiday Ownership Loan.
International Accounting Standard.
International Accounting Standards Board.
Individual Capital Guidance.
International Financial Reporting Standards.
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. This definition also includes
unsecured loans in the Consumer Lending division that are more
than 90 days in arrears and carry identified impairment that is
calculated on a collective basis.
The impairment allowance includes allowances against loans
that have been individually impaired and those that are subject
to collective impairment.
An instalment credit agreement is an agreement similar in
nature to a hire purchase agreement or otherwise known as
a rent-to-own agreement.
The risk of a reduction in the present value of the current statement
of financial position or earnings as a result of adverse movement in
interest rates.
The Group’s own assessment, based on Basel III 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.
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Strategic reportCorporate governanceFinancial statements Glossary continued
Internal Liquidity Adequacy
Assessment Process (ILAAP)
Leverage ratio
Liability yield
The Group’s own assessment of its overall liquidity adequacy and in
particular the level of liquidity resources it requires to meet its
liabilities as they fall due even under stressed conditions, in
accordance with the PRA’s liquidity rules under PS11/15.
The leverage ratio is calculated Common Equity Tier 1 capital
divided by the sum of total assets (excluding intangible assets and
include adjustments for certain off-balance sheet items such as
pipeline and undrawn collateral).
Liability yield is calculated as interest expense and similar charges
divided by average principal employed.
LIBOR (London Inter-Bank
Offered Rate)
The interest rate participating banks offer to other banks for loans
on the London market.
Loss given default
Management expenses ratio
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.
Management expenses ratio is calculated as administrative
expenses plus provisions for liabilities and charges, divided by
average principal employed.
MREL
Minimum Requirements for Eligible Liabilities.
Neither past due nor impaired
Net interest income
Net interest margin (NIM)
Net stable funding ratio
Past due
Past due but not impaired
PD
Pillar 1
PRA
170
Loans that are not in arrears and which do not meet the impaired
asset definition. This segment can include assets subject to
forbearance solutions.
The difference between interest received on assets and interest
paid on liabilities.
Calculated as net operating income divided by average
principal employed.
The ratio of available stable funding required to support the assets
and activities over the medium term as set out by the Basel III
requirements and implemented by the European Banking Authority
and the PRA.
A loan is considered past due when the borrower has failed to make
a payment under the terms of the loan agreement. This may also
include loans past maturity where an outstanding balance exists.
Loans past due but not impaired consist predominantly of loans in
Property Finance and Business Finance that are impaired. This
definition also included unsecured loans in the Consumer Lending
Division that are past due but not more than 90 days.
Probability of default.
The part of the Basel framework that sets outs the rules that govern
the calculation of Minimum capital requirements for credit, market
and operational risks.
Prudential Regulation Authority.
Shawbrook Group plc Annual Report and Accounts 2017 RAS
RBC
Risk Appetite Statement.
Regional Business Centres.
Recovery Plan and Resolution Pack
Repurchase agreements or ‘Repos’
The Bank Recovery and Resolution Directive establishes a common
approach to the recovery and resolution of banks and investment
firms. The Group’s recovery plan enables the Board and Senior
Management to manage a crisis which may threaten the capital
and/or liquidity adequacy of the Bank, or its ultimate viability. The
objective of the plan is to put in place measures (recovery options)
to restore capital, liquidity or profitability so that the Bank can
operate sustainably and viably. The Group’s resolution pack lays out
the information required to support effective resolution planning.
The requirements for the Recovery Plan and Resolution Pack are set
out in supervisory statement SS18/13 and SS19/13 respectively.
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 perspective they are reverse
repurchase agreements (reverse repos).
Return on lending assets
Return on lending assets before tax is calculated as profit/(loss)
before taxation divided by average principal employed.
Return on tangible equity (RoTE)
Risk-weighted assets
RMF
SAF
Secured lending
SF
SIL
SME
SPPI
Standardised approach
Return on tangible equity is calculated as profit 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.
A measure of a bank’s assets adjusted for their associated risks. Risk
weightings are established in accordance with PRA rules and are
used to assess capital requirements and adequacy under Pillar 1.
Risk Management Framework.
Structured Asset Finance.
Lending on which the borrower uses collateral such as equity in
their home.
Structured Finance.
Shawbrook International Limited.
Small to medium enterprises.
Solely payments of principal and interest.
In relation to credit risk, a method for calculating credit risk capital
requirements using External Credit Assessment Institutions 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.
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Strategic reportCorporate governanceFinancial statements Glossary continued
Stress testing
Term Funding Scheme (TFS)
Tier 1 capital
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 or liquidity resources
which are required to be held.
The Bank of England launched the TFS in 2016 to allow banks and
building societies to borrow from the Bank of England at rates close
to Bank base rate. This is designed to increase lending to businesses
by lowering interest rates and increasing access to credit.
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
Total capital ratio
A further component of regulatory capital defined by the PRA.
It comprises eligible collective assessed impairment allowances
under CRD IV.
The total capital ratio is calculated as total regulatory capital
divided by risk-weighted assets.
TSR
Total Shareholder return.
Unencumbered assets
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.
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Shawbrook Group plc Annual Report and Accounts 2017 Shawbrook Group plc, Lutea House, Warley Hill Business Park, The Drive, Great Warley, Brentwood, Essex, CM13 3BE.
Registered in England – Company Number 07240248. Authorised by the Prudential Regulation Authority and regulated
by the Financial Conduct Authority and the Prudential Regulation Authority.
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