Tanami Gold NL Annual Report 2020

Plain-text annual report

Investment evolved T a t t o n A s s e t M a n a g e m e n t p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 2 0 Annual Report and Accounts 2020 INVESTMENT EVOLVED Tatton Asset Management plc has achieved a third successive year of growth in revenue, profits and assets under management (“AUM”) since IPO. Over the three-year period, AUM has increased by 70% from £3.9bn to £6.7bn. We are proud to be working with 595 IFA firms, which has doubled over the same period. Contents Corporate Governance 36 Board of Directors 38 Corporate Governance Statement 40 Directors’ Remuneration Report 43 Directors’ Report 47 Independent Auditor’s Report Financial Statements 53 Consolidated Statement of Total Comprehensive Income 54 Consolidated Statement of Financial Position 55 Consolidated Statement of Changes in Equity 56 Consolidated Statement of Cash Flows 57 Notes to the Consolidated Financial Statements 92 Company Statement of Financial Position 93 Company Statement of Changes in Equity 94 Notes to the Company Financial Statements Strategic Report 01 Highlights 02 At a glance 04 Chairman’s Statement 06 Chief Executive’s Review 10 Chief Investment Officer’s Report 12 Engaging with our stakeholders 14 Our market share and trends 16 Our business model 18 Our strategy for growth 26 Key Performance Indicators 28 Risk management 29 Risk management processes 30 Principal risks 32 Chief Financial Officer’s Report 34 Corporate Responsibility 01 Highlights FINANCIAL — Group revenue increased 22.0% to £21.369m (2019: £17.518m) — Adjusted Operating Profit* up 24.2% to £9.076m (2019: £7.308m) — Adjusted Operating Profit* margin increased to 42.5% (2019: 41.7%) — Operating Profit increased to £10.302m (2019: £5.925m) — Profit before tax increased to £10.296m (2019: £6.112m) — Final dividend increased by 14.3% to 6.4p (2019: 5.6p), giving a full year dividend of 9.6p — Fully diluted adjusted earnings per share (“EPS”)* increased by 19.8% to 12.00p (2019: 10.02p) — Healthy financial position, strong balance sheet and £12.757m of net cash (2019: £12.192m) OPERATIONAL — Tatton’s discretionary assets under management (“AUM”) increased 9.6% to £6.651bn (2019: £6.068bn) — Organic net inflows of £1.129bn (2019: £1.106bn) or 18.6% of opening AUM, an average of £94.1m per month — The Group responded swiftly to the COVID-19 outbreak and efficiently implemented comprehensive business continuity plans — The Group made its first acquisition: Sinfonia Asset Management Limited, five risk-targeted funds that complement the current fund range proposition — Tatton increased its firms by 33.7% to 595 (2019: 445) and number of accounts to 66,100 (2019: 58,500) — Tatton’s long-term business partnership with Tenet, which was announced in June 2019, is developing well with 81 new Independent Financial Adviser (“IFA”) firms and initial business activity has resulted in AUM of £226m — Amalgamation of Consulting and Mortgages creating a simplified IFA support services business, allowing the Group to better meet the needs of IFAs through an integrated approach — Paradigm Mortgage Services increased gross lending via its channels by 17.5% to £9.86bn (2019: £8.39bn) — Paradigm Consulting increased the number of member firms to 394 (2019: 390) Financials Group revenue Adjusted Operating Profit Adjusted EPS £21.369m £9.076m +22.0% +24.2% 12.00p +19.8% Profit before tax Proposed final dividend AUM £10.296m +68.5% 6.4p +14.3% £6.651bn +9.6% * See note 23 for details of alternative performance measures. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202002 At a glance A BROADER PROPOSITION Tatton Asset Management plc offers on-platform only discretionary fund management as well as regulatory, compliance and business consulting services and a whole of market mortgage proposition to IFAs across the UK. This is achieved through two operating divisions: Tatton, the Group’s investment management division, and Paradigm, the Group’s IFA support services business. — Market leading on-platform discretionary fund management service — Full range of risk-rated investment portfolios — Multi-Manager funds complement portfolios — Highly experienced investment team — Exclusively available for the clients of IFAs — Clients benefit from gaining access to full discretionary management of their investments — Platform agnostic – now available on 14 platforms — Financial compliance support to directly authorised wealth managers, IFAs and mortgage advisers — Comprehensive mortgage offering to directly authorised firms, including a whole of market lender panel Group revenue breakdown Tatton Paradigm 15,924 10,567 12,521 4,904 4,949 5,426 2018 2019 2020 Tatton Asset Management plc Annual Report and Accounts 202003 TWO DISTINCT DIVISIONS Tatton Asset Management plc “TAM plc” or “Group” 25% 75% Tatton Investment Management Division Paradigm – IFA Support Services Division An investment manager providing discretionary fund management to the clients of IFAs Paradigm Mortgage Services is one of the UK’s leading mortgage distributor businesses, with through wrap-platform technology. It manages membership of over 1,500 directly authorised £6.651 billion of assets for the private clients from firms, representing c.3,900 regulated IFAs. 595 UK IFA firms. Paradigm Mortgage Services provides access IFAs benefit by being able to offer their clients full to a whole of market lender panel as well as a discretionary asset management whilst retaining wide range of mortgage and related support complete control of those relationships, together services, such as specialist lending distributors, with the ability to manage their clients’ portfolios conveyancing partners and general insurance via through existing platform arrangements. Paradigm Protect. Paradigm Consulting is a leading provider of support services, such as compliance, and other related products/services to directly authorised IFAs in the UK. In a highly regulated, fast changing industry, Paradigm Consulting is setting new standards in service, strategic and technical solutions, ensuring its adviser partners have access to the best propositions from across the financial market. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202004 Chairman’s Statement CONTINUED PROGRESS AGAINST OUR STRATEGY R O G E R C O R N I C K Chairman The financial year ended 31 March 2020 was a challenging period beginning amid the political turmoil caused by Brexit and concluding with the onset of an unprecedented global health crisis. Nevertheless TAM plc has achieved a third successive year of growth in revenue, profits and assets under management (“AUM”). COVID-19 began to affect financial markets across the world at the end of January 2020, and we have included a separate report on its impact on our businesses in the section immediately following this statement. The Board would like to express our sincere hope that all shareholders, staff, clients, advisors and suppliers, have been able to keep safe during this unprecedented development and will be able to get through the pandemic in as positive a manner as is possible. OUR PEOPLE On behalf of the Board, I would like to take the opportunity to acknowledge the very high level of contribution from each member of staff that has made it possible to achieve the position outlined in this statement, and to offer our grateful thanks. At the same time, I should draw attention to the positive and effective leadership provided by the Executive, in unprecedented circumstances, which has enabled the Group to sustain the service levels and high standards needed to maintain positive trading over the last few months, and will equip us to meet the challenges ahead. RESULTS The impact of COVID-19 in the period under review has been to reduce the value of AUM during February and March 2020, although flows of net new funds, and revenues, held up well. Group revenues increased by 22.0% to £21.369 million (2019: £17.518 million). Adjusted Operating Profit* increased by 24.2% to £9.076 million (2019: £7.308 million) and profit before tax, after incurring exceptional items and share-based payment charges, was £10.296 million (2019: £6.112 million). The resulting impact on fully diluted adjusted earnings per share was an increase of 19.8% to 12.00p (2019: 10.02p). Basic earnings per share were 14.98p (2019: 8.69p). Tatton Investment Management (“Tatton”), our on-platform discretionary asset manager, increased AUM by 9.6% to £6.651 billion (2019: £6.068 billion) with strong net inflows of £1.129 billion. Paradigm, the Group’s IFA support business, has enjoyed another year of growth, increasing both the number of member firms and revenue flows. Mortgage Services, the Group’s mortgage distribution and support services business, continued to grow well. Member firms increased 10.9% to 1,544 with associated gross lending from completions increasing 17.5% to £9.86 billion (31 March 2019: £8.39 billion). STRATEGY The Group’s strategic objectives have not been materially affected by recent events. We retain our focus on organic growth through the provision of products and services that are designed to enable Independent Financial Advisers (“IFAs”) to advise their clients, and we continue to invest in both people and technology that will steadily grow the business by enhancing our support for them. Our operating systems have been designed in such a way that staff, working from home, are able to maintain service levels and standards that sustain the broad product offering of all our underlying businesses. We are now focused on reinforcing resilience in our operational, business development, and financial management capabilities. Tatton Asset Management plc Annual Report and Accounts 202005 Challenging market conditions create opportunities and threats in diverse areas and we are acutely conscious of the possibility DIVIDENDS Given the Group’s performance this year; the strong cash of further consolidation in our industry. We have evaluated generation; and our confidence that we can adapt to meet several acquisition opportunities during the period under changing market circumstances, the Board is proposing a final review but remain committed to pursuing only those which dividend of 6.4p per share, bringing the total ordinary dividend are complementary, strategically aligned to the existing model, for the year to 9.6p per share, an increase of 14.3%, which is earnings enhancing and accretive to shareholder value. 1.9 times covered by adjusted earnings per share. The Board BOARD AND CORPORATE GOVERNANCE TAM plc remains committed to the highest standards of corporate governance. The Board and its Committees are key to guiding the Company and leading its strategy, and we are determined to ensure that we have the right mix of skill sets to steer the continues to operate a progressive dividend policy and targets a payout ratio in the region of 70% of annual adjusted earnings per share over the medium term. OUTLOOK While the trading period immediately in front of us is not easy to Group forward. In a business evolving in the current challenging read, the Group remains well-positioned to execute our strategy. environment, we will maintain a governance structure that underpins and encourages growth, while ensuring effective controls and safeguards are in place. As the new financial year progresses, we will adapt where necessary to meet changing trading conditions, while continuing to build on the success achieved to date through further investment SECTION 172 STATEMENT Section 172 of the Companies Act 2006 requires the Directors in efficient operations and customer service. As a result we anticipate delivering continued returns to our shareholders to act in the way that they consider, in good faith, would most through a progressive dividend policy, and remain optimistic likely promote the success of the Company for the benefit of its over our ability to achieve further progress. members as a whole. Further information on our engagement with stakeholders can be found on pages 12 to 13 of this Report and the consideration of our dividend policy is detailed on Roger Cornick Chairman page 43. * Alternative performance measures are detailed in note 23. COVID-19 IMPACT The COVID-19 pandemic has impacted all businesses to varying degrees. The Board of TAM plc is pleased to report that, whilst the Group’s performance has been affected, the Group The Group operates on a lean cost base, which enables our businesses to remain competitive in their markets. However, we are undertaking a cost reduction exercise to ensure operates in resilient markets and the directors believe the that all opportunities to improve efficiency are explored. fundamentals of the business and its route to market remain Whilst investment in future growth will continue, a moratorium strong and relevant in these unprecedented times. on material capital expenditure is in place and salary increases Throughout the pandemic, the Group has supported its customers (the IFAs) by providing valuable data and narrative to enable them to communicate clearly with their clients, further cementing long-term mutually beneficial relationships. TAM plc has a low-risk, high-margin business model, based on strong levels of recurring revenue (circa 85% over the last 3 years). Whilst it’s still too early to estimate accurately the full financial impact of the pandemic, the Group has a robust financial liquidity position with £12.8 million cash at 31 March 2020 and no debt; a £1.5 million overdraft facility and bonuses have been frozen until the COVID-19 situation unfolds. The Group will not take advantage of Government support schemes, which the Board believes are intended for businesses significantly more affected than TAM plc. The Group’s forecast has been reviewed and updated for the expected impact of COVID-19 pandemic, various market scenarios and management actions. This review has allowed management to assess the potential impact on income, costs, cash flow and capital and the ability to implement effective management actions that may be taken to mitigate the impact. which remains undrawn; and a highly efficient working capital The Board will continue to support its people and take all the cycle, ensuring strong operating cash conversion (c.100% of precautions necessary to ensure the Company’s ongoing robust adjusted operating profit). The Company also has indications financial health and remains vigilant, constantly monitoring of a good level of support from quality lending institutions, the evolving situation. New opportunities to strengthen the in the unlikely event that this will be required. business through acquisition will also be evaluated if and The Board is confident that the Group has more than adequate when they arise. resources to withstand the challenges the pandemic presents Further information on the market impact is shown on page in the short to mid-term. 15 and our principal risks shown on pages 30-31. As noted above, the dividend policy remains unchanged. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202006 Chief Executive’s Review INVESTMENT EVOLVED I am pleased to report on another year of progress for the Group, in this our third year as a plc. Despite a complex macro backdrop, we have continued to perform strongly and delivered against all the challenging targets we set ourselves at the time of our IPO. resulting lockdowns which wiped trillions off equity values around the world. We have weathered all these storms and have continued to deliver growth in line with expectations, by focusing on providing simple but effective solution-based services to our clients, including We floated in 2017 with a clear strategy to drive revenue and the most competitive DFM offering available. I would like to profitability through the development and growth of assets under thank our shareholders for backing our team and supporting management (AUM), and by building on existing relationships, our ambitions and our clients for their continuing commitment while further developing new relationships with IFAs and new and faith in our ability to deliver an unrivalled service. members across the Group. Since then, we have increased our AUM from £3.9bn to over COVID-19 As stated in our most recent Trading Update, the Group responded £6.6bn, an increase of circa 70%. Almost all of this growth has swiftly to the COVID-19 outbreak and efficiently implemented been achieved organically. In the year under review, net inflows comprehensive business continuity plans. We pivoted to remote averaged £94.1m per month, compared to £90.0m per month working, seamlessly replicating our processes and systems, in the prior year, with additional support from the acquisition whilst safeguarding the health and safety of our employees of Sinfonia Asset Management from Tenet in September 2019, and ensuring that the business continued to service our clients which added a further £135m of AUM. Today, Tatton is working with over 595 IFA firms, and manages 66,100 client accounts, representing growth of 114% and 55% respectively since IPO. The number of Paradigm Consulting IFA firms, for whom we provide regulatory and compliance services, has also continued to grow in this three-year period, increasing as normal. The Group will not be taking advantage of any Government support scheme, which the Board believes are intended for businesses which have been significantly more affected than TAM plc. THE MARKET OVERVIEW Before the impact of COVID-19 IFA businesses were continuing from 352 to 394, and our Mortgages Services membership to thrive, reporting increased levels of turnover and profitability. increased from 1,069 to 1,544. Over the three years since IPO the key driver for the Group’s growth in both revenue and profits has been our on platform Discretionary Fund Management Managed Portfolio Service (“DFM MPS”) proposition, which remains the most competitive in the market. It has no minimum investment and delivers a standard Over the last 12 months, the number of IFA firms across the full IFA population has remained static and we would expect that, post lockdown, IFAs will return to recent historic levels of activity. We do not expect the number of supporting firms to reduce due to COVID-19 issues, as their recurring revenue model and low geared cost base ensures continued financial prosperity. of service to all levels of investors and their IFA irrespective Tatton has always believed in the benefits of independent of portfolio size, which some other providers normally reserve intermediated advice, and we are very encouraged by how for wealthier clients. This, combined with risk management, IFAs are adapting to change and delivering value to their clients, creates a compelling proposition for IFAs. The Group has achieved its targets, despite facing some major headwinds: global equity markets endured steep declines in Q4 2018 amid persistent worries over trade and economic growth; uncertainty surrounding the UK’s Brexit plans followed closely, creating investor hesitancy throughout 2019; and, in the final month of the year under review, the COVID-19 pandemic and while maintaining profitable businesses. The requirement for independent financial advisory services continues to grow with eight out of ten advisers reporting an increase in client numbers year on year. It is interesting to note that robo-advisory businesses, which provide financial advice and investment management based on mathematical rules or algorithms and with minimal human intervention, are struggling to reach critical mass and financial viability. Tatton Asset Management plc Annual Report and Accounts 2020While many financial advisers continue to manage and run portfolios in-house, it is clear that an increasing number are reviewing their business models in favour of the outsourced investment management services, which contribute to improved efficiency in the financial planning process. The complexity of the financial planning process and burden of regulation, including MIFID II reporting, makes researching and maintaining investment portfolios in-house challenging and increasingly expensive. When set against a backdrop of increased global market volatility and economic uncertainty, we see the trend for outsourcing escalating and demand for Tatton’s services increasing. The broader opportunity for Tatton continues to improve, with over £500bn of assets currently sitting on platforms of which more than £50bn are in model portfolios. Tatton currently has £6.651bn and is the largest provider of DFM MPS. Platforms are expected to grow by 5-6% per annum, with some commentators forecasting that assets will exceed £1.0 trillion by 2023. TATTON This year has seen another strong year of growth for Tatton. Net inflows were £1.129bn (2019: £1.106bn) and we also experienced a significant increase in IFA firms to 595 (2019: 445). The closing balance of AUM was £6.651bn, a 9.6% increase on the prior year despite being impacted by a negative market performance of 14.3% or £1.1bn towards the end of the financial year, due to COVID-19 related market falls. Prior to this, our AUM reached a record level of £7.758bn on 21 February 2020, an increase of 100% since we joined AIM. A significant milestone in the year was the strategic partnership announced in June 2019 with Tenet Group (“Tenet”), one of the UK’s largest financial advisory businesses, to provide a managed portfolio service for its appointed representatives and directly authorised firms. Of the 474 Tenet firms, 81 firms are now using Tatton services and they have contributed £261.0m of net new flows. The year also saw the acquisition of the Tenet’s Sinfonia funds in September which contributed £135.0m of AUM. Our focus this year will be to consolidate our position as the leading DFM MPS provider of choice. We will look to leverage our competitive advantage as being a high value low cost DFM and further developing our AUM organically. However, it has always been our intention to become a true asset manager, building on the success of our MPS services and adapting to increased IFA demand for cost reducing multi-asset multi manager solutions. This ambition is achievable through a combination of organic and M&A activity, enhancing the value of our AUM and continuing to serve the demands of the IFA sector for improved client solutions. 07 P A U L H O G A R T H Chief Executive Officer “ We develop deep and strategic relationships with our Financial Adviser clients across the Group businesses. ” At the current time, it remains unclear what further impact the COVID-19 pandemic will have on the business. Since the year end, AUM has recovered in line with our 0.6 beta1 to the markets and the start of the new financial year has seen positive net inflows in the first two months. Clearly, events will further unfold, but we believe our business model is robust and resilient and the business remains well placed to manage its way through the effects of the pandemic. PARADIGM (IFA SUPPORT SERVICES DIVISION) During the year, we took the decision to simplify our business units to create a clear distinction between our investment management and support services businesses. The Paradigm businesses now report under a single operation and continue to deliver both IFA Consulting and Mortgage Services. Paradigm Consulting maintains close relationships with its financial adviser firms, providing bespoke consultancy and support and helping them manage the risk of an ever-changing landscape of regulation. The number of firms has marginally increased in the year under review, growing from 390 to 394, with a mix of ad hoc consultancy and competitive pricing contributing to a 9.6% increase in revenue to £2.476m (2019: £2.260m). 1 Beta: The level of volatility in comparison to the market as a whole. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202008 Chief Executive’s Review continued Paradigm Mortgages aggregates mortgage lending and life TATTON ASSETS UNDER MANAGEMENT IN £ BILLION insurance. Membership of Paradigm Mortgages enables advisers and their clients to benefit from economies of scale and secure access to the best mortgage deals and life assurance products available. This year has been a difficult one in the mortgage market, with the first half framed by Brexit uncertainties and finishing with the impact of COVID-19. Despite these challenges, revenue rose by 9.7% to £2.949m (2019: £2.689m), as membership grew 10.9% to 1,544 (FY19: 1,392) and gross lending from completions rose by 17.5% to £9.86bn (FY19: £8.39bn). 8 7 6 5 4 3 2 1 0 The recent lockdown restrictions have made completing mortgages difficult. This has, inevitably, impacted all parts of the mortgage April 2013 April 2014 April 2015 April 2016 April 2017 April 2018 April 2019 April 2020 supply chain and, while the restrictions have been eased, it will Tatton Assets under Management take time for the market to return to normality. The likely total impact still remains difficult to forecast. That said, the business is lean and efficient and remains in good shape to navigate its way through this crisis. CURRENT TRADING AND OUTLOOK The strong momentum built through the year has been impacted We expect Paradigm Consulting to trade as normal through this uncertain period, albeit remotely. Clearly, the mortgage during lockdown, with engagement of both existing and potential market and its behaviour are out of our control and we remain client IFAs naturally lower than in the preceding months. Our teams guarded against forecasting any significant recovery in the continue to work remotely, in line with Government guidelines short-term. One thing we know for sure is that lenders will be which, while effective, hampers normal activity levels to a certain more risk adverse, reducing their loan to value (LTV) lending degree. I have no doubt that when restrictions are fully lifted ratio. That said, it is clear that demand will return in the medium and we can safely return to normal operation, the Group’s new term as structural market conditions have not fundamentally business flows will also return to normal levels. Naturally this changed, and Government incentivisation is anticipated to assist will be dependent on government guidelines and no further economic recovery post COVID-19. interruptions caused by freshly imposed restrictions in the future. It would not be the right description to refer to COVID-19 as a All that said, Tatton has provided considerable support and bump in the road but we have often internally referred to the valuable market data to its IFAs throughout this exceptionally recent loss of momentum as leading to a potential lost year difficult time. The positive feedback we are receiving shows on our growth trajectory. Unfortunate as this is, we believe how much this work has been appreciated by our IFAs. I believe the Group is resilient and financially robust, with an enduring the goodwill and positivity around our services will translate to business model and exceptional people. The Board and I have new business opportunities, as IFA businesses talk with their no doubt that the business will rebuild momentum rapidly when peers and come to realise that they have been left significantly circumstances permit. exposed with little or no support in a volatile and difficult market environment. IFAs who have continued to in-source their investment proposition have now been exposed on three separate occasions: Woodford and the “star” fund manager reliance; the suspension and lack of liquidity in property funds, another favourite of IFAs; and latterly, the collapse of global There will, inevitably, be opportunities in our markets as a result of this unprecedented disruption. Tatton maintains its clear focus on delivering sustainable organic and acquisitive growth and is perfectly placed to act should any appropriate opportunities arise. markets. These events must have instilled doubt over the decision The Board looks to the future with confidence and to reporting to continue providing this service in-house and will lead them on the Group’s progress as the year unfolds. to evaluate peer-recommended outsourcing alternatives. AUM £6.651bn Net inflows £1.129bn Paul Hogarth Chief Executive Officer Tatton Asset Management plc Annual Report and Accounts 2020From initiation to implementation 2. STRATEGIC ASSET ALLOCATION Our approach allows us to identify opportunities and use them in appropriate portfolios 4. TACTICAL ASSET ALLOCATION We rebalance when necessary or when opportune, not just automatically 6. PORTFOLIO CONSTRUCTION AND RISK MANAGEMENT We complete portfolio construction by identifying the representatives in each asset class 09 Stage 1 2 3 4 5 6 7 1. CORE BELIEFS Investment excellence has three elements: generating returns; risk management; and competitive fees 3. BENCHMARK PORTFOLIOS We stay within our clients’ risk parameters and manage costs – a compelling combination for investors 5. FUND RESEARCH Our analytical approach ensures we make decisions on which assets should or shouldn’t be held 7. EXECUTION AND MONITORING Outcomes matter: we focus on delivering consistent and superior investment returns by identifying the direction of travel of economic and capital markets Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202010 Chief Investment Officer’s Report BUSINESS GROWTH ACCELERATES L O T H A R M E N T E L Chief Investment Officer Net inflows remained strong at £1.129bn over the year, while the core proposition was expanded to enhance future growth potential. Capital market returns veered from headwind to tailwind during the 2019 calendar year, while AUM growth was driven by strong inflows and positive market performance. Until the pandemic crisis, UK investor sentiment was overshadowed by Brexit, but a more positive liquidity backdrop – as central banks reversed monetary tightening – drove global portfolio values upwards. After reaching a peak of £7.8 billion just before the pandemic, negative market returns drove Tatton’s AUM back down to £6.7 billion. Net client inflows remained positive at £86 million for March, supported by a continual supply of market updates and insights during the crisis, which put investor fear into context and prevented panic-driven redemptions. As adviser business activity gradually returns, we are benefitting from the support we gave them during the crisis, which has strengthened our relationships and boosted confidence in our portfolio stewardship. Our proactive communication approach, together with investor returns strictly within the boundaries of chosen risk profiles, presents a solid base for continued business growth. PROPOSITION DEVELOPMENTS AND BUSINESS INVESTMENTS Tatton has expanded its range of Blended Funds to five, adding two risk categories, defensive and aggressive, to meet the risk spectrum used by IFAs, ensuring a better complementary fit with We expanded our business development capability, adding office- based lead generation to support our field-based team. This reinforces our investment in sales and communications marketing resource to grow the number of firms using Tatton, in particular Tenet. We are now deepening relationships with more adviser firms through white label and investment support for larger firms. We appointed a Deputy Head of Investment and created a new role of Chief Economist, as well as recruiting a Chief Investment Strategist. Greater strength and depth within our investment team will help extend our investment offering across a wider range of asset allocation requirements, allowing us to reach an ever-increasing adviser target audience. our Managed Portfolio Service. Lower charges and consistent performance from the extended range should capture client 2019/2020 CAPITAL MARKETS AND RETURNS Global growth slowed notably in 2019 and although 2020 brought assets that cannot access our Managed Portfolio Service. promising early signs of a recovery, we were waiting for tangible The Tatton Bespoke Investment Service (“BPS”), created in 2019, is gaining inflows and is now available on several investment platforms. Its competitive, transparent charges offer considerable opportunity to increase assets during the coronavirus recovery. IFAs and investors will be seeking price value and we should benefit from existing supplier disturbance created by the lockdown. improvement. Meanwhile, capital markets were banking on a renewed monetary push from central banks and a steadily rebounding global economy showing up in the economic dataflow. Easing trade tensions between the US and China, plus the manufacturing sector emerging from its third midcycle slowdown of the past decade, had many investors decidedly bullish. As a result, the equity rally building since last autumn continued until mid-February, despite corporate results failing to meet lofty expectations. Tatton Asset Management plc Annual Report and Accounts 202011 Investment portfolio returns 1 April 2019 – 31 March 2020 Tatton Fund Performance (%) – core produce set (1/4/2019– 31/03/2020 after DFM charge and fund costs) markets responded with the broadest and steepest multi-asset sell-off in history. Prices only stabilised after the announcement of fiscal and monetary support measures of unprecedented dimension and reach. Temporarily removing the risk of a devastating global Defensive Cautious Balanced Active Aggressive Global Equity Tatton Active Tatton Tracker Tatton Hybrid Tatton Ethical (1.7) (5.0) (7.5) (10.1) (12.5) (7.1) (1.1) (4.1) (6.4) (8.7) (11.0) (6.2) (1.4) (4.5) (7.0) (9.4) (11.8) (6.6) (0.8) (1.6) (2.2) (3.0) (3.5) (3.6) IA credit default cycle, together with pledges of limitless “buyer-of- Sector* (3.5) (7.1) (7.4) (7.7) (8.1) (8.1) last-resort” liquidity, has led to a V-shaped recovery in asset markets which is looking increasingly less likely for the underlying economy. This leaves stock market valuations in early June even more extended than those seen in February, yet with a much more uncertain outlook. Investment managers cannot apply historic experience to this situation full of “unknown unknowns”, except to observe that – similar to the aftermath of the global financial * IA – Investment Association managed fund peer group with comparable asset crisis – the enormous injection of financial support is finding its way allocation characteristics. Since launch 1/2013 Tatton Fund Performance (%) – core produce set (1/1/2013- 31/03/2020, annualised, after DFM charge and fund costs) Tatton Active Tatton Tracker Tatton Hybrid IA Sector* 4.3 5.4 6.1 6.9 7.1 4.6 5.4 6.1 7.0 7.6 4.4 5.4 6.2 7.0 7.4 3.5 4.2 5.1 6.0 6.0 Defensive Cautious Balanced Active Aggressive 39.6% (2019: 36.7%) Blended 38.0% (2019: 44.5%) Active 18.1% (2019: 16.0%) Tracker 3.0% (2019: 1.7%) Ethical/ESG 1.3% (2019: 1.2%) Income Distribution of AUM across proposition matrix — There remains little change in the breakdown of the risk profiles in which our AUM is invested though there has been a shift from the Active range towards our Tracker and Hybrid Strategies. — Ethical has continued its fast growth as a portion of AUM. Although the coronavirus was initially brushed off as a problem confined to the Asia-Pacific region, similar to the 2003 SARS outbreak, the world woke up to the global pandemic threat – and its economic implications – on 20 February. From this point, asset into asset price inflation rather than the traditional price inflation most would expect. Immense monetary and fiscal support measures, together with the need to upgrade healthcare provisions and update elements of the global supply chain, could create the capex demand volumes that had been lacking in the previous decade – or create inflationary pressures while growth remains subdued. We will use the discipline and rigour of our investment approach to position clients’ portfolios to benefit from either outcome, without compromising investment risk. In the prevailing market environment, we are satisfied with our portfolio construction and management on behalf of our investors. While we share the disappointment of poor capital market returns overall, this 2020 market crash has borne fewer surprises than retail investors experienced during the 2008/2009 bear market. By holding our nerve amid the market chaos around us, our response ensured portfolios stayed within the boundaries of what our risk profiles suggested was possible, while fully participating in the risk asset rebound that followed. OUTLOOK 2020 Global crises provide catalysts for change and Tatton is well positioned for the post-lockdown environment. We see a number of positives for our business model as more advisers and clients become comfortable with digital engagement, which appeals to our low-cost operating model. Our cultural agility helps us adapt to new relationship dynamics and we will enhance this capability with more “distance business” throughout 2020. The post-lockdown environment will be highly competitive. Tatton was deliberately very visible during the crisis, offering a viable alternative should existing supplier disturbance require advisers to seek new arrangements for their clients. We will continue to provide responsive information and insight, and will enhance our digital capability to engage with the adviser community in innovative ways. Lothar Mentel Chief Investment Officer Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202012 Engaging with our stakeholders We are committed to engaging and developing strong relationships with our key stakeholders and delivering long-term value. We recognise that it is important that we engage with each of our stakeholders in an open and transparent manner, taking into account their views in our strategic decision making. Our engagement with stakeholders is across all areas and levels of the business, with reporting and escalation to the Board as appropriate. Section 172 statement: In considering how best to promote the success of the Company for the benefit of its members as a whole, the Directors have regard, amongst other matters, to the likely consequences of any decisions in the long term; the interests of the Company’s employees; the need to foster the Company’s business relationships with suppliers, customers and others; the impact of the Company’s operations on the community and environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the Company. Our stakeholders Firms and Clients Shareholders People Society IFAs and their clients are the central focus of our business. The Group’s ongoing success is built upon understanding our customers’ needs, both those of the firm and of their clients, and responding with products and support. As we understand their needs, we will continue to anticipate future requirements to allow IFAs to continue focusing on their clients and build their businesses. We rely on the support and engagement of our shareholders to deliver our strategic objectives and grow the business. Our shareholder base supports the long- term strategy we take in the management of our business. The Board recognises that our people are central to the ongoing success of the firm. The Group’s employees deliver the highest quality of service to our customers. We recognise the responsibility we have to wider society and other key stakeholders. We believe that demanding high levels of corporate responsibility is the right thing to do. Their material issues How we engage Highlights and key decisions Further links — Performance of our funds and portfolios — Transparency — Quality of service — Fair pricing — The business development — Won significant long-term investment mandate — See our Business model on pages 16-17 teams meet regularly with from Tenet, one of the UK’s largest Adviser — A summary of our proposition is shown current and potential firms to support Groups objectives and how these are product range on pages 2-3 26-27 develop a clear view of client — Acquisition of Sinfonia funds extending our — The Group’s KPIs are shown on pages likely to evolve — Expansion of our Blended fund range to five — Read more about our Markets on pages — Breakfast briefings — First flows into Bespoke Investment Service (“BPS”) 14-15 — Amalgamation of Consulting and Mortgages to — The Group’s Strategy is detailed on — Roadshows — Partner Forums — Annual conference — CPD Events create a simplified IFA support services business pages 18-19 to better meet the needs of IFAs through an integrated approach — Compelling business model and growth — Regular meetings are held — Delivered against our dividend policy with a total — See our Business model on pages 16-17 prospects — Long-term sustainable business which delivers attractive returns through maintaining a progressive dividend policy — High standards of governance — Making a difference for our customers — Having opportunities for learning, growth and further development with our investors throughout full year dividend of 9.6p, an increase of 14.3% — Our dividend policy is detailed on page 43 the year (FY19: 8.4p) — The Group’s KPIs are shown on pages — Results presentations are held — Adjusted Operating Profit of £9.076m, an increase 26-27 at the half and full year of 24.2% (FY19: £7.308m) — The Group’s Strategy is detailed on pages 18-19 — Presentations by the Board to — During the year the Group supported a range of — See our Business model on pages 16-17 discuss performance and the individuals through professional qualifications — See our Corporate Responsibility section Company’s strategic plans — Further extension of the EMI and Sharesave on pages 34-35 — Being fairly rewarded for their contributions — Regular management briefings schemes — Society has an interest in how we manage our clients’ assets and ensure good stewardship over our investments — They have an interest in ensuring we manage our business in a manner which minimises our impact on the environment and helps to benefit society for Tatton’s ethical portfolios prioritises funds that actively engage with company managers on ESG issues — We aim for high standards of — Growth in our ethical portfolios — See our Business model on pages 16-17 governance across the Group. — Continued improvement and adoption of Corporate — See our Corporate Responsibility section Our careful selection process Governance guidelines on pages 34-35 External service providers Our external service providers include our distribution partners (platforms, IFAs, fund managers) and our suppliers. — Trusted partnerships — Strong governance — Clear communications — Regular service reviews — We maintain ongoing relations with our key — Read more pages 34-35 — Annual due diligence reviews suppliers and partners during the year with updates — Collaborative engagement at Board meetings They are critical to ensuring the effective distribution of our products. Regulators Tatton Investment Management Limited is regulated by the Financial Conduct Authority (“FCA”). — Ensuring that the business understands and adopts the principles and rules of the FCA Handbook — Open and transparent communication — Demonstrating good conduct — Acting in our customers’ best interests — Direct communication through — Implemented the Senior Managers & Certification — Information on our Risk Management our compliance senior manager Regime (“SM&CR”), designing our framework to framework and processes is shown on function holder meet the standards of an enhanced firm pages 28-29 — We always engage in an open — The Board and Audit and Risk Committee receive — Our Corporate Governance statement and co-operative manner regular compliance reports is shown on pages 38-39 Tatton Asset Management plc Annual Report and Accounts 2020 13 “ Stakeholder engagement – sustainable, balanced, equitable ” Our stakeholders Firms and Clients Shareholders People Society Their material issues How we engage Highlights and key decisions Further links IFAs and their clients are the central focus — Performance of our funds and portfolios of our business. The Group’s ongoing — Transparency success is built upon understanding our — Quality of service customers’ needs, both those of the firm — Fair pricing and of their clients, and responding with products and support. As we understand their needs, we will continue to anticipate future requirements to allow IFAs to continue focusing on their clients and build their businesses. — The business development teams meet regularly with current and potential firms to develop a clear view of client objectives and how these are likely to evolve — Breakfast briefings — Roadshows — Partner Forums — Annual conference — CPD Events — Won significant long-term investment mandate from Tenet, one of the UK’s largest Adviser support Groups — See our Business model on pages 16-17 — A summary of our proposition is shown on pages 2-3 — Acquisition of Sinfonia funds extending our — The Group’s KPIs are shown on pages product range 26-27 — Expansion of our Blended fund range to five — First flows into Bespoke Investment Service (“BPS”) — Amalgamation of Consulting and Mortgages to create a simplified IFA support services business to better meet the needs of IFAs through an integrated approach — Read more about our Markets on pages 14-15 — The Group’s Strategy is detailed on pages 18-19 We rely on the support and engagement — Compelling business model and growth of our shareholders to deliver our strategic prospects objectives and grow the business. — Long-term sustainable business which — Regular meetings are held with our investors throughout the year — Delivered against our dividend policy with a total full year dividend of 9.6p, an increase of 14.3% (FY19: 8.4p) — See our Business model on pages 16-17 — Our dividend policy is detailed on page 43 — The Group’s KPIs are shown on pages Our shareholder base supports the long- delivers attractive returns through — Results presentations are held — Adjusted Operating Profit of £9.076m, an increase 26-27 term strategy we take in the management maintaining a progressive dividend policy at the half and full year of 24.2% (FY19: £7.308m) — The Group’s Strategy is detailed on of our business. — High standards of governance pages 18-19 The Board recognises that our people are — Making a difference for our customers central to the ongoing success of the firm. — Having opportunities for learning, growth The Group’s employees deliver the highest and further development quality of service to our customers. — Being fairly rewarded for their contributions We recognise the responsibility we have to — Society has an interest in how we manage wider society and other key stakeholders. our clients’ assets and ensure good We believe that demanding high levels of stewardship over our investments corporate responsibility is the right thing — They have an interest in ensuring we to do. manage our business in a manner which minimises our impact on the environment and helps to benefit society — Presentations by the Board to discuss performance and the Company’s strategic plans — Regular management briefings — We aim for high standards of governance across the Group. Our careful selection process for Tatton’s ethical portfolios prioritises funds that actively engage with company managers on ESG issues — During the year the Group supported a range of individuals through professional qualifications — Further extension of the EMI and Sharesave — See our Business model on pages 16-17 — See our Corporate Responsibility section on pages 34-35 schemes — Growth in our ethical portfolios — Continued improvement and adoption of Corporate — See our Business model on pages 16-17 — See our Corporate Responsibility section Governance guidelines on pages 34-35 External service providers Our external service providers include our — Trusted partnerships distribution partners (platforms, IFAs, fund — Strong governance managers) and our suppliers. — Clear communications — Regular service reviews — Annual due diligence reviews — Collaborative engagement — We maintain ongoing relations with our key suppliers and partners during the year with updates at Board meetings — Read more pages 34-35 They are critical to ensuring the effective distribution of our products. Regulators Tatton Investment Management Limited — Ensuring that the business understands is regulated by the Financial Conduct and adopts the principles and rules of Authority (“FCA”). the FCA Handbook — Open and transparent communication — Demonstrating good conduct — Acting in our customers’ best interests — Direct communication through our compliance senior manager function holder — Implemented the Senior Managers & Certification Regime (“SM&CR”), designing our framework to meet the standards of an enhanced firm — Information on our Risk Management framework and processes is shown on pages 28-29 — We always engage in an open and co-operative manner — The Board and Audit and Risk Committee receive — Our Corporate Governance statement regular compliance reports is shown on pages 38-39 Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 2020 14 Our market share Market trends Tatton continues to grow as its markets expand. We see the potential opportunity for the UK platform market increasing to £1trn by 2023, with the share of assets using DFM increasing. We are in an unrivalled position to capitalise on this opportunity. 1. GROWING STRENGTH OF THE IFA SECTOR The IFA sector continues to grow in strength and the requirement for advice could well increase due to the economic effects of COVID-19. While the number of firms remains broadly static, the demand for independent advice continues to increase as the mass affluent understand the need for help when making complex decisions around retirement planning, inheritance planning and pension consolidation. COVID-19 saw advisers adapt their advice process and there is opportunity for those businesses that partner with them to enhance their new ways to advise clients. Tatton AUM 2018 2019 2020 £4.9bn £6.1bn £6.7bn 2023 Predicted size: £1trn Growth: +101.8% 2019 Size: £495.5bn Growth: +1.0% 2018 Size: £490.5bn Growth: +9.0% Total On- platform Funds Under Management (“FUM”) t e k r a m r u O 11.7% On-platform DFM FUM as a % of Total On- platform FUM 12.6% 2018 2019 2023 1 Source: UK Fund Distribution: Model Portfolios on Platform, Platforum July 2018. 2 Source: UK Fund Distribution: DFM Distribution Dynamics, Platforum July 2019. Tatton Asset Management plc Annual Report and Accounts 2020 15 Our response We can benefit IFA businesses in two ways, firstly our platform 4. GROWING STRENGTH OF PLATFORM MARKET The platform market is fast growing and becoming an only investment portfolio management services provide cost increasingly attractive method for managing investments. and operationally effective investment propositions to allow In 2019, there were £495 billion of assets under administration the advisers to focus on building client relationships and advice. on investment platforms2. Secondly, we provide expert advice and support to the IFA and their business on compliance with FCA regulatory policy, providing a solid foundation from which they can profitably grow their business. 2. CLIENTS ARE DEMANDING MORE CHOICE, VALUE FOR MONEY AND FEE TRANSPARENCY Clients want a choice of investment options so they can choose what best suits their circumstances. In addition, they want a clear understanding of how much they are paying so they can determine which option provides the best value for money given their specific circumstances. Our response Tatton is an award-winning investment manager known for its market leading, low cost, discretionary investment platform portfolio management service for the clients of IFAs. Following the FCA’s Investment Platforms Market Study in March 2019, it should become easier for consumers to choose or switch platforms through clearer information regarding charging structures and the reduction or removal of exit fees. Our response Tatton’s business model is founded on a platform agnostic discretionary portfolio management service as a centralised investment proposition for IFAs’ clients. Tatton’s investment portfolios are available across 14 major platforms, increasing access to cost effective discretionary asset management. 5. IMPACT OF REGULATORY CHANGE The market demand for financial advice is growing, however, the ability of IFAs to meet this demand has been challenged partly due to increased regulatory pressures, such as MiFID II and General Data Protection Regulation (“GDPR”). The need Clients benefit from gaining access to full discretionary investment to comply with increasing regulation, such as SM&CR, means management, with clear pricing and a wide range of strategy that IFAs face significant costs and resource challenges. options to meet different client needs, including a focus on the growing appetite for ESG products. IFAs benefit by being able to offer their clients fully transparent investments and pricing, at a market leading cost, whilst retaining complete control of client relationships and the ability to administer clients’ portfolios through existing platform arrangements. Our response Within our Paradigm division, we have the expertise and capabilities to provide support, training and other consultancy services to our existing and new firms through adapting efficiently to new regulation. All the Group businesses support and facilitate a better, more efficient supply of financial advice to satisfy Tatton’s commitment to fee transparency, highly frequent increasing consumer demand for professional advice. investment communications and platform independence helps clients understand the services they are paying for and attach value to it. Similarly, its pure investment, platform agnostic business model as well as investment and communication standards builds trust with advisers which leads to lasting business relationships. 3. MARKETPLACE DISRUPTION COVID-19 has provided the most significant level of market 6. APPETITE FOR LENDING The prime lending market had seen increasing volumes as a level of confidence returned to the housing market post-election. However, the impact of COVID-19 has since been felt, and with lenders unable to survey and value properties, combined with severe administrative burdens from lockdown measures and payment holidays, the house purchase market significantly slowed. Intermediaries have turned their focus to low LTV re- turbulence since the financial crisis of 2008. Whilst investment mortgaging, product transfers and mortgage insurance and as markers recover, such live disrupting episodes can significantly lockdown measures ease and viewings, valuations and surveys affect consumer confidence and alter both their short and long can take place again, the market is stabilising and is set to term attitudes towards savings and investment. return to normality over a period of time. Our response The most effective measure to reassure clients during periods Our response As our members feel the effects of COVID-19, we continue of market turbulence is to provide relevant and up to date to support them through online support, webinar and video communications. From an investment management perspective updates, CPD content and assistance with digital strategies. we actively manage portfolios to ensure they remain aligned Throughout the year, we have increased our membership month to clients’ risk and return objectives. The close integration on month, whilst adding new lenders and providers to our of both communication and management has the effect of panels strengthening the quality and breadth of our proposition. reassuring clients and advisers of our highest standards of Through a focus on service excellence and consistent member portfolio stewardship during times of crisis and leads to an recruitment we have been able to outperform the market these avoidance of irreversible client side market timing errors that past three years and this strategy means we can maintain this are driven by fear of the unknown and the natural urge to act. going forward. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202016 How we create value Client financial goals — Investment goals — Length of investment — Risk appetite Paradigm Mortgages CLIENT MORTGAGES AND INSURANCE — 1,544 member firms — £9.86bn gross lending IFA We work hard to manage the investments of our IFAs’ clients and provide support to help firms to grow their clients’ wealth and focus on building relationships. Tatton CLIENT INVESTMENT PRODUCTS — 595 firms — 66,100 client accounts — £6.651bn AUM — 29 risk rated portfolios across a range of strategies across 14 platforms Our business model Our business model remains the same. We succeed because we work closely with IFAs to understand what they and their clients need; this also helps us to develop our market insight to support the future development of the overall Group offer. Our inputs RELATIONSHIP WITH IFAS We provide high quality investment management, consultancy and mortgage-related services which empower IFAs to support their clients. We establish long-lasting relationships to support IFAs in building bigger, better businesses. TALENTED PEOPLE We recruit, develop and retain high calibre people with relevant expertise to deliver a high-quality service and implement our Group strategy. REGULATORY KNOWLEDGE Our Paradigm Consulting team has vast regulatory experience and technical knowledge. We offer first class support to IFAs where there is increased demand for advice in an increasingly regulated industry. CAPITAL ALLOCATION Capital is retained for both regulatory requirements and investment needs. The Board considers possible acquisition opportunities which are complementary, strategically aligned to the existing model, earnings enhancing and accretive to shareholder value. TECHNOLOGY The Group invests in technology through both operational and capital expenditure. Investment priorities are determined where technology supports the Group in delivering its long-term growth strategy. BRAND RECOGNITION The recognition of our brand has continued to improve. The Group invests in cost-effective marketing through direct marketing and events, whilst raising brand awareness through a combination of PR and referrals. Tatton Asset Management plc Annual Report and Accounts 202017 Our outputs SHAREHOLDERS The Group has a cash-generative business model, significant levels of recurring revenue and strong profit AUM £6.651bn margins in a growth market. The value Adjusted Operating Profit* £9.076m * Alternative performance measures are detailed in note 23. generated from the business is issued to shareholders as dividends or reinvested in the business to drive future growth. We have a progressive dividend policy – see page 33. CLIENTS We help clients achieve their long- term goals through providing a quality service and by managing their wealth through our range of funds and portfolios, which are flexible, responsive and cost effective. IFAS We provide IFAs with support in an increasingly regulated environment and access to whole of market lenders and distributors. EMPLOYEES Our employees support our clients and deliver shareholder value. In return we offer our employees challenging and rewarding careers where they can learn and develop. SOCIETY The services provided by the Group to IFAs and their clients allow individuals to save and invest with confidence. The Group pays its taxes in full and on time and we conduct our tax affairs in a clear, fair and transparent way. Paradigm Consulting COMPLIANCE ADVICE AND SUPPORT TO IFAS — 394 member firms — Over 1,110 IFAs Our business model is underpinned by: — Our Strategy, pages 18-19 — Our Risk Management Framework, pages 28-29 — Our high standards of Corporate Governance, pages 38-39 — How we engage with Our Stakeholders, pages 12-13 Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202018 Our strategy for growth The Group continues to deliver increasing AUM, new customer acquisition and improving financial results against the backdrop of a complex and challenging market environment. respective markets, and we continue to develop and reinforce our business. To augment our organic growth we will look to make acquisitions that will enhance earnings and contribute to our broad strategic goals and the Group remains optimistic We are focused on the provision of products and services that an IFA requires to service its clients and continue to invest in both people and technology that will enhance and enable our business model. The Group is strategically well positioned in its about its long-term prospects. Our strategy 1 Deepen the IFA relationships to grow AUM 2 Organic growth – Increase share of our respective markets 3 M&A activity remains part of the Group’s growth strategy 4 5 Migration of asset “back books” Strategic Partnerships Description Strengthening existing IFA/client Further penetrate our markets We continue to look to complement Existing clients using Tatton’s DFM Agreements put in place to develop relationships and building new adding new firms in Tatton and new our strong organic growth service have a back book of assets strategic partnership/alliances as long-term relationships, delivering members in Paradigm Consulting/ through targeted acquisitions that we look to migrate over to an additional distribution channel sustainable value for both the IFA/ Mortgages that will fit strategically and be Tatton in the medium term to increase assets on the Tatton clients and shareholders earnings enhancing DFM service 2020 Achievements — AUM has increased by 9.6% — New firms and new members — This year we made our first, — This year we developed and — In June 2019 we signed a to £6.651bn from £6.068bn in increased across all parts of relatively modest, acquisition. migrated back books with a total strategic partnership with Tenet the prior year across all firms the business In September we acquired 5 risk value of £125m and clients — Tatton +33.7% to 595 firms — The number of firms in the year — Paradigm Consulting +1% to 394 increased 33.7% to 595 adding — Paradigm Mortgages +10.9% to 150 new relationships 1,544 rated Sinfonia funds with a total AUM value of £135m Group one of the UKs largest financial advisory businesses 2021 Objectives — We continue to invest in account — Maintain new firm growth in — Our ambition is to grow both — We maintain a pipeline of back — Continue to develop existing management both external and Tatton while also developing organically but also through book opportunities. As we head strategic alliances and develop internal to ensure we are well Tenet firm relationships making strategic acquisitions into the new year, we will look new relationships that align placed to service the IFA needs — Maintain growth in Paradigm that are earnings enhancing to execute the migrations while objectives and deliver the best — Further broaden our proposition Consulting and Mortgages and have the potential to fit developing further opportunities outcomes for the client and IFA and service portfolio through further marketing and our wider strategic objectives. to add to the pipeline — Maintain the market leading account management service cost proposition We will continue to evaluate opportunities as and when they arise Our vision is: To be the partner of choice for all the needs of Independent Financial Advisers, supplying the tools and investment management that allow them to meet the needs of their clients whilst growing their businesses too. Tatton Asset Management plc Annual Report and Accounts 202019 Our strategy 1 2 Deepen the IFA relationships to grow AUM Organic growth – Increase share of our respective markets 3 M&A activity remains part of the Group’s growth strategy 4 Migration of asset “back books” 5 Strategic Partnerships Description Strengthening existing IFA/client Further penetrate our markets We continue to look to complement Existing clients using Tatton’s DFM Agreements put in place to develop relationships and building new adding new firms in Tatton and new our strong organic growth service have a back book of assets strategic partnership/alliances as long-term relationships, delivering members in Paradigm Consulting/ through targeted acquisitions that we look to migrate over to an additional distribution channel sustainable value for both the IFA/ Mortgages that will fit strategically and be Tatton in the medium term to increase assets on the Tatton clients and shareholders earnings enhancing DFM service 2020 Achievements — AUM has increased by 9.6% — New firms and new members — This year we made our first, — This year we developed and — In June 2019 we signed a to £6.651bn from £6.068bn in increased across all parts of relatively modest, acquisition. migrated back books with a total strategic partnership with Tenet the prior year across all firms the business In September we acquired 5 risk value of £125m and clients — Tatton +33.7% to 595 firms — The number of firms in the year — Paradigm Consulting +1% to 394 increased 33.7% to 595 adding — Paradigm Mortgages +10.9% to 150 new relationships 1,544 rated Sinfonia funds with a total AUM value of £135m Group one of the UKs largest financial advisory businesses 2021 Objectives — We continue to invest in account — Maintain new firm growth in — Our ambition is to grow both — We maintain a pipeline of back — Continue to develop existing management both external and Tatton while also developing organically but also through book opportunities. As we head strategic alliances and develop internal to ensure we are well Tenet firm relationships making strategic acquisitions into the new year, we will look new relationships that align placed to service the IFA needs — Maintain growth in Paradigm that are earnings enhancing to execute the migrations while objectives and deliver the best — Further broaden our proposition Consulting and Mortgages and have the potential to fit developing further opportunities outcomes for the client and IFA and service portfolio through further marketing and our wider strategic objectives. to add to the pipeline — Maintain the market leading account management service cost proposition We will continue to evaluate opportunities as and when they arise Our vision is: To be the partner of choice for all the needs of Independent Financial Advisers, supplying the tools and investment management that allow them to meet the needs of their clients whilst growing their businesses too. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202020 Top performing funds with the lowest fees “Embedding Tatton in our business has been one of the most rewarding and successful strategies that we have ever implemented in the history of our company!” Howard Lee, Managing Director Burgess & Lee “Tatton has certainly moved our business forward. The regular updates and communication during COVID-19 have helped our clients remain calm during a difficult period and improved our client engagement.” David Carter, Managing Director CMS Financial Management Limited Tatton lead the market in Discretionary Fund Management (DFM) IFAs can access 29 investment portfolios across 14 platforms. The Tatton business continues to innovate and support the needs of IFAs in a changing world. UM grew to £6.651bn +9.6% (2019: £6.068bn) Firms utilising our Discretionary Fund Management services grew to 595 +33.7% (2019: 445) Number of accounts increased 66,100 +13.0% (2019: 58,500) Tatton Asset Management plc Annual Report and Accounts 2020 21 Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report22 Tatton Asset Management plc Annual Report and Accounts 202023 Industry leading knowledge and technical support “ Over the last 20 years we have used various compliance providers and I can honestly say that Paradigm’s Compliance services are the best we have used.” Paul Sands, Managing Director Sands Financial Management Paradigm has unrivalled expertise in providing compliance services to a broad range of firms. We understand the difficulties facing firms in an industry of increasing regulation and how it can affect their business. Paradigm Consulting members increased 394 +1.0% (2019: 390) Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report24 Powering the UK’s leading financial advisers “Paradigm Mortgage Services excel in their service to us: an extensive panel, a friendly and approachable team, and comprehensive support to our business.” Robin Fawke, Partner, Hawke Financial Services LLP Paradigm provides a comprehensive mortgage offering to directly authorised firms, including a whole of market lending panel with market-leading procuration fees, a highly commended helpdesk and regular CPD events. Paradigm Mortgages increased Number of firms gross lending to increased to £9.86bn +17.5% 1,544 +10.9% (2019: £8.39bn) (2019: 1,392) Tatton Asset Management plc Annual Report and Accounts 202025 Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report26 Key Performance Indicators Financial KPIs Group revenue (£m) £21.4m +22.0% Adjusted Operating Proﬁt* (£m) £9.1m +24.2% Fully diluted adjusted EPS* (p) 12.0p +19.8% Proposed ﬁnal dividend (p) Return on Capital Employed (%) 6.4p +14.3% 48.8% +1.0% 4 . 1 2 1 . 9 . 0 2 1 . 5 7 1 . 5 5 1 3 7 . . 5 6 . 0 0 1 1 . 9 4 6 . 6 5 . 4 4 . 1 . 8 4 . 8 7 4 . 8 8 4 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 Description Description Description Description Description Revenue generated Adjusted Operating Adjusted profit after tax* Final proposed dividend Return on Capital by the Group for the Profit* generated by divided by the weighted per share. financial year. the Group. Comment Comment average number of fully diluted ordinary shares. Revenue has grown by The high level of Comment Comment Dividends represent an important part of return 22.0% driven by the recurring revenue An important measure of to shareholders. increase in AUM and and low level of performance as it shows number of firms receiving operational gearing profitability reflecting the Tatton and Paradigm has delivered increased the effects of any future services. In addition there profits and maintains potential new share A final proposed dividend of 6.4p gives a full year dividend of 9.6p. has been a change to the strong margins. issuance and determining Target Employed is calculated by dividing the Group’s Adjusted Operating Profit* by its capital employed (total assets less current liabilities). Comment The Group is capital light and makes efficient use of the capital employed VAT treatment of Tatton’s services, see note 6. Adjusted Operating Profits* increased by the value delivered to shareholders. 24.2% to £9.1 million Strong growth across delivering Adjusted the Group has delivered Operating Profit* margin strong growth in fully Continue to grow to generate strong dividends per share in returns and create value line with the Group’s for our shareholders. dividend policy, detailed on page 43. of 42.5%. diluted adjusted EPS*, up 19.8% to 12.00p. Target Continue to grow EPS through the scalability of the business model and continued strategic execution. * Alternative performance measures are detailed in note 23. Tatton Asset Management plc Annual Report and Accounts 2020 27 Non-financial KPIs AUM (£bn) £6.7bn +9.6% Asset net inﬂows (£bn) £1.1bn +2.1% Tatton ﬁrms Paradigm Consulting 595 +33.7% 394 +1.0% . 7 6 1 . 6 1 . 1 1 . 1 0 . 1 5 9 5 0 9 3 4 9 3 8 6 3 . 9 4 5 4 4 1 4 3 Paradigm Mortgages lending (£bn) £9.9bn +17.5% 9 9 . 4 8 . 9 6 . 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 Description Description Description Description Description Total AUM at the end of Strong growth in new Number of investment The year end Value of gross lending by the year. Comment clients has helped drive management firms at the number of Paradigm Paradigm firms. increase in net inflows. end of the financial year. Consulting members. Comment AUM has increased by Comment Comment Comment Strong growth in new £0.6 billion or 9.6% this Despite challenging Strong growth in the Steady growth in new members has helped year, with net inflows of market conditions during number of firms using the members maintained. drive growth throughout £94 million per month on the year, net inflows Tatton DFM service. the business. average. AUM reached a for the year have been peak of £7.758 billion on strong at £1.1 billion. 21 February 2020 before the closing balance of AUM was impacted by a negative market performance of 14.3% towards the end of the financial year due to market falls related to the COVID-19 pandemic. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 2020 Risk management Effective risk management is essential for the financial strength and resilience of the Group. The risk management framework ensures that the business identifies existing and emerging risks to delivering the Group strategy and continues to develop appropriate mitigation to protect our stakeholders. RISK MANAGEMENT FRAMEWORK The Board is ultimately responsible for the Group’s risk management and internal control systems, and for determining the Group’s risk appetite. A risk management framework has been developed by the Board to ensure that all potential areas of risk to the business are identified, assessed and regularly reviewed and monitored. We continue to focus on embedding the ownership of risks within relevant divisions and teams whilst ensuring that the appropriate oversight and escalation process is in place. This is delivered through moving towards a three lines of defence model (see opposite). We carry out a robust assessment of the principal risks facing the Group, including those that would threaten our business model, future performance, solvency or liquidity. We categorise these risks into risk groups covering potential impacts to clients, revenue, capital and reputation. The three risk groups are: — Industry risks — Operational risks — Financial risks PHILOSOPHY AND CULTURE The Board encourages a strong risk culture throughout the 28 BOARD EXECUTIVE MANAGEMENT RISK MANAGEMENT A U D I T A N D R I S K C O M M I T T E E S E N I O R M A N A G E M E N T C O M P L I A N C E F U N C T I O N S those risks. It also ensures that the principal risks of the Group are considered. The Audit and Risk Committee met four times in the year and business. It believes an embedded risk culture enhances the its members are: effectiveness of risk management and decision making across the Group. The Board is responsible for setting the right tone and, through our senior management team, encouraging appropriate behaviours and collaboration on managing risk across the business. This strong risk culture ensures that employees are able to identify, assess, manage and report against the risks the Group faces. The Group has a whistleblowing procedure where employees can raise concerns anonymously either internally or externally. GOVERNANCE Our internal governance structure includes departmental management reviews with dedicated risk registers, where — Chris Poil, Chairman (and Non-Executive Board Director) — Roger Cornick (Non-Executive Chairman of the Board) — Other Executive Directors and senior management are invited to attend as appropriate, including: — Paul Hogarth (CEO) — Paul Edwards (CFO) — Helen O’Neill (COO of Tatton Investment Management) RISK APPETITE The Audit and Risk Committee regularly reviews the Group’s risk registers and mitigating processes to ensure that these are considered acceptable to the risk appetite and attitude of the Board. each department is responsible for overseeing key investment, The Board’s strategic objectives and expectations are that the operational and corporate functions. The Group’s Audit and business will continue to grow; however, the Board remains Risk Committee serves as the focal point for risk management committed to having a balanced appetite for risk, ensuring activities, reviewing and challenging specific risks to the Group, that our internal controls mitigate risk to appropriate levels. and reviewing the effectiveness of frameworks in place to manage Tatton Asset Management plc Annual Report and Accounts 202029 Risk management processes RISK REPORTING Identified risks that have a sufficiently high likelihood of potential material impact on the Group are reflected in the Group Risk Three lines of defence 1 FIRST LINE OF DEFENCE Risk management within the business Business operations and senior management are Management Dashboard, to ensure they receive an appropriately responsible for identifying and managing risks by high level of senior management and Board attention. The Board developing and maintaining effective internal controls takes action where these risks are deemed to be outside the to mitigate risk. Group’s risk tolerance. 2 SECOND LINE OF DEFENCE The following section shows our assessment of the top risks that we face, along with how the significance of the risk has Risk oversight and challenge The Audit and Risk Committee, the Board and those changed during the year. All our significant risks fall into the involved in compliance functions maintain a level of industry, operational and financial categories. While the named independence from the first line. These Committees top risks have not changed since last year, these risks are not and other functions provide oversight and challenge. static; new and emerging risks are considered and assessed by the Board throughout the year for inclusion in this list. 3 THIRD LINE OF DEFENCE Independent assurance The Group does not have an internal audit function, however, there are other external bodies which provide some independent assurance. Third party companies are used for testing areas such as IT Security, Human Resources, and Health and Safety. Regulators set requirements for specific controls in our regulated entity, Tatton Investment Management Limited. Regular Board reviews Departmental reviews Executive risks Principal risks identiﬁed and reported to Board Update to risk registers Mitigating action agreed 4. Report 1. Identify Risk management philosophy and culture 3. Monitor and control 2. Assess Existing and emerging risks Operational business reviews Review by Audit and Risk Committee Departmental reviews Risk- scoring for likelihood & impact Allocate each risk to a named owner The Board and senior management are actively involved in a continuous risk assessment process as part of our risk management framework. Day to day, our risk assessment process considers both the impact and likelihood of risk events which could materialise, affecting the delivery of the strategic goals and the annual business plans. A top-down and bottom-up approach ensures that our assessment of key risks is challenged and reviewed on a regular basis. The Board and Audit and Risk Committee receive regular reports and information from senior management, operational business units and compliance functions. Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202030 Key Risk increase Risk decrease No change to risk IMPACT MITIGATION — Downturns in the market and resultant falls in AUM or other income will have a negative impact on the Group’s revenue and profit — The Group has an experienced investment management team with a strong track record — Investment strategies are continually monitored by the Investment Committee with appropriate governance and oversight — A prudent approach to investment strategy means that a significant proportion of AUM is made up of lower risk appetite portfolios which typically have a market fall correlation of less than 50% — Loss of competitive advantage such — Broad service offering, providing that AUM and client number targets are adversely impacted. This would have a negative impact on profitability — Regulatory censure and/or fine — Related negative publicity could reduce customer confidence and affect ability to generate net inflows — Poor conduct could have a negative impact on customer outcomes, impacting the Group’s ability to achieve strategic objectives — Regulatory related complaints and claims from third parties and clients could have an adverse impact on the Group’s financial condition diversified revenue streams — Highly competitive pricing points across a range of services — Deep industry experience and strong client relationships resulting in a loyal customer base — Strong brand and excellent reputation — Regulatory advice is a core business stream for the Group, meaning that a strong culture of compliance exists throughout the Group — The Group delivers regulatory and compliance support through dedicated compliance teams and systems — The Group’s strong financial position provides a safeguard should changes to regulatory capital requirements occur — Uncertainty in the market or adverse — Geographical diversification of all client impact on the UK economic performance may reduce customer transactional activity and/or cause the value of AUM to reduce investment portfolios — Savings and investment in pensions and other wrap products may reduce, so reducing AUM and the Group’s revenue — Broad service offering, providing diversified revenue streams Principal risks 1. Industry risks RISK Adverse macro-economic, political and market factors Economic, political and market forces, particularly impacting the UK equity markets, which are beyond the Group’s control could adversely affect the value of AUM from which the Group derives revenues. This could be sudden in cases such as COVID-19 which causes significant volatility in global markets and severe economic weakness undermines confidence. Changing competitive environment The market environment in which the Group operates is highly competitive with fast changing characteristics and trends. Regulatory risk Changes to legislation and regulation, or changes to interpretation and enforcement of existing legislation and regulation, may adversely impact the Group’s operations and competitive advantages. Termination of the UK’s European Union membership The UK exiting the European Union could have a material adverse impact on the fiscal and legal framework in which the Group operates, and impact the UK’s economic performance in the long term. Change to UK tax law Changes to UK tax law could adversely impact the performance and attractiveness of long-term saving and investment through pensions and other wrap products. 2. Operational risks Failure of a third party platform provider The Group manages its investments through third party platform providers. Operational failure or cessation of trade of a major platform could have a material adverse impact on the Group’s reputation, operations, financial performance and growth. — Negative impact on customer outcomes due to website unavailability, delays in receiving and/or processing customer transactions or interruptions to settlement and reconciliation processes — Financial impact through increased operational losses — Regulatory fine and/or censure — Due diligence is performed when selecting key suppliers — The Group is covered by third party indemnities for business-critical services — Third party relationships are subjected to a high level of ongoing oversight, including due diligence and a risk- based approach, from the Group’s internal compliance function. This gives assurance that third party platform providers meet the Group’s high standards Tatton Asset Management plc Annual Report and Accounts 202031 Key Risk increase Risk decrease No change to risk RISK IMPACT MITIGATION Failure of investment strategy The risk that investment strategies fail to maintain an acceptable level of performance, particularly in times of significant market volatility such as due to the impact of COVID-19, resulting in a decline in revenues and in the value of assets from which revenues are derived. Loss or failure of key IFA client The Group has several major IFA clients. A change in relationship or termination of business with any of these, and the Group being unable to replace them in a timely fashion, could have a material adverse impact. Failure to recruit and retain quality personnel The Group operates in a competitive market for talent and failure to recruit and retain key personnel could adversely impact the Group’s operational performance. — Negative impact on achievement of AUM — The Group has an experienced and client number strategic targets — Poor client outcomes that also prevent the achievement of our growth targets — Reputational damage investment management team with a strong track record — Investment strategies are continually monitored by senior management, the Investment Committee and the Board — Negative impact on achievement of AUM, Operating Profit and client number strategic targets — Reputational damage — Inability to service client needs — Reputational damage — The Group has a clearly defined business development strategy which continues to enhance the Group’s service offering — Client engagements are proactively managed through dedicated client managers who have in-depth knowledge of the IFA industry and expert regulatory and compliance knowledge — Recruitment programmes are in place to attract suitable staff — The success of the Group’s listing has increased our ability to attract and retain high calibre candidates — Staff share schemes are now in place to incentivise staff and encourage long- term retention System failure, cyber security and data protection The risk that operations are impacted or that data loss or data breach occurs due to system error, malfunction or malicious external breach. In addition, there is the risk of heightened market abuse and financial fraud as individuals take advantage of the current COVID-19 situation. — Related negative publicity could damage customer and market confidence in the business, affecting our ability to retain and attract new customers — Information security breaches could — Experienced in-house team of IT professionals supported by reputable and established third party suppliers — IT disaster recovery procedures in place — Data Protection Officer appointed result in fine/censure from regulators, the Information Commissioner’s Office and FCA for GDPR — Penetration testing conducted regularly — Increased awareness and training of employees 3. Financial risks Counterparty credit risk A counterparty to a financial obligation may default on repayments, particular if under financial stress due to COVID-19. — Unintended market exposure — Customer detriment — Increased future capital requirements Liquidity risk The Group may be unable to meet financial liabilities as they become due because of a shortfall in cash or other liquid assets or inability to obtain sufficient funding. — Reputational damage — Potential customer detriment — Financial loss — Unable to meet obligations as they fall due Bank default The risk a bank could default. — Financial loss — Unable to meet obligations as they fall due Concentration risk Risk arising from lack of diversification in business activity or geography. — Over-reliance on one business activity could lead to financial underperformance — The Group trades only with reputable, credit worthy third parties — Receivable balances are reviewed regularly for non-collection and any doubtful balances are provided against — Cash-generative business — Appropriate banking facilities in place — Active cash flow forecasting and liquidity management to ensure availability of liquid funds at short notice — The Group maintains a cash surplus above regulatory and working capital requirements — The Group only uses banks with strong credit ratings — Banking relationships are reviewed regularly — Broad range of business services offered, providing diversified revenue streams — Active recruitment is ongoing within the Group’s sales functions in order to grow AUM across a broader client base Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 202032 Chief Financial Officer’s Report GROWTH AND LONG- TERM VALUE CREATION P A U L E D W A R D S Chief Financial Officer OVERVIEW I am pleased to report that the Group has continued to make good progress and has delivered another year of double-digit growth in both revenue and adjusted operating profits* with strong performances from both Tatton and Paradigm. RECORD REVENUE AND PROFITS Revenue – Group reported revenue increased by 22.0% to £21.369 million (2019: £17.518 million) and includes £1.2m relating to the change in the VAT treatment of Tatton’s investment management services which is explained below. Tatton revenue increased 27.2% to £15.924 million (2019: £12.521 million) supported by the continued growth of AUM, which ended the year at £6.651 billion (2019: £6.068 billion), an increase of 9.6% despite the impact of COVID-19 related market deterioration which occurred towards the end of the financial year. The growth of AUM was driven by strong net inflows in the year at £1.129 billion, an average of £94.1m per month. Paradigm continues to make progress following the amalgamation of Paradigm Mortgages and Paradigm Consulting which was announced at the interim period, with revenue increasing 9.6% to £5.426 million (2019: £4.949 million). Mortgages member firms increased to 1,544 (2019: 1,392) driving an increase of 17.5% in gross lending from completions to £9.86 billion (2019: £8.39 billion), Consulting members increased to 394 (2019: 390). Profit – The Group delivered adjusted operating profit* of £9.076 million (2019: £7.308 million), an increase of 24.2% and adjusted operating profit margin increased to 42.5% (2019: 41.7%). Total Group operating profit was £10.302 million (2019: £5.925 million) after crediting separately disclosed items of £1.226 million. Tatton continues to make investments which underpin our growth, including updating IT systems and the new online portal. In the second half of the year we have added new resource, including both investment personnel and sales and marketing resource to help drive and support future growth; accordingly, adjusted operating profit* increased 20.9% to £8.910 million (2019: £7.371 million) and its margin slightly decreased to 56.0% (2019: 58.9%). Tatton’s continued strong growth has ensured it is now the largest part of the Group, contributing 74.5% of the revenue and 98.2% of the adjusted operating profit* (see note 4), a trend that is expected to continue. Paradigm’s adjusted operating profit* contributed £2.128 million (2019: £1.818 million), with margin of 39.2% (2019: 36.7%). Return on capital employed is 48.8% (31 March 2019: 47.8%). The Group remains capital light and makes efficient use of the capital employed to generate strong returns and create value for our shareholders. CHANGE IN VAT TREATMENT During the year, the Group has agreed with HMRC that Tatton’s supplies of discretionary fund management services in respect of model investment portfolios are exempt from VAT. As a result, the Group has received a VAT refund relating to the period from May 2015 to March 2019 of £1.7m. The refund has been recognised as exceptional income in the current year results, offset by professional fees of £0.1m. The current year impact of £1.2m has been recognised within revenue, and also an increase in costs of £0.2m relating to the irrecoverable element of input VAT. * Alternative performance measures are detailed in note 23. Tatton Asset Management plc Annual Report and Accounts 202033 Group revenue (£m) AUM (£bn) £21.4m +22.0% £6.7bn +9.6% 4 . 1 2 . 5 7 1 . 5 5 1 . 7 6 1 . 6 . 9 4 Return on capital employed (%) 48.8% +1.0% 1 . 8 4 . 8 7 4 . 8 8 4 2018 2019 2020 2018 2019 2020 2018 2019 2020 SEPARATELY DISCLOSED ITEMS Separately disclosed items include the cost of share-based payments of £0.108 million, amortisation of customer relationship intangible assets of £0.060 million, £0.097 million of acquisition- related fees, £0.097 million of restructuring costs and a credit relating to the treatment of VAT of £1.588 million, see note 6 to the Group financial statements. Although some of these items may recur from one period to the next, operating profit has been adjusted for these items to give better clarity of the underlying performance of the Group. The Alternative Performance Measures (“APMs”) are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets. EARNINGS PER SHARE Basic earnings per share increased 72.4% to 14.98p (2019: 8.69p). Adjusted earnings per share* increased 19.5% to 13.13p (2019: 10.99p) and adjusted fully diluted earnings per share increased 19.8% to 12.00p (2019: 10.02p). CASH FLOW The Group continued to see healthy cash generation. Net cash generated from operating activities before exceptional items was £9.831 million (2019: £8.011 million), 108.3% of adjusted operating profit*. Exceptional items totalled £1.394 million and net cash generated from operating activities was £8.947 million (2019: £6.136 million). There was an increase in the level of income tax paid in the year as Tatton now pays its quarterly instalments earlier in line with the requirements for “very large” companies. Tax paid in the year was £2.278 million (2019: £1.366 million) and dividends paid in the year totalled £4.9 million (2019: £4.0 million). The Group made intangible and tangible asset investments of £0.565 million and ended the year with cash on the balance sheet of £12.757 million (2019: £12.192 million). DIVIDENDS AND CAPITAL ALLOCATION The Board is recommending a final dividend of 6.4p. When added to the interim dividend of 3.2p this gives a full year dividend of 9.6p. This proposed dividend reflects both our cash performance in the period and our underlying confidence in our business. Dividend cover (being the ratio of earnings per share before exceptional items and share-based payment charges) is 1.9 times. If approved at the Annual General Meeting the final dividend will be paid on 28 August 2020 to shareholders on the register on 17 July 2020. Our objective is to maximise long- term shareholder returns through a disciplined deployment of cash. To support this, we have adopted a cash allocation policy that allows for: investment in capital projects that support growth; regular returns to shareholders from our free cash flow; acquisitions to supplement our existing portfolio of business; and an efficient balance sheet appropriate to the Company’s investment requirements. STATEMENT OF FINANCIAL POSITION The Group continues to strengthen its balance sheet and net assets increased to £17.778 million (2019: £15.288 million). Tangible and intangible assets (excluding goodwill) totalled £2.529 million (2019: £0.602 million), increasing in the year due to recognition of a customer relationships intangible asset of £1.196 million on the acquisition of Sinfonia and the adoption of IFRS 16, with further increases due to investments made in both systems and infrastructure. Goodwill totalled £6.254 million (2019: £4.917 million), the increase again due to the acquisition of Sinfonia in September 2019. NEW REPORTING STANDARDS The Group has adopted IFRS 16 ‘Leases’ with effect from 1 April 2019 using the modified retrospective approach, under which method prior year comparatives have not been restated, with the right-of-use asset equal to the lease liability at transition date. The net impact on the balance sheet is a reduction in net assets of £0.1m at March 2020 and there is no material impact on the Group’s KPIs. Further details and the impact are set out in note 2.5 in the financial statements. RISK MANAGEMENT AND THE YEAR AHEAD Risk is managed closely and is spread across our businesses and managed to individual materiality. Our key risks have been referenced in this Annual Report primarily on pages 30 to 31. We choose key performance indicators that reflect our strategic priorities of investment, growth and profit. These KPIs are part of our day to day management of the business and in the year ahead we will focus on growth and value creation. In this way we aim to deliver continued value to shareholders. The Strategic Report found on pages 1 to 35 has been approved and authorised for issue by the Board of Directors and signed on their behalf on 15 June 2020 by: Paul Edwards Chief Financial Officer Financial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 2020 34 Corporate Responsibility POSITIVE ACTION The Group ensures that social, environmental and ethical considerations are built into the Group’s strategy across the whole of the business and we conduct our operations with integrity, fairness and transparency. We recognise that we have an important part to play in shaping the future for all our stakeholders. We are committed to delivering positive outcomes for all. CORPORATE GOVERNANCE The Company has applied the principles of the Quoted Companies Alliance Corporate Governance Code (the “Code”) in so far as it can be applied practically. The Code is constructed around ten broad principles, accompanied by an explanation of what those Our workforce – split by gender Executives Male 100% Female 0% Senior management Male 60% Female 40% principles entail together with a set of disclosure requirements. Other staff These principles and how we comply with them can be found on pages 38 to 39 of this report and on the Group’s website. EMPLOYEES People are our most important asset in achieving our Group strategy, to provide excellent service, support and tools to Male 62% Female 38% Independent Financial Advisers to allow them to meet the needs We recognise that women have been less well represented of their clients. To allow our staff to do this, we aim to ensure at all levels in the investment management industry and our all employees are respected, motivated and safeguarded while commitment to diversity and inclusiveness is a continuous process. at work. We encourage all employees to develop and progress, whether SUPPLIERS The Group acknowledges its responsibilities in relation to through internal training, apprenticeship schemes or professional tackling modern slavery and has a zero tolerance stance on qualifications. The Group supports its employees in meeting slavery and human trafficking within our workforce and supply their CPD targets set by our regulators through training and chain. We are a largely UK-based provider of financial services, development, ensuring that our investment managers have meaning we do not produce, manufacture or sell any physical the appropriate technical and supervision skills to maintain goods. We also do not have a long or complex supply chain. the highest levels of client service. Our main suppliers provide support services like information We encourage employees to take a long term view of the business technology, market data and property services. through the provision of EMI share option schemes to all eligible We consider our suppliers to be at a relatively low risk of employees SAYE share option schemes to all employees. engaging in practices of modern slavery or human trafficking. DIVERSITY AND INCLUSION The Group is an equal opportunities employer and it is our policy We nonetheless remain committed to preventing any such practices from occurring in our business or supply chain. to ensure that all job applicants and employees are treated fairly and on merit, regardless of race, sex, marital/civil partnership ESG INVESTMENTS Tatton was one of the first firms to launch a complete range of risk status, age, disability, religious belief, pregnancy, maternity or rated Ethical Portfolios. We know that our private investors are sexual orientation. We believe that an inclusive culture in which increasingly taking an interest not only in how their investments employees are highly engaged enables everybody to succeed. are performing, but also how they affect the world around us. Tatton Asset Management plc Annual Report and Accounts 202035 In response we developed portfolios that combine negative and positive screening to give clients peace of mind that their investments not only align with their principles but also help to improve the bigger picture. ENVIRONMENT As a financial services business, our main environmental impacts are largely through UK-based travel and the consumption of resources and emissions at our business premises. We look to manage and reduce our environmental impact and carbon footprint through the efficient use of resources. At the beginning of the year we moved to a more modern, energy efficient office at St Swithin’s Lane in London and took our carbon footprint into consideration throughout the fitout. We have installed energy efficient lighting and equipment and make use of enhanced video conferencing facilities where possible to reduce employee travel. ANTI-BRIBERY AND CORRUPTION We value our reputation for ethical behaviour and integrity. The Company operates anti-bribery policies which extend across the Group and we are committed to conducting our operations free from bribery and corruption. We also have a whistleblowing Policy which encourages employees to report matters of significant concern to the Chair of the Audit and Risk Committee. TAX STRATEGY Tatton is committed to full compliance with all statutory obligations and full disclosure to tax authorities. The Group’s tax affairs are managed in line with our overall high standards of governance, and with consideration of our corporate reputation. Our appetite for tax risk is low and we do not participate in aggressive tax planning or condone abusive tax practices which would contravene our ethics and culture. European sustainable funds hold £668bn of assets An increase of 58% from 2018 (Morningstar, February 2020) Global sustainable assets stand at over $30tn which is greater than the GDP of either the US or EU (Global Sustainable Investment Alliance, 2019) “ 82% of IFAs believe the number of ESG propositions will increase over the coming 12 months (FE fundinfo, May 2020) ” We pay all tax as it falls due and believe in maintaining a transparent and professional working relationship with HM Revenue & Customs (“HMRC”) and other tax authorities. In respect of the year ended 31 March 2020, the Group has paid £2.3 million of corporation tax. Tatton Ethical Portfolios Tatton was one of first investment managers to provide risk-rated discretionary ethical portfolios. It became clear from discussions with IFAs that many clients want their principles to be applied to their entire investment portfolio, not just a selection of funds. Environmental – considerations for the environment, pollution, climate change Social – Socially responsible practices, human rights, equality, data security Governance – Positive employment practices, business ethics, diversity Tatton Ethical Portfolios www.tattoninvestments.com1Tatton Ethical Portfolios For investment with integrityFinancial StatementsCorporate GovernanceStrategic ReportTatton Asset Management plc Annual Report and Accounts 2020Board of Directors 36 Roger CornickChairmanPaul HogarthChief Executive Officer Paul EdwardsChief Financial Officer Roger is TAM plc’s Non-Executive Chairman. From January 2009 to September 2016, Roger was Chairman of Aberdeen Asset Management having joined the Board in January 2004. Prior to joining Aberdeen, Roger was with Perpetual plc for over twenty years.Paul is the Chief Executive Officer of TAM plc, as well as Senior Partner at Paradigm Consulting.Paul has over 30 years’ experience in financial services, the majority of which were at the centre of IFA distribution. Paul was the Co-Founder of Bankhall in 1987, and built Bankhall Investment Associates from scratch to sale in May 2001 at which point 25% of the IFA sector utilised at least part of the Bankhall service proposition. After leaving Bankhall he went on to establish Paradigm Partners Ltd which launched in April 2007 and has since grown to become one of the UK’s top five distribution businesses. Subsequently he was also the Founder of Perspective Financial Group Limited in December 2007 and of Tatton Capital Limited in July 2012.Paul has a BA in Economics from Heriot-Watt University in Edinburgh.Paul is the Chief Financial Officer of TAM plc. He is also Finance Director of Paradigm Partners Limited and Tatton Investment Management Limited.Prior to joining TAM plc Paul was the Group Finance Director of Scapa Group Plc for six years and NCC Group Plc for ten years. He has also held several other senior roles in a broad range of listed and private companies. Until recently Paul was also the Chair of the Hallé Pension Trustees, having spent five years in the role.Tatton Asset Management plc Annual Report and Accounts 2020 Committee memberships Nominations Committee Remuneration Committee Audit and Risk Committee Board Director Board Composition Length of tenure of Directors Executive 3 Non-Executive 2 Directors Less than a year One to three years Three to six years More than six years 37 – 5 – – Chris PoilNon-Executive & Head of Audit and RiskRobert HuntChief Executive Officer of MortgagesLothar Mentel Director & Chief Investment OfficerLothar is the Chief Investment Officer of TAM plc. He is also Chief Executive Officer for Tatton Investment Management.Prior to setting up Tatton Investment Management in 2012, Lothar was the Chief Investment Officer of Octopus Investments from 2008, where he built a multi-manager fund business that he grew to £1.6 billion. He has also held senior positions with N M Rothschild, Threadneedle, Barclays Wealth and Commerzbank Asset Management. Lothar began his career in Germany as a performance and risk analyst and later designing and launching the Barclays Multi-Manager funds.Lothar was educated in Germany and holds a postgraduate degree in Business and Economics (Diplom Ökonom) from Ruhr-Universität Bochum.Chris is TAM plc’s Senior Independent Non-Executive Director. Previously he served as Head of UK Equities at ING Baring Asset Management. Prior to joining ING he was a Director of Mercury Asset Management. Chris has previously been a Non-Executive Director of Ignite Group Ltd, Novus Leisure Ltd and Byron Ltd.Robert is the Chief Executive of Paradigm Mortgage Services LLP and a Board member of the Society of Mortgage Professionals (“SMP”) acting as a respected figurehead and representative of mortgage clubs. He also manages the operations of Paradigm Consulting and has over 30 years’ experience of working with financial intermediaries.Prior to setting up Paradigm Mortgages in 2007, Robert was the key accounts director at Santander (formerly Abbey National) for 13 years. Before joining Santander, he had various management roles at Hill Samuel Asset Management Group in which he worked for 11 years. Robert has now led Paradigm Mortgages to win the Mortgage Strategy’s Best Mortgage Club Award for two consecutive years.In 1978 Robert joined the Royal Air Force where he studied electronic engineering for five years.Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report 38 Corporate Governance Statement INTRODUCTION The Board is committed to achieving Responsibilities of each Board member BOARD EFFECTIVENESS, have been clearly established and there is COMPOSITION AND INDEPENDENCE high standards of corporate governance, a clearly defined division of responsibility integrity and business ethics. This year the between the Chairman and the Chief OF THE BOARD During the year, and up until the date of Group has taken into consideration the Executive. The Chairman is responsible signing this report, the Board comprised a guidance for smaller quoted companies for leading the Board, ensuring that Non-Executive Chairman, a Non-Executive on the Code produced by the Quoted shareholders are adequately informed Director and three Executive Directors. Companies Alliance (the “Code”) and with respect to the Group’s affairs and The Board has determined that all the taken steps to apply the principles of that there are efficient communication Non-Executive Directors are independent the Code in so far as it can be applied channels between management, the Board in character and judgement and neither practically, given the current size of the and shareholders. The Chief Executive is represent a major shareholder group Group and the nature of its operations. responsible for innovation, managing the nor have any involvement in the day to Under the AIM Rules, the Group is not strategy of the Group and leading the day management of the Company or its required to comply with the provisions senior management team in developing subsidiaries. The Non-Executive Directors of the UK Corporate Governance Code and implementing the strategy to maximise continue to complement the Executive While the UK Corporate Governance Code shareholder value. has not been applied in full, the Board has continued working towards full compliance over the coming years. BOARD COMMITTEES Nominations Committee The Nominations Committee is responsible Directors’ experience and skills, bringing independent judgement and objectivity to enhance shareholder value. The skills and experience of the Non- LEADERSHIP AND ROLE OF for Board recruitment and succession Executive Directors are wide and varied THE BOARD The Board is responsible for the long-term success of the Group and is ultimately accountable for the Group’s strategy, risk management and performance. The Board’s primary roles are to provide entrepreneurial leadership to the Group within a framework of prudent and effective control which enables risk to be assessed planning, to ensure that the right skill and they provide constructive challenge sets are present in the Boardroom. in the Boardroom. The composition of Remuneration Committee The Remuneration Committee is responsible for determining all elements of remuneration for the Executive Directors and for reviewing the appropriateness and relevance of the Group’s remuneration policy. the Board is intended to ensure that its membership represents a mix of backgrounds and experience that will optimise the quality of deliberations and decision making. We consider diversity in the composition to be an important factor in the effectiveness of the Board and managed, and to set the Group’s strategic objectives and ensure that the Audit and Risk Committee The Audit and Risk Committee’s and, in searching for prospective Directors, we consider the existing skill set of the necessary resources are made available main responsibilities are to challenge Board and areas we have identified for so that those objectives can be met. management, monitor the integrity of the development to meet future needs and The Board also sets the Group’s values and Group’s financial statements, review internal address succession planning. standards and is responsible for ensuring and external audit activity and monitor that its obligations to its shareholders and the effectiveness of risk management and other stakeholders, including employees, internal controls. suppliers, customers and the community, are understood and met. During the year, the Audit Committee ran a tender process for the external audit. The Board comprises three Executive Following a comprehensive exercise the Directors, a Non-Executive Chairman Audit Committee was pleased to reappoint and a Non-Executive Director. The names, Deloitte LLP. biographical details and Committee memberships of the Board are set out on pages 36 and 37 of this report. The Board composition of Non-Executive and Executive Directors has remained the same during the financial year. Although not members of the Committees, the Executive Directors attend meetings of the Audit and Risk Committee, Remuneration Committee and Nominations Committee as invited attendees, when appropriate. Tatton Asset Management plc Annual Report and Accounts 202039 Meetings and attendance The following table sets out attendance of each Director at Board meetings held during the 12 months to the year ended 31 March 2020: This process has been in place throughout the year under review and includes key risks (financial and operational) facing the Remuneration Nominations Audit Group. The process has also included the review and circulation of the Group Open Door Policy and procedure (previously known as the Whistleblowing Policy) to enable anonymous reporting of complaints. In addition, the Board has also received external reports in relation to cyber security and uses a range of measures to manage this risk, including the use of cyber security policies and procedures, security protection tools and ongoing detection and monitoring of threats. The Board routinely reviews the effectiveness of the systems of internal control and risk management to ensure controls react to changes in the Group’s operations. Approved and authorised for issue by the Board of Directors and signed on its Board Committee Committee Committee Number of meetings held Roger Cornick Chris Poil Paul Hogarth Lothar Mentel Paul Edwards 8 8 8 8 8 8 2 2 2 2* – 2* – – – – – – 4 4 4 3* – 4* PERFORMANCE The Board conducts a formal annual review making and consideration of stakeholder interests is consistent. Further information of the performance of individual Directors, on the Company’s key stakeholders is to monitor and improve effectiveness. shown on pages 12-13. The review of the Chief Executive is undertaken by the Non-Executive Chairman. In addition to individual reviews, the Board considers its overall performance as a body and the performance of its Committees. The review has confirmed that the performance of the Board and its Committees is effective and appropriate. DEVELOPMENT AND TRAINING The Chairman is responsible for ensuring Directors’ continuing professional development and every Director is entitled to receive training and development relevant to their responsibilities and duties. The Directors take advantage of relevant seminars and conferences and receive training and advice on new regulatory requirements and relevant current developments from the Company and professional advisers. STAKEHOLDER INTERESTS AND ENGAGEMENT As Directors, we are obliged to fulfil our section 172 duties, having regard to the factors set out in the Chairman’s Statement on page 5 and also on page 12 and, in taking decisions, ensure that we promote the success of the Company as a whole. We believe that effective stakeholder engagement is critical to running a COMMUNICATION WITH SHAREHOLDERS The Board is committed to maintaining an ongoing dialogue with the Company’s shareholders. The principal methods of communication with private investors remain the Annual Report and financial behalf by: Paul Edwards Chief Financial Officer 15 June 2020 statements, the Interim Report, the Annual General Meeting and the Group’s website (www.tattonassetmanagement.com). At the Company’s Annual General Meeting, all Directors will be available to respond to questions from shareholders present. The Annual General Meeting provides a forum for constructive communication between the Board and shareholders. In addition, throughout the year, the Executive Directors, and separately the Chairman, meet with investors to discuss matters relevant to the Company. INTERNAL CONTROL AND RISK MANAGEMENT The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. Such systems are designed to manage rather than eliminate risks and can only provide reasonable, not absolute, assurance against material misstatement or loss. long-term sustainable business and by An ongoing process has been established to considering the Company’s strategic promote and communicate an appropriate priorities and having a process in place risk culture within the Group and to for decision making, the Board aims to identify, evaluate and manage significant make sure that its approach to decision risks faced by each part of the Group. * Attendance by invitation at Audit Committee and Remuneration Committee meetings. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report40 Directors’ Remuneration Report REMUNERATION POLICY Remuneration policy for External appointments It is the policy of the Group, which is The Non-Executive Director fees policy is to pay a basic fee for membership of the Executive Directors The policy of the Remuneration Committee reflected in the contract of employment, Board, with additional fees for the Senior that no Executive Director may accept Independent Director and Chairmanship is to set basic salaries at a level which any Non-Executive Directorships or other of a Committee to take into account is competitive with that of comparable appointments without the prior approval of the additional responsibilities and time businesses. The same principles are the Board. Any outside appointments are commitments of these roles. The Non- applied to Directors’ fixed remuneration, considered by the Nominations Committee Executive Directors’ fee is currently set pension contributions and benefits as are or the Board to ensure that they would not at £70,000 per annum. applied to those of employees throughout give rise to a conflict of interest. It is the the organisation. The main principles of the senior executive remuneration policy are set out below: — Attract and retain high calibre executives in a competitive market, and remunerate executives fairly and responsibly. — Motivate delivery of our key business strategies and encourage a strong and sustainable performance orientated culture. Group’s policy that remuneration earned from any such appointment may be retained by the individual Executive Director. Service contracts It is the Group’s policy for all Executive Directors to have contracts of employment that contain a termination notice period of Remuneration policy for the Chairman not less than twelve months. All Executive and Non-Executive Directors The Chairman and other Non-Executive Director appointments continue until terminated by either party on giving not less Directors are appointed under a letter of than 12 months’ notice to the other party. appointment. The letters of appointment cover such matters as duties, time commitment and other business interests. Non-Executive Directors do not have service contracts. A letter of appointment provides for an initial period of 12 months — Align the business strategy and The Remuneration Committee determines and continues until terminated by either achievement of planned business the remuneration for the Chairman and party giving three months’ prior written objectives. Non-Executive Directors within the limits notice to expire at any time on or after — Take into consideration the views of set in the Company’s Articles of Association. the initial 12 month period. shareholders and best practice guidelines. The fee for the Chairman’s role takes into The Committee believes that the level of account the time commitment required remuneration for Executive Directors is for the role, the skills and experience of commensurate with the corporate and the individual and market practice in personal performance of the Executive comparable companies. The Chairman’s Directors for the financial year ended fee is currently set at £90,000 per annum. 31 March 2020. Single total figure of remuneration for each Director (audited) Directors’ remuneration payable in respect of the year ended 31 March 2020 was as follows: 31/03/2020 31/03/2019 Basic salary Pension related and other taxable Basic salary Pension related and other taxable Executive Directors and fees Bonus benefits Total and fees Bonus benefits Total Paul Hogarth Lothar Mentel Paul Edwards Sub-total Non-Executives Roger Cornick Chris Poil Notes 342,000 300,381 262,500 – 35,000 – 1,622 11,573 935 343,622 346,954 263,435 342,000 295,950 245,667 – – – 1,560 15,459 836 343,560 311,409 246,503 904,881 35,000 14,130 954,011 883,617 – 17,855 901,472 90,000 70,000 – – – – 90,000 70,000 90,000 70,000 – – – – 90,000 70,000 1,064,881 35,000 14,130 1,114,011 1,043,617 – 17,855 1,061,472 1 Paul Hogarth and Paul Edwards have received additional basic salary in lieu of pension contributions. 2 Paul Hogarth and Lothar Mentel have received additional basic salary in lieu of provision of a company car. 3 All Executive Directors have received additional basic salary in lieu of pension contributions. Tatton Asset Management plc Annual Report and Accounts 202041 COMPONENTS OF REMUNERATION Salaries and fees Salaries for Executive Directors are Sharesave Plan The Sharesave plan is an “all-employee” the EMI plan in 2018 and 1 April 2019 for the options granted in the extension of the save as you earn (“SAYE”) share option plan EMI plan in 2019. If the EPS growth falls determined by the Remuneration which gives eligible participating employees between the thresholds for EPS growth, the Committee. The level of salary broadly the opportunity to acquire ordinary shares proportion of the option subject to the EPS reflects the value of the individual, their in the Company using savings of up to measure that vests will be determined on a role, skills and experience. Salaries are £500 per month or such other amount straight-line basis. The options granted in reviewed annually in April taking account permitted under the relevant legislation 2017 will vest in respect of growth in TSR of market levels, corporate performance governing “tax-approved” savings-related from the date of IPO to 31 March 2020. and individual performance. share option plans. Fees to Non-Executive Directors are TAM PLC LONG-TERM INCENTIVE determined by the Board, having regard to fees paid to other Non-Executive PLAN The Directors have adopted the TAM Directors in other UK quoted companies, plc EMI plan which became effective on the responsibilities of the individual Non- admission and which was extended in both Executive Director and the time committed August 2018 and August 2019. The EMI to the Company. Pension provision Where an Executive Director has not reached their maximum lifetime allowance, the Group will pay minimum contributions into a personal pension plan nominated by each Executive Director at a rate between 5% and 10% of their basic salary. If the plan is a share option plan under which all eligible employees (including Executive Directors) may be granted options over shares on a tax-advantaged basis, under the provisions of Schedule 5 of the Income (“Schedule 5”). Non-qualifying options may also be granted under the EMI plan. maximum lifetime allowance has been reached, the Director will receive the Performance conditions Options granted under the EMI plan are The options granted in the extension of the EMI plan in 2018 will vest in respect of growth in TSR over the three-year performance period commencing 1 April 2018. If the Compound Annual Growth Rate (“CAGR”) of TSR falls between the thresholds for CAGR, the proportion of the option subject to the TSR measure that vests will be determined on a straight- line basis. Clawback Vested and unvested EMI plan awards are Grant of equity share options under the EMI plan At 31 March 2020, the Company had granted options to certain of its Executive Tax (Earnings and Pensions) Act 2003 subject to a formal clawback mechanism. equivalent in basic salary. only exercisable subject to the satisfaction Directors and senior managers to acquire of performance conditions which will (in aggregate) up to 5.4% of its share determine the proportion of the option capital. The maximum entitlement of any that will vest at the end of the three-year individual was 2.6%. Other benefits Executive Directors are entitled to benefits commensurate with their position, including consideration for a discretionary performance-related annual bonus scheme, private medical cover, life assurance and car allowances. performance period. The performance conditions used in determining the number of options that will vest are split between adjusted earnings per share (“EPS”) growth and total shareholder return (“TSR”). Short-term incentives Performance-based bonuses are assessed The Committee currently believes these are fair and appropriate conditions for on a discretionary basis. rewarding participants as they align their LONG-TERM INCENTIVES The long-term incentive plan for Executives is designed to reward execution of strategy and growth in shareholder value over a multiple-year period. Long-term interests with those of shareholders and, being measured over a three-year period, align the reward with the Group’s strategy for growth by encouraging longer-term profitable growth. performance measurement discourages When determining the adjusted EPS excessive risk taking and inappropriate growth, the shares will be fully diluted short-term behaviours and encourages and the impact of adjusted items as Executive Directors to take a long-term determined by the Board, see note 23, will view by aligning their interests with those be disregarded to ensure that they do not of shareholders. Where possible, and to artificially impact the EPS measurement. the limits applied by the legislation, the The option will vest in respect of growth long-term incentive plan benefits from in EPS over the three-year performance the tax advantages under an Enterprise periods, commencing 1 April 2017 for the Management Incentive (“EMI”) scheme. options granted in 2017, 1 April 2018 for the options granted in the extension of Terms of awards Options may be granted over newly issued shares, treasury shares or shares purchased in the market. To satisfy exercised options, shares may be purchased in the market or new shares subscribed from the Company. At 31 March 2020 the Company held no shares in treasury, other than those held by the Employee Benefit Trust to satisfy options awarded under share incentive schemes (2019: nil). Unapproved share scheme Options issued under the long-term incentives are intended to be qualifying options for EMI purposes. If they are not qualifying options (for example, because they exceed the statutory limit at the date of grant) then they will take effect as unapproved options which cannot benefit from the preferential tax treatments afforded to options granted pursuant to an EMI scheme. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report42 Directors’ Remuneration Report continued Directors’ interests in share options Outstanding share options granted to Executive Directors are as follows: Paul Hogarth Lothar Mentel Paul Edwards Total Date of grant 7 July 2017 7 August 2018 7 July 2017 7 August 2018 7 August 2018 Exercise price £1.89 £0.00 £1.89 £0.00 £0.00 At 31 March 2019 Number 503,168 330,000 1,118,150 330,000 765,000 3,046,318 Granted during the year Exercised Forfeited At 31 March during the year during the year 2020 Number – – – – – – – – – – – – – – – – – – 503,168 330,000 1,118,150 330,000 765,000 3,046,318 Employee Benefit Trust (“EBT”) On 18 November 2019, the Company Directors’ interests The beneficial interests of the Directors and their connected persons in the ordinary established the EBT, with an independent share capital of the Company at 31 March 2020 were as follows: Jersey-based trustee. The EBT was established for the benefit of the employees, former employees and their dependants Paul Hogarth No. of ordinary Percentage shares shareholding (%) 10,575,358 991,785 94,864 173,205 32,051 18.91 1.77 0.17 0.31 0.06 Lothar Mentel Paul Edwards Christopher Poil Roger Cornick On behalf of the Board: Chris Poil Chairman of the Remuneration Committee 15 June 2020 Total Shareholder returns % n r u t e R 140 130 120 110 100 90 80 70 60 1/4/19 1/5/19 1/6/19 1/7/19 1/8/19 1/9/19 1/10/19 1/11/19 1/12/19 1/1/20 1/2/20 1/3/20 Tatton FTSE AIM All-Share Total Return Source: Morningstar Direct. of the Group. The EBT may be used in conjunction with the EMI plan where the Remuneration Committee decides in its discretion that it is appropriate to do so. The Company may provide funds to the trustee by way of loan or gift to enable the trustee to subscribe or purchase existing shares in the market in order to satisfy awards made under the EMI plan or the SAYE share option plan. During the year, the Company has made a gift of £1 million to the EBT. As at 31 March 2020, the EBT held a total of 413,411 ordinary shares (2019: nil) equating to 0.74% of the issued ordinary share capital of the Company (2019: nil). Total shareholder returns from admission on AIM to 31 March 2020 The Company’s share price in the period from admission on AIM on 7 July 2017 to 31 March 2020 increased from £1.56 to £1.96 and market capitalisation grew from £87,215,720 to £109,578,725, with £10.18 million returned to shareholders by way of dividend. The graph below shows the Company’s total shareholder returns (“TSR”) compared to the FTSE AIM All-Share Index in the twelve months to 31 March 2020. TSR is defined as share price growth plus reinvested dividends. The Directors consider the FTSE AIM All-Share Index to be the most appropriate index against which the TSR of the Company should be measured. Tatton Asset Management plc Annual Report and Accounts 2020 43 Directors’ Report The Directors are pleased to present their report together with the audited consolidated ALTERNATIVE PERFORMANCE financial statements for the year ended 31 March 2020. REVIEW OF THE BUSINESS AND FUTURE DEVELOPMENTS A review of the business and future developments can be found in the Chairman’s Statement and the Chief Executive’s Statement on pages 4 to 5 and 6 to 8 respectively. MEASURES We use a number of performance measures to assist in presenting information in this statement in a way which can be easily analysed and understood. We use such PRINCIPAL ACTIVITIES TAM plc is a holding company whose shares are listed on the AIM market of the measures consistently and reconcile them as appropriate and they are used by London Stock Exchange and is domiciled and incorporated in the UK. It has three management in evaluating performance. core operating subsidiaries within two core operating divisions as follows: See note 2.24. Subsidiary name the Company Principal activities of subsidiary Operating division % owned by Tatton Investment 100% Provides discretionary fund Tatton Management Limited overlay services to IFAs (“Tatton”) Paradigm Partners 100% Provides compliance Paradigm Limited (“Paradigm Consulting” or “PPL”) consultancy and technical support services to IFAs Paradigm Mortgage 100% Provides mortgage and Paradigm Services LLP (“PMS”) insurance product distribution services RESULTS AND DIVIDENDS Group profit before tax was £10.296 million (2019: £6.112 million), up 68.5% on the prior year due to strong revenue growth and a change in the VAT treatment of Tatton’s investment management services, see note 6. Adjusted Operating Profit* was £9.076 million (2019: £7.308 million) giving an Adjusted Operating margin* of 42.5% (2019: 41.7%). Operating Profit after the effect of share-based payments, amortisation on customer relationship intangible assets and exceptional items is £10.302 million (2019: £5.925 million). An interim dividend in respect of the period ended 30 September 2019 of 3.2p per share was paid to shareholders on 13 December 2019. The Directors recommend a final The policy is intended to ensure that shareholders benefit from the growth of the Group, and it aligns with the strategic objective of growing our dividend. The Board recognises the importance of dividends to shareholders and the benefit of providing sustainable shareholder returns. The target payout ratio has been adopted to provide sufficient flexibility for the Board to remunerate shareholders for their investment whilst recognising that there may at times be a requirement to retain capital within the Group. In determining the level of dividend in any year, the Directors follow the dividend policy and also consider a number of other factors that influence the proposed dividend, including: dividend of 6.4p per share. This has not been — the level of retained distributable included within the Group financial statements as no obligation existed at 31 March 2020. If approved, the final dividend will be paid on 28 August 2020 to ordinary shareholders whose names are on the register at the close reserves in the Company; — availability of cash resources; — future cash commitments and investment plans, in line with the Company’s strategic plan; and of business on 17 July 2020. The Company operates a progressive dividend policy to grow dividends in line with the Group’s adjusted earnings, with a target payout ratio in the region of 70% of annual adjusted diluted earnings per share. — the impact of the decision on the Company’s key stakeholders. The Company’s key stakeholders are shown on pages 12-13 and we have detailed how we engage with them and understand their issues and the impact of the decisions of management on our stakeholders. SHARE CAPITAL As at 31 March 2020 there were 55,907,513 fully paid ordinary shares of 20p amounting to £11,181,503. Details of the issued share capital shown are in note 18 to the consolidated financial statements. The Company has one class of ordinary shares which carry no right to fixed income. Each ordinary share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding or on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation other than: certain restrictions may be imposed from time to time by laws and regulations pursuant to the Listing Rules of the Financial Conduct Authority (“FCA”), whereby certain Directors, officers and employees of the Group require the approval of the Group to deal in ordinary shares of the Company. The Directors are not aware of any other agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. SHARE OPTIONS Details of the Company’s share capital and options over the Company’s shares under the Company’s employee share plans are given in note 20 to the Group financial statements. * Alternative performance measures are detailed in note 23. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report44 Directors’ Report continued SIGNIFICANT SHAREHOLDERS At 29 May 2020, the Company had been notified of the following interests representing 3% or more of its issued share capital: Shareholder Paul Hogarth and connected parties Funds and accounts under management by direct and indirect investment management subsidiaries of BlackRock, Inc. Liontrust Investment Partners LLP Chelverton Asset Management Limited Gresham House Asset Management Limited Kames Capital plc Legal & General Investment Management Limited Canaccord Genuity Wealth Limited Standard Life Aberdeen plc Shares Percentage held 10,575,358 8,490,747 7,097,519 3,102,914 2,939,084 2,764,449 2,613,866 2,406,000 1,829,564 holding 18.91% 15.18% 12.69% 5.55% 5.26% 4.94% 4.67% 4.30% 3.27% PURCHASE OF OWN SHARES At the 2019 AGM, shareholders authorised TAKE OVER DIRECTIVE The Company has only one class of DIRECTORS’ INTERESTS Directors’ emoluments, interests in the the Company to buy back up to 10% of its ordinary share and these shares have shares of the Company and options to own ordinary shares by market purchase equal voting rights. The nature of individual acquire shares are disclosed in the Directors’ at any time prior to the conclusion of the Directors’ holdings is disclosed on page Remuneration Report on pages 40 to 42. AGM to be held in 2020. The Company did 42. There are no other significant holdings Paul Hogarth is also the beneficial owner not purchase any of its own shares during of any individual. the financial year, other than through the Employee Benefit Trust (note 19). The cost of shares purchased and held by the EBT is deducted from equity. BOARD OF DIRECTORS The names of the present Directors and their biographical details are shown on of Paradigm House, the Group’s registered address and the trading premises of PPL. CONFLICTS OF INTEREST There are procedures in place to deal pages 36 and 37. At the AGM, to be held with any Directors’ conflicts of interest At the forthcoming AGM, the Directors will on 18 August 2020, all Executive and Non- arising under section 175 of the Companies seek to extend shareholders’ approval for Executive Directors will offer themselves Act 2006. a further period to the conclusion of the for re-election. AGM to be held in 2021, by way of special resolution, for the grant of an authority for the Company to make market purchases of up to 10% of its own shares. The Directors consider that the grant of the power for the Company to make market purchases of the Company’s shares would be beneficial for the Company and accordingly they recommend this special resolution to shareholders. The Directors would only exercise the authority sought if they believed such a purchase in the interests of shareholders generally. The minimum price to be paid will be the shares’ nominal value of 20p and the maximum price will be no more than 5% above the average middle market quotations for the shares on the five days before the shares are purchased. APPOINTMENT AND REPLACEMENT OF DIRECTORS With regard to the appointment and DIRECTORS’ INDEMNITY All Directors and Officers of the Company have the benefit of the indemnity provision contained in the Company’s Articles. replacement of Directors, the Company is The provision, which is a qualifying third governed by its Articles of Association (the party indemnity provision, was in force “Articles”), the UK Corporate Governance throughout the last financial year and is Code, the Companies Act 2006 and related currently still in force. The Group also legislation. The Articles themselves may purchased and maintained throughout be amended by special resolution of the the financial period Directors’ and Officers’ shareholders. The powers of Directors liability insurance in respect of itself and its are described in the Articles which Directors and Officers, although no cover can be found on the Group’s website exists in the event Directors or Officers (www.tattonassetmanagement.com). are found to have acted fraudulently or dishonestly. PRINCIPAL RISKS A report on principal risks, risk management and internal controls is included on pages 28 to 31. Tatton Asset Management plc Annual Report and Accounts 202045 EMPLOYEES The Group is committed to the principle POST BALANCE SHEET DATE EVENTS There have been no material post balance RELATED PARTIES Details of related party transactions are given of equal opportunities in employment and sheet events. in note 22 to the Group financial statements. POLITICAL DONATIONS The Group made no political donations or GOING CONCERN The Board has reviewed detailed papers contributions during the year (2019: £nil). prepared by management that consider to ensuring that no applicant or employee receives less favourable treatment on the grounds of gender, marital status, age, race, colour, nationality, ethnic or national origin, religion, disability, sexuality, or unrelated criminal convictions. The Group applies employment policies which are believed to be fair and equitable and which ensure that entry into, and ANNUAL GENERAL MEETING (“AGM”) The AGM of the Company will be held on 18 August 2020. A notice convening the meeting will be sent to shareholders on 23 July 2020. progression within, the Group is determined solely by application of job criteria and AUDITOR Deloitte LLP was the Group’s independent personal ability and competency. auditor during the year and has confirmed The Group aims to give full and fair consideration to the possibility of employing disabled persons wherever suitable opportunities exist. Employees who become disabled are given every opportunity to their willingness to continue in office. A resolution to reappoint Deloitte LLP as auditor to the Group and to authorise the Directors to set its remuneration will be proposed at the 2020 AGM. the Group’s expected future profitability, dividend policy, capital position and liquidity, both as they are expected to be and also under more stressed conditions. The Board has also reviewed the management actions that could be taken in these scenarios. Management have also prepared reports in relation to the operational resilience of the business reflecting the switch to home working in compliance with Government advice and effectively implementing its business continuity planning procedures. The Group also maintains its high level of continue their positions or be trained for Each of the persons who is a Director at ongoing oversight and monitoring of third other suitable positions. the date of approval of this Annual Report party platforms. The Board is satisfied that The Group provides a Group Personal Pension plan which is open to all employees. The Group operates an Enterprise Management Incentive scheme and a Group Sharesave scheme, details of which are provided in the Directors’ Remuneration Report and the financial statements. FINANCIAL INSTRUMENTS The Group’s financial instruments at 31 March 2020 comprise cash and cash equivalents and receivable and payable balances that arise directly from its daily operations. Cash flow is managed to ensure that sufficient cash is available to meet liabilities. The Group is not reliant on income generated from cash deposits. The Group has one operating subsidiary (Tatton) which is supervised in the UK by the FCA. The Group must comply with the regulatory capital requirements set by the FCA and manages its regulatory capital through continuous review of Tatton’s capital positions and requirements, which are reported to the Board monthly. confirms that: — so far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and the business can operate successfully in these conditions. The Board is satisfied that the Group has adequate resources to continue in operational existence for — the Director has taken all the steps the foreseeable future: that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. CORPORATE GOVERNANCE A full review of corporate governance appears on pages 38 to 39. STATEMENT OF DIRECTORS’ RESPONSIBILITIES/DISCLOSURES TO THE AUDITOR As far as the Directors are aware, there is no relevant information of which the Group’s independent auditors are unaware. The Directors have taken all the steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s independent auditor is aware of that information. Liquidity – The Group has a robust financial liquidity position with £12.8m cash at 31 March 2020 and no debt, a £1.5 million overdraft facility which remains undrawn and a highly efficient working capital cycle, ensuring strong operating cash conversion (c.100% of Adjusted Operating Profit). Regulatory position – Management has assessed the impact of COVID-19 and has confirmed that the Group continues to have significant headroom over its regulatory requirements. Having given due consideration to the risks, uncertainties and contingencies disclosed in the financial statements and accompanying reports, the Directors believe the business is well placed to manage its business risk successfully. Accordingly the financial statements have been prepared on a going concern basis. Details of the Group’s business activities, results, cash flows and resources, together with the risk it faces and other factors likely to affect its future development, performance and position are set out in the Strategic Report, see page 5. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report46 Directors’ Report continued BASIS OF PREPARATION OF THE In preparing the Group financial statements, DIRECTORS’ RESPONSIBILITIES FINANCIAL STATEMENTS The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and Article 4 of the International Accounting Standards (“IAS”) Regulation and have elected to prepare the Parent Company financial statements in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’. 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 Company and of the profit or loss of the Company for that period. In preparing the Parent Company financial statements, the Directors are required to: — select suitable accounting policies and then apply them consistently; — make judgements and accounting estimates that are reasonable and IAS 1 requires that Directors: STATEMENT — properly select and apply accounting We confirm that to the best of our policies; knowledge: — present information, including accounting — the financial statements, prepared in policies, in a manner that provides accordance with the relevant financial relevant, reliable, comparable and reporting framework, give a true and understandable information; fair view of the assets, liabilities, — provide additional disclosures when financial position and profit or loss of compliance with the specific requirements the Company and the undertakings in IFRSs are insufficient to enable users included in the consolidation taken to understand the impact of particular as a whole; transactions, other events and conditions — the Strategic Report includes a fair review on the entity’s financial position and of the development and performance financial performance; and of the business and the position of — make an assessment of the Company’s the Company and the undertakings ability to continue as a going concern. included in the consolidation taken as The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company a whole, together with a description of the principal risks and uncertainties that they face; and — the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy. and hence for taking reasonable steps for The Directors’ Report has been approved the prevention and detection of fraud and and authorised for issue by the Board other irregularities. of Directors and signed on its behalf by: prudent; The Directors are responsible for the — state whether applicable Financial maintenance and integrity of the corporate Reporting Standard 101 ‘Reduced and financial information included on the Disclosure Framework’ has been Company’s website. Legislation in the United followed, subject to any material Kingdom governing the preparation and departures disclosed and explained dissemination of financial statements may Paul Hogarth Chief Executive Officer in the financial statements; and differ from legislation in other jurisdictions. 15 June 2020 — prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. Paul Edwards Chief Financial Officer 15 June 2020 Tatton Asset Management plc Annual Report and Accounts 202047 Independent Auditor’s Report to the Members of Tatton Asset Management plc Report on the audit of the financial statements 1. OPINION In our opinion: — the financial statements of Tatton Asset Management plc (the ‘Parent We have audited the financial statements which comprise: — the consolidated statement of total comprehensive income; — the consolidated and parent company balance sheets; Company’) and its subsidiaries (the — the consolidated and parent company ‘Group’) give a true and fair view of statements of changes in equity; the state of the Group’s and of the — the consolidated statement of cash flows; Parent Company’s affairs as at 31 March — the related notes 1 to 26. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice). 2020 and of the Group’s profit for the year then ended; — the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (IASB); — the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and — the financial statements have been in accordance with the prepared requirements of the Companies Act 2006. 2. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 3. SUMMARY OF OUR AUDIT APPROACH Key audit matters The key audit matters that we identified in the current year were: — share based payments; and — valuation and completeness of intangible assets Within this report, key audit matters are identified as follows: ! Newly identified > Increased level of risk <> Similar level of risk < Decreased level of risk Materiality The materiality that we used for the Group financial statements was £439,000, which was determined on the basis of 5% of adjusted income before tax. Scoping Our audit covered 100% of the Group’s profit before tax, revenue, and net assets. Significant changes in our approach We have identified a new key audit matter relating to the valuation and completeness of intangible assets, in relation to the acquisition in the year of Sinfonia Asset Management Limited, due to the inherent management judgement involved in determining the fair value of the assets acquired. We have not considered related parties as a key audit matter in the current period, in response to the risk assessment performed in the current period. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report48 Independent Auditor’s Report to the Members Of Tatton Asset Management PLC continued 4. CONCLUSIONS RELATING TO GOING CONCERN We are required by ISAs (UK) to report in respect of the following matters where: — the directors’ use of the going concern basis of accounting in preparation of the financial statements is not appropriate; or — the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the Parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. We have nothing to report in respect of these matters. 5. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 5.1 Share-based payments <> Key audit matter The Group floated on the AIM market of the London Stock Exchange through 2017. Subsequent to listing, description certain employees within the Group have been offered an Enterprise Management Incentive (EMI) scheme, and a Sharesave scheme each period. As such, six incentive schemes, relating to 2017, 2018, and 2019, remain active at 31 March 2020. Our key audit matter has been focuss ed on the 2018 EMI scheme, given the materiality of the scheme. The 2018 EMI scheme has two performance conditions; total shareholder return (TSR) and earnings per share (EPS) growth over the three year vesting period. TSR growth is a market condition, which means that the number of options expected to vest is embedded in the fair value of the option, using a Monte Carlo model. EPS growth is a non-market condition, which means that the number of options expected to vest should be adjusted to the extent that the relevant measure of performance is expected to be met, using a Black Scholes model. To determine its IFRS 2 - Share-based payments (IFRS 2) accounting, the Group is required to estimate the exercise price, risk free rate, yield %, volatility and leavers, with the most sensitive estimate being the accuracy of the number of options expected to vest under the EPS performance conditions of the scheme. Further, the estimate of vesting options is reliant upon the accuracy of EPS forecasts, which involve significant management assumptions. Due to the potential for management to introduce inappropriate bias to estimates, we have determined that there is a risk of misstatement due to fraud. The accounting policies adopted by the Group have been disclosed within note 2.21 to the financial statements. In light of COVID-19, the estimate of future performance of the Group, and thus the estimated EPS growth, have been impacted. How the scope To address our share-based payment key audit matter, we have: of our audit responded to the key audit matter — Gained an understanding of the relevant controls put in place by management to manage the risks associated with accounting for share-based payments; — Challenged the EPS growth assumptions that determine the number of options vesting, through a recalculation and extrapolation of historic growth rates, and by reviewing and challenging growth forecasts, including the impact of COVID-19 on these forecasts; — Challenged management’s assumptions around exercise price, risk free rate, yield %, volatility and leavers using internal and external data as appropriate; — Involved our internal specialists on share-based payment valuations to review the scheme documentation, and recalculate the valuation of the schemes at the reporting date under IFRS 2; and — Assessed the fair value output from the fair value model to determine whether it is generating a reasonable fair value based on the assumptions. Tatton Asset Management plc Annual Report and Accounts 202049 Key observations As a result of the above procedures, we concur that Management’s accounting treatment of the share- based payment schemes is consistent with IFRS 2. 5.2. Valuation and completeness of intangible assets ! Key audit On 30 September 2019, the Group acquired 100% of the shares in Sinfonia Asset Management for a matter description purchase price of £2.7m. The total consideration consisted of an initial payment of £2.0m, and deferred consideration of a maximum of £0.7m, payable two instalments on the first and second anniversary of the transaction. In accordance with IFRS 3 - Business combinations (IFRS 3), management have completed the assessment of the acquisition recognising a client relationship intangible of £1.2m, goodwill of £1.3m, deferred tax of £0.2m and deferred consideration of £0.3m within the financial statements. The identification of intangible assets requires judgement and estimates, including the recognition criteria, future net cash flows, discount rate, and expected fund life. We have identified a key audit matter in relation to the completeness of the identifiable assets and the valuation of the client relationship intangible, specifically in relation to the estimation of future cash flows. In addition to the acquisition accounting and in light of COVID-19 we have also identified a risk in relation to the appropriateness of the valuation of the deferred consideration and the assumptions used in determining the cash flow forecasts to support the impairment assessment at the year end date. Due to the potential for management to introduce inappropriate bias to judgements and estimates, we have determined that there is a risk of misstatement due to fraud. Management have detailed the accounting policies relating to goodwill, and client relationship intangibles through note 2 to the financial statements. Further details of the cash flow assumptions are provided through notes 11 and 12 to the financial statements. How the scope To address our intangible assets key audit matter, we have: of our audit responded to the key audit matter — Gained an understanding of the relevant controls put in place by management to manage the risks associated with the completeness of intangible assets identified and the estimates made in the valuation prepared by management; — Challenged the completeness of identified acquired assets in line with the criteria in IFRS 3; — Challenged key assumptions, (including the criteria for recognition, discount factor, expected life, and net inflows) by performing sensitivity analysis, and seeking external contradictory and supporting evidence; — Tested management’s forecasting accuracy by reference to actual cash flows observed since the acquisition date; — Assessed the valuation of the deferred consideration as of the acquisition date, and subsequently at the year end date with reference to external market predictions considering the impact of COVID-19; and — Challenged Management’s impairment test as of the year end date to test the intangible asset for impairment which also included consideration of the impact of COVID-19. Key observations As a result of the above procedures, we have concluded that Management’s judgements and estimates are reasonable, with both reference to the completeness and valuation of the intangible assets that were acquired. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report50 Independent Auditor’s Report to the Members Of Tatton Asset Management PLC continued 6. OUR APPLICATION OF MATERIALITY We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Materiality Basis for determining materiality Group financial statements Parent Company financial statements £439,000 (2019: £308,000) £351,000 (2019: £242,000) We have determined materiality based on 5% of Parent Company materiality equates to 2% of total adjusted income before tax. We have normalised assets, which is capped at 80% of Group materiality. the benchmark by adjusting for the impact of the This is consistent with the prior period. prior period VAT refund, within exceptional income. As management could not have reasonably known the outcome of the VAT refund in the prior period, the impact has been to increase current year income before tax. We do not deem this to be “business as usual”, as such have adjusted the benchmark used for our determination of materiality. In the prior period, we did not include adjustments to income before tax in the determination of materiality. Rationale for the We have determined materiality based on adjusted The main operation of the Parent Company is to hold benchmark applied income before tax as it is a profit driven business, investments in the subsidiaries. We have therefore therefore is considered the most relevant benchmark selected total assets as the benchmark for determining for users of the financial statements. materiality. We have however capped materiality based on the Group materiality. Adjusted income before tax £8,799k Group materiality £439k Component materiality range £417k to £83k Audit Committee reporting threshold £22.0k Adjusted income before tax Group materiality 6.2 Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 70% of Group materiality for the 2020 audit (2019: 70%). In determining performance materiality, we considered the following factors: — our risk assessment, including our assessment of the Group’s overall control environment; and — our past experience of the audit, which has indicated a low number of corrected and uncorrected misstatements identified in prior periods. 6.3 Error reporting threshold We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £22,000 (2019: £15,400), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. Tatton Asset Management plc Annual Report and Accounts 2020 51 7. AN OVERVIEW OF THE SCOPE OF OUR AUDIT 7.1 Identification and scoping of components Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. At a Group level, the audit team has also tested the consolidation process and adjustments. Our Group audit focused on the three material trading entities within the Group’s three reportable segments and the three material holding companies including the parent Company. The Group audit team performed full scope audits on all entities directly, which account for 100% of the Group’s profit before tax, revenue and net assets. We have used appropriate levels of materiality for the three material trading entities and three material holding companies that ranged from £83,000–£417,000 (2019: £14,000–£272,000). 8. OTHER INFORMATION The directors are responsible for the other information. The other information comprises the information We have nothing included in the annual report, Chairman’s letter, the Chief Executive Officer’s Review, the Strategic to report in respect Report, the Chief Investment Officer’s Report, Principal Risks and Uncertainties, the Directors’ Report, of these matters. the Corporate Governance Report and the Directors’ Remuneration Report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. 9. RESPONSIBILITIES OF DIRECTORS As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the 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 the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. 10. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report52 Independent Auditor’s Report to the Members Of Tatton Asset Management PLC continued Report on other legal and regulatory requirements 11. OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, based on the work undertaken in the course of the audit: — the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and — the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report. 12. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION 12.1 Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: — we have not received all the information and explanations we require for our audit; or — adequate accounting records have not been kept 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. 12.2 Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made. We have nothing to report in respect of these matters. We have nothing to report in respect of this matter. 13. USE OF OUR REPORT This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. David Heaton (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor Manchester, United Kingdom 15 June 2020 Tatton Asset Management plc Annual Report and Accounts 2020Consolidated Statement of Total Comprehensive Income For the year ended 31 March 2020 Revenue Other exceptional income Administrative expenses Operating Profit – Share-based payment costs – Amortisation of intangibles – customer relationships – Exceptional items Adjusted Operating Profit (before separately disclosed items)1 Finance (costs)/income Profit before tax Taxation charge Profit attributable to shareholders Earnings per share – Basic Earnings per share – Diluted Adjusted earnings per share – Basic2 Adjusted earnings per share – Diluted2 53 31-Mar 2019 (£’000) 17,518 – (11,593) 5,925 874 – 509 7,308 187 6,112 (1,255) 4,857 8.69p 7.92p 10.99p 10.02p 31-Mar 2020 (£’000) 21,369 1,588 (12,655) 10,302 108 60 (1,394) 9,076 (6) 10,296 (1,933) 8,363 14.98p 14.54p 13.13p 12.00p Note 6 6 6 7 8 9 9 9 9 1 Adjusted for exceptional items, amortisation on client relationship intangibles and share-based payments. See note 23. 2 Adjusted for exceptional items, amortisation on client relationship intangibles and share-based payments and the tax thereon. See note 23. All revenue, profit and earnings are in respect of continuing operations. There were no other recognised gains or losses other than those recorded above in the current or prior year and therefore a Statement of Other Comprehensive Income has not been presented. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic ReportConsolidated Statement of Financial Position As at 31 March 2020 Non-current assets Goodwill Intangible assets Property, plant and equipment Deferred tax assets Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Corporation tax Total current liabilities Non-current liabilities Other payables Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity attributable to equity holders of the Company Share capital Share premium account Own shares Other reserve Merger reserve Retained earnings Total equity 54 31-Mar 2019 (£’000) 4,917 223 349 104 5,593 2,508 12,192 14,700 20,293 (4,521) (484) (5,005) – – – (5,005) 15,288 11,182 8,718 – 2,041 (28,968) 22,315 Note 11 12 13 16 14 15 15 16 18 19 31-Mar 2020 (£’000) 6,254 1,495 1,034 – 8,783 3,431 12,757 16,188 24,971 (6,186) (199) (6,385) (702) (106) (808) (7,193) 17,778 11,182 8,718 (996) 2,041 (28,968) 25,801 17,778 15,288 The financial statements on were approved by the Board of Directors on 15 June 2020 and were signed on its behalf by: Paul Edwards Director Company registration number: 10634323 Tatton Asset Management plc Annual Report and Accounts 2020 Consolidated Statement of Changes in Equity 55 For the year ended 31 March 2020 Share capital (£’000) Share premium (£’000) Own shares (£’000) Other reserve (£’000) Merger reserve (£’000) Retained earnings (£’000) Total equity (£’000) Note At 1 April 2018 11,182 8,718 Profit and total comprehensive income Dividends Share-based payments Deferred tax on share-based payments At 31 March 2019 Profit and total comprehensive income Dividends Share-based payments Deferred tax on share-based payments Own shares acquired in the year 9 20 9 20 19 – – – – – – – – 11,182 8,718 – – – – – – – – – – – – – – – – – – – – (996) 2,041 (28,968) 20,588 13,561 – – – – – – – – 4,857 (4,025) 765 4,857 (4,025) 765 130 130 2,041 (28,968) 22,315 15,288 – – – – – – – – – – 8,363 (4,920) 86 8,363 (4,920) 86 (43) – (43) (996) At 31 March 2020 11,182 8,718 (996) 2,041 (28,968) 25,801 17,778 The other reserve and merger reserve were created on 19 June 2017 when the Group was formed, where the difference between the Company’s capital and the acquired Group’s capital has been recognised as a component of equity being the merger reserve. Both the other reserve and the merger reserve are non-distributable. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic ReportConsolidated Statement of Cash Flows For the year ended 31 March 2020 Operating activities Profit for the year Adjustments: Income tax expense Finance costs/(income) Depreciation of property, plant and equipment Amortisation of intangible assets Share-based payment expense Changes in: Trade and other receivables Trade and other payables Exceptional items Cash generated from operations before exceptional items Cash generated from operations Income tax paid Net cash from operating activities Investing activities Payment for the acquisition of subsidiary, net of cash acquired Purchase of intangible assets Purchase of property, plant and equipment Net cash used in investing activities Financing activities Interest received Dividends paid Purchase of own shares Repayment of lease liabilities Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Net cash and cash equivalents at end of period 56 31-Mar 2020 (£’000) 31-Mar 2019 (£’000) Note 8,363 4,857 7 13 12 6 6 21 9 19 1,933 6 298 195 108 (1,016) 1,338 (1,394) 9,831 11,225 (2,278) 8,947 (2,002) (271) (294) (2,567) 162 (4,920) (996) (61) (5,815) 565 12,192 12,757 1,255 (187) 91 43 874 78 491 509 8,011 7,502 (1,366) 6,136 – (266) (336) (602) 53 (4,025) – – (3,972) 1,562 10,630 12,192 Tatton Asset Management plc Annual Report and Accounts 2020Notes to the Consolidated Financial Statements 57 1 GENERAL INFORMATION Tatton Asset Management plc (“the Company”) is a public company limited by shares. The address of the registered office is Paradigm House, Brooke Court, Lower Meadow Road, Wilmslow, SK9 3ND. The registered number is 10634323. The Group comprises the Company and its subsidiaries. The Group’s principal activities are discretionary fund management, the provision of compliance and support services to independent financial advisers (“IFAs”), the provision of mortgage adviser support services and the marketing and promotion of Tatton Oak funds. News updates, regulatory news and financial statements can be viewed and downloaded from the Group’s website, www.tattonassetmanagement.com. Copies can also be requested from: The Company Secretary, Tatton Asset Management plc, Paradigm House, Brooke Court, Lower Meadow Road, Wilmslow, SK9 3ND. The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement. 2 ACCOUNTING POLICIES The principal accounting policies applied in the presentation of the annual financial statements are set out below. 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted for use in the European Union and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations issued by the International Accounting Standards Board (“IASB”) and the Companies Act 2006. The financial statements of the Company have been prepared in accordance with UK Generally Accepted Accounting Practice, including Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (“FRS 101”). The consolidated financial statements have been prepared on a going concern basis and prepared on the historical cost basis. The consolidated financial statements are presented in sterling and have been rounded to the nearest thousand (£’000). The functional currency of the Company is sterling as this is the currency of the jurisdiction where all of the Group’s sales are made. The preparation of financial information in conformity with IFRSs requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual events may ultimately differ from those estimates. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in the consolidated financial statements. 2.2 Going concern These financial statements have been prepared on a going concern basis. The Directors have prepared cash flow projections and are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. To form the view that the consolidated financial statements should continue to be prepared on an ongoing basis in light of the current COVID-19 pandemic and the resulting economic uncertainty, the Directors have assessed the outlook of the Group by considering various market scenarios and management actions. This review has allowed management to assess the potential impact on income, costs, cash flow and capital and the ability to implement effective management actions that may be taken to mitigate the impact. The Directors have also considered the risks associated with Brexit, including considering the effect on clients’ wealth, attitude towards savings and investment and changes in government policy. The Directors do not consider that the impact of Brexit will affect the Group continuing as a going concern. Accordingly, the Directors continue to adopt the going concern basis in preparing these financial statements. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic ReportNotes to the Consolidated Financial Statements continued 58 2 ACCOUNTING POLICIES CONTINUED 2.3 Basis of consolidation On 23 February 2017, the Company was incorporated under the name Nadal Listco Limited, which changed to Tatton Asset Management Limited on 31 May 2017. On 19 June 2017, the Company acquired the entire share capital of Nadal Newco Limited via a share for share exchange with the shareholders of Nadal Newco Limited. On 19 June 2017, Tatton Asset Management Limited was re-registered as a public company with the name Tatton Asset Management plc. 2.4 Subsidiaries The Group’s financial statements consolidate those of the Parent Company and all of its subsidiaries as at 31 March 2020. The Parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of 31 March. All transactions between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a Group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, up to the effective date of disposal, as applicable. 2.5 Adoption of new and revised standards New and amended IFRS Standards that are effective for the current year In the current period, the Group, for the first time, has applied IFRS 16 ‘Leases’ (as issued by the IASB in January 2016) which became effective for accounting periods beginning on or after 1 January 2019. The date of initial application of IFRS 16 for the Group was 1 April 2019. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lessee accounting by removing the distinction between operating and finance lease and requiring the recognition of a right- of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged. The impact of the adoption of IFRS 16 on the Group’s consolidated financial statements is described below. The Group has applied IFRS 16 using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of internally applying IFRS 16 is recognised in retained earnings at the date of initial application, however there is no impact on the net assets and retained earnings of the Group at 1 April 2019. Tatton Asset Management plc Annual Report and Accounts 202059 2 ACCOUNTING POLICIES CONTINUED 2.5 Adoption of new and revised standards continued Impact on the new definition of a lease The Group has made use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to be applied to those leases entered or modified before 1 April 2019. The change in definition of a lease mainly relates to the concept of control. IFRS 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for consideration. The Group applies the definition of a lease and related guidance set out in IFRS 16 to all lease contracts entered into or modified on or after 1 April 2019 (whether it is a lessor or a lessee in the lease contract). In preparation for the first-time application of IFRS 16, the Group has carried out an implementation project. The project has shown that the new definition in IFRS 16 will not change significantly the scope of contracts that meet the definition of a lease for the Group. Impact on lessee accounting Former operating leases IFRS 16 changes how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance sheet. Applying IFRS 16, for all leases (except as noted below), the Group: (a) recognises right-of-use assets and lease liabilities in the Consolidated Statement of Financial Position, initially measured at the present value of the future lease payments; (b) recognises depreciation of right-of-use assets and interest on lease liabilities in the Consolidated Statement of Total Comprehensive Income; and (c) separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the Consolidated Statement of Cash Flows. Lease incentives (e.g. rent-free period) are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas under IAS 17 they resulted in the recognition of a lease liability incentive, amortised as a reduction of rental expenses on a straight-line basis. Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 ‘Impairment of Assets’. This replaces the previous requirement to recognise a provision for onerous lease contracts. For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as personal computers and office furniture), the Group has opted to recognise a lease expense on a straight-line basis as permitted by IFRS 16. This expense is presented within Other operating expenses in the Consolidated Statement of Total Comprehensive Income. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report60 2 ACCOUNTING POLICIES CONTINUED 2.5 Adoption of new and revised standards continued Financial impact of initial application of IFRS 16 The tables below show the amount of adjustment for each financial statement line item affected by the application of IFRS 16 for the current period. Impact on profit or loss in the period Increase in depreciation1 Increase in finance costs1 Decrease in other operating expenses1 Decrease in profit for the period Impact on earnings per share Increase in earnings per share from continuing operations Basic Diluted Impact on assets, liabilities and equity as at 31 March 2020 Right-of-use asset1 Net impact on total assets Trade and other payables Lease liabilities1 Net impact on total liabilities Impact on net assets Retained earnings £’000 (138) (22) 150 (10) p 0.02p 0.02p As if IAS 17 still IFRS 16 applied £’000 adjustments As presented £’000 £’000 – – (103) – (103) (103) (103) 551 551 103 (650) (547) 4 4 551 551 – (650) (650) (99) (99) 1 The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the recognition of right-of-use assets and lease liabilities. It resulted in a decrease in Other operating expenses and an increase in depreciation and interest expense. Operating lease commitments disclosed as at 31 March 2019 (Less): short-term leases recognised on a straight-line basis as expense Lease liability recognised as at 1 April 2019 discounted using the lessee’s incremental borrowing rate at the date of initial application Of which are: Current lease liabilities Non-current lease liabilities £’000 778 (28) 750 689 40 649 689 Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202061 2 ACCOUNTING POLICIES CONTINUED 2.5 Adoption of new and revised standards continued The application of IFRS 16 has an impact on the consolidated cash flows of the Group. Under IFRS 16, lessees must present: — short-term lease payments and payments for leases of low-value assets as part of operating activities (the Group has included these payments as part of payments to suppliers and employees); — cash paid for the interest portion of lease liability as either operating activities or financing activities, as permitted by IAS 7 (the Group has opted to include interest paid as part of operating activities); and — cash payments for the principal portion for lease liability, as part of financing activities. Under IAS 17, all lease payments on operating leases were presented as part of cash flows from operating activities. At the reporting date there is no impact on net cash generated by operating activities as no payments have been made against the relevant lease in the period. The adoption of IFRS 16 did not have an impact on net cash flows. The Group as lessee The Group assesses whether a contract is or contains a lease at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise: — fixed lease payments (including in substance fixed payments), less any lease incentives; — the amount expected to be payable by the lessee under residual value guarantees; — the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and — payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. The lease liability is presented within Trade and other payables in the Consolidated Statement of Financial Position. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: — the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report62 2 ACCOUNTING POLICIES CONTINUED 2.5 Adoption of new and revised standards continued — the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); and — a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. The Group did not make any such adjustments during the periods presented. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. The costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The right-of-use assets are within property, plant and equipment in the Consolidated Statement of Financial Position. The Group applies IAS 36 ‘Impairment of Assets’ to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the property, plant and equipment policy. As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Group has not used this practical expedient. Standards in issue not yet effective The following IFRS and IFRIC interpretations have been issued but have not been applied by the Group in preparing the historical financial information, as they are not as yet effective. The Group intends to adopt these Standards and Interpretations when they become effective, rather than adopt them early. Effective date 1 January 2020 Amendments to the Conceptual Framework in IFRS Standards Amendments to IAS 1 ‘Presentation of Financial Statements’ Amendments to IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ Amendments to IFRS 3 ‘Business Combinations’ Amendments to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 7 ‘Financial Instruments: Disclosure’ Effective date 1 January 2021 IFRS 17 ‘Insurance Contracts’ A number of IFRS and IFRIC interpretations are also currently in issue which are not relevant for the Group’s activities and which have not therefore been adopted in preparing the annual financial statements. The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202063 2 ACCOUNTING POLICIES CONTINUED 2.6 Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business, net of discounts, VAT and other sales-related taxes. Revenue is reduced for estimated rebates and other similar allowances. Revenue is recognised when control is transferred and the performance obligations are considered to be met. The Group’s revenue is made up of the following principal revenue streams: — Fees charged to IFAs for compliance consultancy services, which is recognised when performance obligations are met. — Fees for providing investment platform services. Revenue is recognised on a daily basis, in line with the satisfaction of performance obligations, on the Assets Under Administration held on the relevant investment platform. — Fees for discretionary fund management services in relation to on-platform investment Assets Under Management (“AUM”). Revenue is recognised daily based on the AUM. — Fees for mortgage-related services including commissions from mortgage and other product providers and referral fees from strategic partners. Commission is recognised when performance obligations are met. — Fees for marketing services provided to providers of mortgage and investment products, which is recognised when performance obligations are met. 2.7 Exceptional items Exceptional items are disclosed and described separately in the Financial statements where it is necessary to do so to provide further understanding of the underlying financial performance of the Group. These include material items of income or expense that are shown separately due to the significance of their nature and amount. 2.8 Interest income and interest expense Finance income is recognised as interest accrued (using the effective interest method) on funds invested outside the Group. Finance expense includes the cost of borrowing from third parties and is recognised on an effective interest rate basis, resulting from the financial liability being recognised on an amortised cost basis. 2.9 Impairment Assets which have an indefinite useful life are not subject to amortisation and are tested for impairment at each Statement of Financial Position date. Assets subject to depreciation and amortisation are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Impairment losses on previously revalued assets are recognised against the revaluation reserve as far as this reserve relates to previous revaluations of the same assets. Other impairment losses are recognised in the Statement of Total Comprehensive Income based on the amount by which the carrying value exceeds the recoverable amount. The recoverable amount is the higher of the fair value less the costs to sell, and the value in use. Impairment losses recognised in respect of cash-generating units (“CGUs”) are allocated first to reduce the carrying amount of any goodwill allocated to CGUs and then to reduce the carrying amount of other assets in the unit on a pro rata basis. The impairment review has also considered the COVID-19 pandemic as a potential indicator of impairment and as a result of this review, none of the assets held by the Group were impaired. See note 11 for further details. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report64 2 ACCOUNTING POLICIES CONTINUED 2.10 Goodwill and Intangible assets Goodwill is initially recognised and measured as set out in note 2.12. Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-generating units) expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Following initial recognition, intangible assets are held at cost less any accumulated amortisation and any provision for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). Intangible assets acquired separately are measured on initial recognition at cost. Computer software licences acquired are capitalised at the cost incurred to bring the software into use and are amortised on a straight-line basis over their estimated useful lives, which are estimated as being five years. Costs associated with developing or maintaining computer software programs that do not meet the capitalisation criteria under IAS 38 are recognised as an expense as incurred. Intangible assets acquired in a business combination and recognised separately from goodwill are recognised initially at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, the customer relationship intangible assets have a finite useful life and are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using the straight-line method over their useful lives, estimated at ten years. Gains and losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying value of the asset. The difference is then recognised in the income statement. An assessment is made at each reporting date as to whether there is any indication that an asset in use may be impaired. If any such indication exists and the carrying values exceed the estimated recoverable amount at that time, the assets are written down to their recoverable amount. The recoverable amount is measured as the greater of fair value less costs to sell and value in use. Non-financial assets that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. The Directors have reviewed the intangible assets as at 31 March 2020 and have considered the COVID-19 pandemic as a potential indicator of impairment. As a result of the review, it was determined that none of the assets are impaired (2019: none). Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202065 2 ACCOUNTING POLICIES CONTINUED 2.11 Property, plant and equipment Property, plant and equipment assets are stated at cost net of accumulated depreciation and accumulated provision for impairment. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Principal annual rates are as follows: Computer, office equipment and motor vehicles – 20-33% straight-line. Fixtures and fittings – 20% straight-line. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on disposal or scrappage of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. 2.12 Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of assets transferred to the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that: deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 ‘Income Taxes’ and IAS 19 ‘Employee Benefits’ respectively; and assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. When the consideration transferred by the Group in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Other contingent consideration is remeasured to fair value at subsequent reporting dates with changes in fair value recognised in profit or loss. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report66 2 ACCOUNTING POLICIES CONTINUED 2.13 Leases Policy applicable from 1 April 2019 The Group has applied the practical expedient to grandfather the definition of a lease at the date of transition. Therefore, this policy applies to all contracts entered into on or after 1 April 2019. At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group uses the definition of a lease in IFRS 16. The Group recognises a right-of-use (“ROU”) asset and a lease liability at the inception date of the lease. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The ROU assets are subsequently depreciated on a straight-line basis over the shorter of the expected life of the asset and the lease term, adjusted for any remeasurements of the lease liability. At the end of each reporting period, the ROU assets are assessed for indicators of impairment in accordance with IAS 36. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. The Group uses its incremental borrowing rate as the discount rate. Lease payments included in the measurement of the lease liability comprise the following: — fixed payments, including in-substance fixed payments; — variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; — amounts expected to be payable under a residual value guarantee; and — the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is subsequently measured by adjusting the carrying amount to reflect the interest charge, the lease payments made and any reassessment or lease modifications. The lease liability is remeasured if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right- of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Where the Group is an intermediate lessor in a sub-lease, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. Policy applicable before 1 April 2019 Lease agreements which do not transfer substantially all of the risks and rewards of ownership of the leased assets to the Group are classified as operating leases. Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. The impact of any lease incentives is spread over the term of the lease. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202067 2 ACCOUNTING POLICIES CONTINUED 2.14 Cash and cash equivalents Cash and cash equivalents comprise cash at bank and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and bank balances for the purpose only of the Consolidated Statement of Cash Flows. 2.15 Financial instruments Financial assets and financial liabilities are recognised in the Group’s Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument. 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 fair value through profit or loss) 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 acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. All financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a 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 at fair value through profit or loss. Transaction costs directly attributable to the acquisition of financial assets classified as at fair value through profit or loss are recognised immediately in profit or loss. Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and bank balances, loans and borrowings, and trade and other payables. Trade receivables Trade receivables do not carry interest and are stated at amortised cost as reduced by appropriate allowances for estimated irrecoverable amounts. They are recognised when the Group’s right to consideration is only conditional on the passage of time. Allowances incorporate an expectation of lifetime credit losses from initial recognition and are determined using an expected credit loss approach. Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, where applicable or required. These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial period, which are unpaid. Financial liabilities at fair value through profit or loss (“FVTPL”) Financial liabilities are classified as at FVTPL when the financial liability is (i) contingent consideration of an acquirer in a business combination, (ii) held for trading or (iii) designated as at FVTPL. Financial liabilities at FVTPL are measured at fair value, with any gains or losses arising on changes in fair value recognised in profit or loss. Interest-bearing borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. The Group does not hold or issue derivative financial instruments for trading purposes. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report68 2 ACCOUNTING POLICIES CONTINUED 2.16 Taxation Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred tax Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary difference and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each Statement of Financial Position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted at the Statement of Financial Position date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off the current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the year Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202069 2 ACCOUNTING POLICIES CONTINUED 2.17 Retirement benefit costs The Group pays into personal pension plans for which the amount charged to income in respect of pension costs and other post-retirement benefits is the amount of the contributions payable in the year. Payments to defined contribution retirement benefit scheme are recognised as an expense when employees have rendered service entitling them to the contributions. Differences between contributions payable and paid are accrued or prepaid. The assets of the plans are invested and managed independently of the finances of the Group. 2.18 Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the Statement of Financial Position date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. 2.19 Equity, reserves and dividend payments Share capital represents the nominal value of shares that have been issued. Retained earnings include all current and prior period retained profits or losses. Dividend distributions payable to equity shareholders are included in other liabilities when the dividends have been approved in a general meeting prior to the reporting date. 2.20 Employee Benefit Trust The Company provides finance to the EBT to purchase the Company’s shares on the open market in order to meet its obligation to provide shares when an employee exercises awards made under the Group’s share-based payment schemes. Administration costs connected with the EBT are charged to the Consolidated Statement of Comprehensive Income. The cost of shares purchased and held by the EBT is deducted from equity. The assets held by the EBT are consolidated into the Group’s financial statements. 2.21 Share-based payments The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of the Black-Scholes model or Monte Carlo model as appropriate. * Alternative performance measures are detailed in note 23. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report70 2 ACCOUNTING POLICIES CONTINUED 2.22 Operating segments The Group comprises the following two operating segments which are defined by trading activity: — Tatton – investment management services — Paradigm – the provision of compliance and support services to IFAs and mortgage advisers The Board is considered to be the chief operating decision maker. Following changes to the structure of the Group’s internal organisation, and subsequent changes to the way in which financial and management information is presented to both the Board and the Executive Committee, the composition of the Group’s reportable segments changed in the financial year ended 31 March 2020. The change to the Group’s organisation structure was the establishment of the Paradigm division in order to bring together the activities of Paradigm Consulting and Paradigm Mortgages under single leadership. The change allows the needs of independent financial advisers and mortgages advisers to be better met through an integrated approach. The services being provided to these customers include compliance and support services. In addition, the Tatton division now includes wrap-related revenue which was previously included in the Paradigm Consulting division. This change brings the management and responsibility for all asset-related management and services into one division. As a result of these changes, activities previously reported under Paradigm Consulting have been split between Tatton and Paradigm, with Paradigm Mortgages being reported under Paradigm. The Revenue, Operating Profit and Adjusted Operating Profit* by segment disclosure note for the year ended March 2019 has been amended as follows: (i) Revenue by segment Tatton Paradigm Paradigm Consulting Paradigm Mortgages Central Total (ii) Operating Profit by segment Tatton Paradigm Paradigm Consulting Paradigm Mortgages Central Total * Alternative performance measures are detailed in note 23. Year ended 31 March 2019 As reported Adjustment £’000 8,732 – 6,049 2,689 48 17,518 £’000 3,789 4,949 (6,049) (2,689) – – Year ended 31 March 2019 As reported Adjustment £’000 4,098 – 2,983 1,565 (2,721) 5,925 £’000 2,743 1,805 (2,983) (1,565) – – Restated £’000 12,521 4,949 – – 48 17,518 Restated £’000 6,841 1,805 – – (2,721) 5,925 Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202071 Year ended 31 March 2019 As reported Adjustment £’000 4,628 – 2,996 1,565 (1,881) 7,308 £’000 2,743 1,818 (2,996) (1,565) – – Restated £’000 7,371 1,818 – – (1,881) 7,308 2 ACCOUNTING POLICIES CONTINUED 2.22 Operating segments continued (iii) Adjusted Operating Profit* by segment Tatton Paradigm Paradigm Consulting Paradigm Mortgages Central Total 2.23 Critical accounting judgements and key sources of estimation uncertainty In the process of applying the Group’s accounting policies, which are described above, management have made judgements and estimations about the future that have an effect on the amounts recognised in the financial statements. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Changes for accounting estimates would be accounted for prospectively under IAS 8. Goodwill and client relationship intangibles Critical judgement Impairment of goodwill and client relationship intangibles The impact of COVID-19 has been considered as a potential indicator of impairment of goodwill and intangible assets. Impairment exists when the carrying value of an asset or cash-generating unit (‘CGU’) exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of impairment testing, the recoverable amount of goodwill is determined using a discounted cash flow model, as detailed in note 11. The results of the calculation indicate that goodwill and client relationship intangibles are not impaired. Client relationship intangibles Critical judgements Client relationship intangibles purchased through corporate transactions When the Group purchases client relationships through transactions with other corporate entities, a judgement is made as to whether the transaction should be accounted for as a business combination or as a separate purchase of intangible assets. In making this judgement, the Group assesses the assets, liabilities, operations and processes that were the subject of the transaction against the definition of a business combination in IFRS 3. In particular, consideration is given to the scale of the operations subject to the transaction and whether ownership of a corporate entity has been acquired, among other factors. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report72 2 ACCOUNTING POLICIES CONTINUED 2.23 Critical accounting judgements and key sources of estimation uncertainty continued Business combinations Critical judgement Treatment and fair value of consideration transferred On 30 September 2019, the group acquired the entire share capital of Sinfonia Asset Management Limited (“Sinfonia“). The group accounted for the transaction as a business combination. Business combinations and acquisitions require a fair value exercise to be undertaken to allocate the purchase price to the fair value of the identifiable assets acquired and the liabilities assumed. The determination of the fair value of the asset and liabilities is based, to a considerable extent, on management’s judgement. The amount of goodwill initially recognised as a result of a business combination is dependent on the allocation of this purchase price to the identifiable assets and liabilities with any unallocated portion being recorded as goodwill. As described in note 21 to the financial statements, the purchase price payable for the acquisition is split into a number of different parts. The payment of certain elements has been deferred. At 31 March 2020, two elements of deferred consideration remained unvested and subject to ongoing vesting conditions. Vesting of the earn-out consideration is conditional on achieving certain operational targets. Estimation uncertainty Valuation of the earn-out consideration The value of earn-out consideration is variable, dependent on performance by the acquired business against certain operational targets by 30 September 2020 and 30 September 2021. The estimated value of earn-out consideration that will be payable at these dates is £344,000, based on projections of growth in funds under management over that period. If qualifying funds under management do not exceed £98 million then no earn-out consideration is payable. If qualifying funds under management at 30 September 2020 are £10 million higher or lower than management’s estimate then the earn-out consideration would be £200,000 higher or lower and the charge to profit or loss in the year to 31 March 2020 would be £200,000 higher or lower. Under the terms of the agreements, the maximum possible payment under the earn-out and incentivisation awards is capped at £689,000; which represents qualifying funds under management of approximately £132.5 million at 30 September 2021. Share-based payments Estimation uncertainty Given the significance of share-based payments as a form of employee remuneration for the Group, share-based payments have been included as a significant accounting estimate. The principal estimations relate to: — forfeitures (where awardees leave the Group as “bad” leavers and therefore forfeit unvested awards); and — the satisfaction of performance obligations attached to certain awards. These estimates are reviewed regularly and the charge to the Statement of Total Comprehensive Income is adjusted appropriately (at the end of the relevant scheme as a minimum). The sensitivity analysis carried out shows that if it was considered that 100% of the options would vest, the charge for the year would increase by £1,420,000; an increase of 10% in the vesting assumptions would increase the charge in the year by £185,000. In considering the level of satisfaction of performance obligations, the Group’s forecast has been reviewed and updated for the expected impact of COVID-19 pandemic, various market scenarios and management actions. This forecast has been used to estimate the relevant vesting assumptions for the EMI schemes in place. There are no other judgements or assumptions made about the future, or any other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202073 2 ACCOUNTING POLICIES CONTINUED 2.24 Alternative performance measures In reporting financial information, the Group presents alternative performance measures (“APMs”) which are not defined or specified under the requirements of IFRSs. The Group believes that these APMs provide users with additional helpful information on the performance of the business. The APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets. The APMs used by the Group are set out in note 23 including explanations of how they are calculated and how they can be reconciled to a statutory measure where relevant. There is also further information on separately disclosed items in note 6. 3 CAPITAL MANAGEMENT The Group’s objectives when managing capital are i) to safeguard the Group’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; ii) to maintain a strong capital base and utilise it efficiently to support the development of its business; and iii) to comply with the regulatory capital requirements set by the FCA. Capital adequacy and the use of regulatory capital are monitored by the Group’s management and Board. There is one active regulated entity in the Group: Tatton Investment Management Limited, regulated by the FCA. Regulatory capital is determined in accordance with the requirements of the Capital Requirements Directive IV prescribed in the UK by the FCA. The Directive requires continual assessment of the Group’s risks in order to ensure that the higher of Pillar 1 (Minimum Capital Requirements) and Pillar 2 (Supervisory Review) requirements is met. Pillar 1 imposes a minimum capital requirement on investment firms which is calculated as the higher of the sum of the credit and market risk capital requirements and the fixed overheads requirement (“FOR”). The FOR equates to 25% of the fixed overheads reported in the most recent audited financial statements. Pillar 2 requires investment firms to assess firm-specific risks not covered by the formulaic requirements of Pillar 1, the objective of this being to ensure that investment firms have adequate capital to enable them to manage their risks. The Group completes its assessment of regulatory capital requirements using its Internal Capital Adequacy Assessment Process (“ICAAP”) under Pillar 2, which is a forward looking exercise that includes stress testing on major risks, such as a significant market downturn, and identifying mitigating action. As required by the FCA, Tatton Investment Management Limited holds capital based on a multiple of Pillar 1 and maintains a significant surplus over this requirement at all times. The Group manages its total equity which totalled £17.8 million as at 31 March 2020 (2019: £15.3 million). Surplus regulatory capital was maintained throughout the year at both a consolidated Group level and individual regulated entity level. There were no changes in the Group’s approach to capital management during the year. 4 SEGMENT REPORTING Information reported to the Board of Directors as the chief operating decision maker for the purposes of resource allocation and assessment of segmental performance is focused on the type of revenue. The principal types of revenue are discretionary fund management and the marketing and promotion of the funds run by the companies under Tatton Capital Limited (“Tatton”) and the provision of compliance and support services to IFAs and mortgage advisers (“Paradigm”). The Group’s reportable segments under IFRS 8 are therefore Tatton, Paradigm, and “Central” which contains the Operating Group’s central overhead costs. The operating segments disclosed have changed during the reporting period, see note 2.22. The principal activity of Tatton is that of Discretionary Fund Management (“DFM”) of investments on-platform and the provision of investment wrap services. The principal activity of Paradigm is that of provision of support services to IFAs and mortgage advisers. For management purposes, the Group uses the same measurement policies used in its financial statements. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report74 4 SEGMENT REPORTING CONTINUED The following is an analysis of the Group’s revenue and results by reportable segment: Year ended 31 March 2020 Revenue Other exceptional income Administrative expenses Operating Profit/(Loss) Share-based payments Exceptional items Amortisation of client relationship intangible assets Adjusted Operating Profit/(Loss) (before separately disclosed items)* Finance (costs)/income Profit/(loss) before tax Year ended 31 March 2019 (restated, see note 2.22) Revenue Administrative expenses Operating Profit/(Loss) Share-based payments Exceptional charges Adjusted Operating Profit/(Loss) (before separately disclosed items)* Finance income Profit/(loss) before tax All turnover arose in the United Kingdom. * Alternative performance measures are detailed in note 23. Tatton (£’000) 15,924 1,588 (7,204) Paradigm (£’000) 5,426 – (3,362) Central (£’000) 19 – (2,089) Group (£’000) 21,369 1,588 (12,655) 10,308 2,064 (2,070) 10,302 – (1,458) 60 8,910 (20) – 64 – 2,128 13 108 – – 108 (1,394) 60 (1,962) 9,076 1 (6) 10,288 2,077 (2,069) 10,296 Tatton (£’000) 12,521 (5,680) 6,841 34 496 7,371 – 6,841 Paradigm (£’000) 4,949 (3,144) 1,805 – 13 1,818 185 1,990 Central (£’000) 48 (2,769) (2,721) 840 – Group (£’000) 17,518 (11,593) 5,925 874 509 (1,881) 7,308 2 (2,719) 187 6,112 5 OPERATING PROFIT The operating profit and the profit before taxation are stated after charging/(crediting): Amortisation of software Depreciation of property, plant and equipment Depreciation of right-of-use assets Separately disclosed items (note 6) Services provided by the Group’s auditor: Audit of the statutory consolidated and Company financial statements of TAM plc Audit of subsidiaries Other fees payable to auditor: Other taxation advisory services Non-audit services 31-Mar 2020 (£’000) 135 160 138 (1,226) 34 58 – 86 31-Mar 2019 (£’000) 43 91 – 1,383 33 40 38 10 Total audit fees were £92,000 (2019: £73,000). Total non-audit fees payable to the auditor were £86,000 (2019: £48,000). Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202075 31-Mar 2020 (£’000) – – – 97 97 (1,588) (1,394) 108 60 31-Mar 2019 (£’000) 13 293 203 – – – 509 874 – (1,226) 1,383 6 SEPARATELY DISCLOSED ITEMS IPO costs Project set-up costs related to transferring Authorised Corporate Director New fund set-up costs Restructuring costs Acquisition-related expenses VAT reclaim Total exceptional items Share-based payments Amortisation of client relationship intangible assets Total separately disclosed items Separately disclosed items shown separately on the face of the Consolidated Statement of Total Comprehensive Income or included within administrative expenses reflect costs and income that do not relate to the Group’s normal business operations and that are considered material (individually (or in aggregate if of a similar type) due to their size or frequency. Exceptional items On 30 September 2019 the Group acquired the share capital of Sinfonia Asset Management Limited (see note 21) and incurred acquisition-related costs of £97,000. These costs are part of separately disclosed items within administrative expenses in the Consolidated Statement of Total Comprehensive Income. The restructuring charge relates to the rationalisation and restructuring of various departments and functions. The headcount reduction resulted in redundancy costs, payment in lieu of notice, settlement and other restructuring-related costs. These have been excluded from underlying earnings in view of their one-off nature. During the year, the Group has agreed with HMRC that Tatton’s supplies of discretionary fund management services in respect of model investment portfolios are exempt from VAT. As a result, the Group has recognised income of £1,756,000 relating to the 4 year period ending 31 March 2019, £1,675,000 of which has been received from HMRC as a VAT refund. This is offset by £168,000 of professional fees. The Group has reflected this change in treatment of revenue and the level of irrecoverable input VAT in revenue and administrative expenses from 1 April 2019. During the financial year ended 31 March 2019, the Group incurred exceptional one-off costs of £496,000 which related to the funds in Tatton. Tatton transferred its Authorised Corporate Director, who acts on behalf of the Company to administer the funds, and this transfer incurred significant project management charges. In addition, Tatton launched new funds in the year and incurred material set-up costs as part of the process; both are included within exceptional items and separately disclosed items within administrative expenses in the Consolidated Statement of Total Comprehensive Income. Various legal and professional costs incurred in relation to the IPO of the Group in July 2017 are shown as part of separately disclosed items within administrative expenses in the Consolidated Statement of Total Comprehensive Income in the prior year. Share-based payments Share-based payments is a recurring item, though the value will change depending on the estimation of the satisfaction of performance obligations attached to certain awards. It has been excluded from the core business operating profit since it is a significant non-cash item. Underlying profit, being adjusted operating profit, represents largely cash-based earnings and more directly relates to the financial reporting period. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report76 6 SEPARATELY DISCLOSED ITEMS CONTINUED Amortisation of client relationship intangible assets Payments made for the introduction of customer relationships that are deemed to be intangible assets are capitalised and amortised over their useful life, which has been assessed to be ten years. This amortisation charge is recurring over the life of the intangible asset, though has been excluded from the core business operating profit since it is a significant non-cash item. Underlying profit, being adjusted operating profit, represents largely cash-based earnings and more directly relates to the financial reporting period. 7 FINANCE (COSTS)/INCOME Bank interest income Other interest income Interest expense on lease liabilities Bank charges 8 TAXATION Current tax expense Current tax on profits for the period Adjustment in respect of previous years Deferred tax expense Share-based payments Origination and reversal of temporary differences Adjustment in respect of previous years Effect of rate changes Total tax expense 31-Mar 2020 (£’000) 31-Mar 2019 (£’000) 3 13 (22) – (6) 31-Mar 2020 (£’000) 1,986 7 1,993 (12) 57 (95) (10) 2 214 – (29) 187 31-Mar 2019 (£’000) 1,318 (74) 1,244 (19) 30 – – 1,933 1,255 The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the UK applied to profit for the year are as follows: Profit before taxation Tax at UK corporation tax rate of 19% (2019: 19%) Expenses not deductible for tax purposes Adjustments in respect of previous years Differences in tax rates Share-based payments Total tax expense 31-Mar 2020 (£’000) 10,296 1,956 87 (88) (10) (12) 1,933 31-Mar 2019 (£’000) 6,112 1,161 25 (74) (2) 145 1,255 A reduction in the UK corporation tax rate from 19% to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016. In the 11 March 2020 Budget, it was announced that the UK corporation tax rate will remain at the current level of 19% and not reduce to 17% from 1 April 2020. Deferred tax is calculated using the rate expected to apply when the relevant timing differences are forecast to unwind. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202077 9 EARNINGS PER SHARE AND DIVIDENDS Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares during the year. Number of shares Basic Weighted average number of shares in issue Effect of own shares held by an EBT Diluted Weighted average number of shares (diluted)1 Adjusted diluted Adjusted diluted weighted average number of options and shares for the year2 2020 2019 55,907,513 (72,355) 55,907,513 – 55,835,158 55,907,513 57,529,989 61,313,712 61,075,935 61,313,712 1. The weighted average number of shares is diluted due to the effect of potentially dilutive contingent issuable shares from share option schemes. 2. The dilutive shares used for this measure differ from that used for statutory dilutive earnings per share; the future value of service costs attributable to employee share options is ignored and contingently issuable shares for Long-Term Incentive Plan (“LTIP”) options are assumed to fully vest. The Directors have selected this measure as it represents the underlying effective dilution by offsetting the impact to the calculation of basic shares of the purchase of shares by the EBT to satisfy options. Own shares held by an EBT represents the Company’s own shares purchased and held by the Employee Benefit Trust (EBT), shown at cost. In the year ending 31 March 2020 the EBT purchased 413,411 (2019: none) of the Company’s own shares. Earnings attributable to ordinary shareholders Basic and diluted profit for the period Share-based payments – IFRS 2 option charges Amortisation of intangible assets – customer relationships Exceptional (income)/costs – see note 6 Tax impact of adjustments Adjusted basic and diluted profits for the period and attributable earnings Earnings per share (pence) – Basic Earnings per share (pence) – Diluted Adjusted earnings per share (pence) – Basic Adjusted earnings per share (pence) – Diluted 31-Mar 2020 (£’000) 8,363 108 60 (1,394) 194 7,331 14.98 14.54 13 .13 12.00 31-Mar 2019 (£’000) 4,857 874 – 509 (97) 6,143 8.69 7.92 10.99 10.02 Dividends The Directors consider the Group’s capital structure and dividend policy at least twice a year ahead of announcing results and do so in the context of its ability to continue as a going concern, to execute the strategy and to invest in opportunities to grow the business and enhance shareholder value. During the year, TAM plc paid the final dividend related to the year ended 31 March 2019 of £3,131,000, representing a payment of 5.6p per share. In addition, the Company paid an interim dividend of £1,789,000 (2019: £1,565,000) to its equity shareholders. This represents a payment of 3.2p per share (2019: 2.8p per share). The Company’s dividend policy is described in the Directors’ Report on page 43. At 31 March 2020, the Company’s distributable reserves were £25.8 million (2019: £22.3 million). Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report78 31-Mar 2019 (£’000) 4,389 648 110 – 874 6,021 31-Mar 2019 74 3 77 10 STAFF COSTS The staff costs shown below exclude key management compensation which is shown separately below. Wages, salaries and bonuses Social security costs Pension costs Termination benefits Share-based payments The average monthly number of employees during the year was as follows: Administration Key management 31-Mar 2020 (£’000) 5,995 594 160 88 123 6,960 31-Mar 2020 79 3 82 Key management compensation The remuneration of the statutory Directors who are the key management of the Group is set out below in aggregate for each of the key categories specified in IAS 24 ‘Related Party Disclosures’. Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments 31-Mar 2020 (£’000) 940 11 3 (15) 939 31-Mar 2019 (£’000) 884 14 3 587 1,488 In addition to the remuneration above, the Non-Executive Chairman and Non-Executive Directors have submitted invoices for their fees as follows: Total fees The remuneration of the highest paid Director was: Total 31-Mar 2020 (£’000) 160 31-Mar 2020 (£’000) 347 31-Mar 2019 (£’000) 160 31-Mar 2019 (£’000) 343 The highest paid Director did not exercise any share options in the period. There were no share options granted to the highest paid Director in the year. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202079 Goodwill (£’000) 4,917 1,337 6,254 11 GOODWILL Cost and carrying value at 31 March 2019 Recognised on acquisition of subsidiary Cost and carrying value at 31 March 2020 The carrying value of goodwill includes £5.9 million allocated to the Tatton operating segment and CGU. This is made up of £2.5 million arising from the acquisition in 2014 of an interest in Tatton Oak Limited by Tatton Capital Limited consisting of the future synergies and forecast profits of the Tatton Oak business, £2.0 million arising from the acquisition in 2017 of an interest in Tatton Capital Group Limited and £1.3 million of goodwill generated in the year on the acquisition of Sinfonia, see note 21. The carrying value of goodwill also includes £0.4 million allocated to the Paradigm operating segment and CGU relating to the acquisition of Paradigm Mortgage Services LLP. None of the goodwill is expected to be deductible for income tax purposes. Impairment loss and subsequent reversal Goodwill is subject to an annual impairment review based on an assessment of the recoverable amount from future trading. Where, in the opinion of the Directors, the recoverable amount from future trading does not support the carrying value of the goodwill relating to a subsidiary company then an impairment charge is made. Such impairment is charged to the Statement of Total Comprehensive Income. Impairment testing For the purpose of impairment testing, goodwill is allocated to the Group’s operating companies which represents the lowest level within the Group at which the goodwill is monitored for internal management accounts purposes. Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units (“CGUs”) or group of units that are expected to benefit from that business combination. The Directors test goodwill annually for impairment, or more frequently if there are indicators that goodwill might be impaired. The impairment review considered the COVID-19 pandemic as a potential indicator of impairment, consequently, the Group carried out an exercise The Directors have reviewed the carrying value of goodwill at 31 March 2020 and do not consider it to be impaired. Growth rates The value in use is calculated from cash flow projections based on the Group’s forecasts for the year ended 31 March 2021 which are extrapolated for a further four years. The Group’s latest financial forecasts, which cover a three-year period, are reviewed by the Board. Discount rates The pre-tax discount rate used to calculate value is 7.7% (2019: 8.3%). The discount rate is derived from a benchmark calculated from a number of comparable businesses. Cash flow assumptions The key assumptions used for the value in use calculations are those regarding discount rate, growth rates and expected changes in margins. Changes in prices and direct costs are based on past experience and expectations of future changes in the market. The growth rate used in the calculation reflects the average growth rate experienced by the Group for the industry. The headroom compared to the carrying value of goodwill as at 31 March 2020 is £414 million (2019: £223 million). From the assessment performed, there are no reasonable sensitivities that result in the recoverable amount being equal to the carrying value of the goodwill attributed to the CGU. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report80 Total (£’000) – 266 266 271 1,196 1,733 – (43) (43) (195) (238) – 223 Computer Customer software (£’000) relationships (£’000) – 266 266 271 – 537 – (43) (43) (135) (178) – 223 359 – – – – 1,196 1,196 – – – (60) (60) – – 12 INTANGIBLE ASSETS Cost Balance at 31 March 2018 Additions Balance at 31 March 2019 Additions Acquired on acquisition of a subsidiary Balance at 31 March 2020 Accumulated amortisation and impairment Balance at 31 March 2018 Charge for the period Balance at 31 March 2019 Charge for the period Balance at 31 March 2020 Net book value As at 31 March 2018 As at 31 March 2019 As at 31 March 2020 All amortisation charges are included within administrative expenses in the Consolidated Statement of Total Comprehensive Income. 1,136 1,495 Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202081 13 PROPERTY, PLANT AND EQUIPMENT Cost Balance at 1 April 2018 Additions Balance at 31 March 2019 Adoption of IFRS 16 Additions Balance at 31 March 2020 Accumulated depreciation and impairment Balance at 1 April 2018 Charge for the period Balance at 31 March 2019 Charge for the period Balance at 31 March 2020 Net book value As at 1 April 2018 As at 31 March 2019 As at 31 March 2020 Computer, office Right-of-use equipment and Fixtures and assets motor vehicles (£’000) fittings (£’000) – buildings (£’000) Total (£’000) 435 72 507 – 81 588 (331) (66) (397) (73) (470) 104 110 118 214 264 478 – 213 691 (214) (25) (239) (87) (326) – 239 365 – – – 689 – 689 – – – (138) (138) – – 649 336 985 689 294 1,968 (545) (91) (636) (298) (934) 104 349 551 1,034 All depreciation charges are included within administrative expenses in the Consolidated Statement of Total Comprehensive Income. The Group leases buildings and IT equipment. The Group has applied the practical expedient for low value assets and so has not recognised IT equipment within ROU assets. The average lease term is five years. No leases have expired in the current financial period. All depreciation charges are included within administrative expenses in the Consolidated Statement of Total Comprehensive Income. Right-of-use assets Amounts recognised in profit and loss Depreciation on right-of-use assets Interest expense on lease liabilities Expense relating to short-term leases Expense relating to low value assets At 31 March 2020, the Group is committed to £nil for short-term leases. The total cash outflow for leases amounts to £156,000. 31-Mar 2020 (£’000) (138) (22) (94) (1) (255) Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report82 31-Mar 2020 (£’000) 116 108 1,948 1,259 – 3,431 31-Mar 2019 (£’000) 313 107 1,763 191 134 2,508 14 TRADE AND OTHER RECEIVABLES Trade receivables Amounts due from related parties Prepayments and accrued income Other receivables Loan notes All trade receivable amounts are short term. The carrying value is considered a fair approximation of their fair value. The Group applies the IFRS 9 simplified approach to measuring expected credit losses (ECLs) for trade receivables at an amount equal to lifetime ECLs. In line with the Group’s historical experience, and after consideration of current credit exposures, the Group does not expect to incur any credit losses and has not recognised any ECLs in the current year (2019: £nil). The amounts due from related parties are net of provisions. At 31 March 2017, Paradigm Mortgage Services LLP made full provision of £1,251,000 against the recoverability of amounts due from Jargon Free Benefits LLP. Also, as at 31 March 2017, Paradigm Partners Limited made full provision of £350,000 against the recoverability of amounts due from Amber Financial Investments Limited, an entity controlled by Paul Hogarth. The carrying value of the provisions as at 31 March 2020 was £1,601,000 (2019: £1,601,000). There has been no movement in the carrying value during the year. Trade receivable amounts are all held in sterling. 15 TRADE AND OTHER PAYABLES Trade payables Amounts due to related parties Accruals Deferred income Contingent consideration Other payables Less non-current portion: Contingent consideration Other payables Total non-current trade and other payables Total current trade and other payables 31-Mar 2020 (£’000) 275 222 2,476 131 344 3,440 6,888 (172) (530) (702) 6,186 31-Mar 2019 (£’000) 414 386 1,382 165 – 2,174 4,521 – – – 4,521 The carrying values of trade payables, amounts due to related parties, accruals and deferred income are considered reasonable approximation of fair value. Trade payable amounts are all held in sterling. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202083 Total £’000 (15) (11) 130 104 (227) 60 (43) (106) 16 DEFERRED TAXATION Liability at 1 April 2018 Income statement (charge)/credit Equity credit Asset/(liability) at 31 March 2019 Acquisition of subsidiary Income statement (charge)/credit Equity charge (Liability)/asset at 31 March 2020 Deferred capital Share-based Acquisition allowances payments intangibles £’000 £’000 £’000 (15) (30) – (45) – (81) – (126) – 19 130 149 – 130 (43) 236 – – – – (227) 11 – (216) 17 FINANCIAL INSTRUMENTS The Group’s treasury activities are designed to provide suitable, flexible funding arrangements to satisfy the Group’s requirements. The Group uses financial instruments comprising borrowings, cash and items such as trade receivables and payables that arise directly from its operations. The main risks arising from the Group’s financial instruments are interest rate risks, credit risks and liquidity risks. The Board reviews policies for managing each of these risks and they are summarised below. The Group finances its operations through a combination of cash resource and other borrowings. Short-term flexibility is satisfied by overdraft facilities in Paradigm Partners Limited which are repayable on demand. Fair value estimation IFRS 7 requires disclosure of fair value measurements of financial instruments by level of the following fair value measurement hierarchy: — Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). — Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2). — Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). All financial assets are categorised as Loans and receivables and are classified as level 1. All financial liabilities except for contingent consideration are categorised as Financial liabilities measured at amortised cost and are also classified as level 1. The only financial liabilities measured subsequently at fair value on level 3 fair value measurement represent contingent consideration relating to a business combination. No gain or loss for the year relating to this contingent consideration has been recognised in profit or loss. Interest rate risk The Group finances its operations through a combination of retained profits and bank overdrafts. The Group has an exposure to interest rate risk, as the overdraft facility is at an interest rate of 3.2% above the base rate. At 31 March 2020, total borrowings were £nil (2019: £nil). Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report84 17 FINANCIAL INSTRUMENTS CONTINUED Credit risk Credit risk is the risk that a counterparty will cause a financial loss to the Group by failing to discharge its obligation to the Group. The financial instruments are considered to have a low credit risk due to the mitigating procedures in place. The Group manages its exposure to this risk by applying Board approved limits to the amount of credit exposure to any one counterparty, and employs strict minimum credit worthiness criteria as to the choice of counterparty thereby ensuring that there are no significant concentrations. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The maximum exposure to credit risk for receivables and other financial assets is represented by their carrying amount. The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at 31 March, as summarised below: Classes of financial assets – carrying amounts: Cash and cash equivalents Trade and other receivables 31-Mar 2020 (£’000) 12,757 3,110 15,867 31-Mar 2019 (£’000) 12,192 2,208 14,400 The Group continuously monitors defaults of customers and other counterparties, identified either individually or by the Group, and incorporates this information into its credit risk controls. The Group’s policy is to deal only with credit worthy counterparties. The Group’s management consider that all of the above financial assets that are not impaired or past due for each of the 31 March reporting dates under review are of good credit quality. At 31 March the Group had certain trade receivables that had not been settled by the contractual date but were not considered to be impaired. The amounts at 31 March, analysed by the length of time past due, are: Not more than 3 months More than 3 months but not more than 6 months More than 6 months but not more than 1 year More than 1 year Total 31-Mar 2020 (£’000) 75 19 17 5 116 31-Mar 2019 (£’000) 241 72 – – 313 Trade receivables consist of a large number of customers within the UK. Based on historical information about customer default rates, management consider the credit quality of trade receivables that are not past due or impaired to be good. The Group has rebutted the presumption in paragraph 5.5.11 of IFRS 9 that credit risk increases significantly when contractual payments are more than 30 days past due. The credit risk for cash and cash equivalents is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202085 17 FINANCIAL INSTRUMENTS CONTINUED Liquidity risk Liquidity risk is the risk that companies within the Group will encounter difficulty in meeting obligations associated with financial liabilities. To counter this risk, the Group operates with a high level of interest cover relative to its net asset value and no debt. In addition, it benefits from strong cash flow from its normal trading activities. The Group manages its liquidity needs by monitoring scheduled debt servicing payments for long-term financial liabilities as well as forecast cash inflows and outflows due in day to day business. The data used for analysing these cash flows is consistent with that used in the contractual maturity analysis below. The totals for each category of financial instruments, measured in accordance with IFRS 9 and IFRS 7 as detailed in the accounting policies to this historical financial information, are as follows: At 31 March 2020, the Group’s non-derivative financial liabilities have contractual maturities (including interest payments where applicable) as summarised below: At 31 March 2020 Trade and other payables Lease liabilities Contingent consideration Total Current Non-current Within 6 months 6 to 12 months 1 to 5 years Later than 5 years 5,761 37 – 5,798 – 84 172 256 – 530 172 702 – – – – This compares with the maturity of the Group’s non-derivative financial liabilities in the previous reporting period as follows: At 31 March 2019 Trade and other payables Total Current Non-current Within 6 months 4,356 4,356 6 to 12 months 1 to 5 years Later than 5 years – – – – – – The above amounts reflect the contractual undiscounted cash flows, which may differ to the carrying values of the liabilities at the reporting date. 18 EQUITY Authorised, called up and fully paid £0.20 ordinary shares Each share in TAM plc carries one vote and the right to a dividend. 31-Mar 2020 31-Mar 2019 (number) (number) 55,907,513 55,907,513 Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report86 19 OWN SHARES The following movements in own shares occurred during the year: At 1 April 2019 Acquired in the year At 31 March 2020 Number of shares – 413,411 413,411 £’000 – 996 996 Own shares represent the cost of the Company’s own shares, either purchased in the market or issued by the Company, that are held by an employee benefit trust to satisfy future awards under the Group’s share-based payment schemes (note 20). 413,411 shares were held in the Employee Benefit Trust at 31 March 2020 (2019: nil). 20 SHARE-BASED PAYMENTS During the year, a number of share-based payment schemes and share options schemes have been utilised by the Company, described under 20.1 Current schemes, below. 20.1 Current schemes (i) TAM plc EMI Scheme (“TAM EMI Scheme”) On 7 July 2017 the Group launched an EMI share option scheme relating to shares in TAM plc to enable senior management to participate in the equity of the Company. A total of 3,022,733 options with a weighted average exercise price of £1.89 were granted during the prior period, each exercisable in July 2020. The scheme was extended on 8 August 2018 and a total of 1,720,138 zero cost options were granted during the year ended 31 March 2019, each exercisable in August 2021. The scheme was further extended on 1 August 2019 and a total of 193,000 zero cost options were granted, each exercisable in August 2022. A total of 4,755,737 options remain outstanding at 31 March 2020, none of which are currently exercisable. No options were exercised during the period. A total of 68,319 options were forfeited in the period (111,815 options were forfeited in the prior year). The options vest in July 2020, August 2021 or August 2022 provided certain performance conditions and targets, set prior to grant, have been met. If the performance conditions are not met, the options lapse. Within the accounts of the Company, the fair value at grant date is estimated using the appropriate models including both Black-Scholes methodology and Monte Carlo modelling methodologies. Outstanding at 1 April 2018 Granted during the period Forfeited during the period Outstanding at 31 March 2019 Exercisable at 31 March 2019 Outstanding at 1 April 2019 Granted during the period Forfeited during the period Outstanding at 31 March 2020 Exercisable at 31 March 2020 Number of share options granted (number) 3,022,733 1,720,138 (111,815) 4,631,056 – 4,631,056 193,000 (68,319) 4,755,737 – Weighted average price (£) 1.89 – 1.89 1.19 – 1.19 – 0.52 1.15 – Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202087 20 SHARE-BASED PAYMENTS CONTINUED (ii) TAM plc Sharesave Scheme (“TAM Sharesave Scheme”) On 7 July 2017, 5 July 2018 and 3 July 2019 the Group launched all employee Sharesave schemes for options over shares in TAM plc, administered by Yorkshire Building Society. Employees are able to save between £10 and £500 per month over a three-year life of each scheme, at which point they each have the option to either acquire shares in the Company, or receive the cash saved. Over the life of the 2017 Sharesave scheme it is estimated that, based on current saving rates, 197,481 share options will be exercisable at an exercise price of £1.70. Over the life of the 2018 Sharesave scheme it is estimated that, based on current saving rates, 48,688 share options will be exercisable at an exercise price of £1.90. Over the life of the 2019 Sharesave scheme it is estimated that, based on current savings rates, 75,610 share options will be exercisable at an exercise price of £1.79. No options have been exercised or expired in the period and 10,741 options have been forfeited in the period. Within the accounts of the Company, the fair value at grant date is estimated using the Black-Scholes methodology for 100% of the options. Share price volatility has been estimated using the historical share price volatility of the Company, the expected volatility of the Company’s share price over the life of the options and the average volatility applying to a comparable group of listed companies. Key valuation assumptions and the costs recognised in the accounts during the period are noted in 20.2 and 20.3 overleaf respectively. Outstanding at 1 April 2018 Granted during the period Forfeited during the period Outstanding at 31 March 2019 Exercisable at 31 March 2019 Outstanding at 1 April 2019 Granted during the period Forfeited during the period Outstanding at 31 March 2020 Exercisable at 31 March 2020 Number of share options Weighted average granted (number) 63,344 82,322 (13,690) 131,976 – 131,976 102,493 (10,741) 223,728 26,176 price (£) 1.70 1.74 1.71 1.70 – 1.70 1.75 1.85 1.73 1.70 20.2 Valuation assumptions Assumptions used in the option valuation models to determine the fair value of options at the date of grant were as follows: Share price at grant (£) Exercise price (£) Expected volatility (%) Expected life (years) Risk free rate (%) Expected dividend yield (%) EMI Scheme Sharesave Scheme 2019 2.12 0.00 30.44 3.00 0.35 3.96 2018 2.40 0.00 28.48 3.00 0.81 2.75 2017 1.89 1.70 26.00 3.00 0.66 4.50 2019 2.14 1.79 30.44 3.00 0.35 3.96 2018 2.34 1.90 28.48 3.00 0.81 2.75 2017 1.89 1.70 26.00 3.00 0.66 4.50 Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report88 31-Mar 2020 (£’000) 84 24 108 31-Mar 2019 (£’000) 839 35 874 20 SHARE-BASED PAYMENTS CONTINUED 20.3 IFRS 2 Share-based option costs TAM EMI Scheme TAM Sharesave Scheme 21 BUSINESS COMBINATION On 30 September 2019, the Group acquired 100% of the issued share capital of Sinfonia Asset Management Limited (“Sinfonia”), obtaining control of Sinfonia. Sinfonia is an administration services company which facilitates the sale of investment products. Sinfonia holds funds within the IFSL Sinfonia Open-Ended Investment Companies. Sinfonia was acquired in order to complement Tatton’s existing fund range and give IFAs’ clients further access to a range of investments balanced to reflect a particular risk profile. The amounts recognised in respect of the identifiable assets acquired and liabilities assumed upon acquisition of Sinfonia are set out in the table below: Identifiable intangible assets Financial assets Financial liabilities Deferred tax liability Total identifiable assets Goodwill Total consideration Satisfied by: Cash Contingent consideration arrangement Total consideration transferred Net cash outflow arising on acquisition: Cash consideration Less: cash and cash equivalent balance acquired Net cash outflow £’000 1,196 54 (13) (227) 1,010 1,337 2,347 2,003 344 2,347 2,003 (1) 2,002 Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202089 21 BUSINESS COMBINATION CONTINUED The fair value of the financial assets includes accrued income and prepayments with a fair value of £54,000. The best estimate at acquisition date of the contractual cash flows not to be collected is £nil. The fair value of Sinfonia’s client relationship intangible assets has been measured using a multi-period excess earnings method. The model uses estimates of client longevity and the level of activity driving commission income to derive a forecast series of cash flows, which are discounted to a present value to determine the fair value of the client relationships acquired. The useful economic life of the client relationships has been determined to be ten years. The goodwill of £1,337,000 arising from the acquisition consists of future synergies and future income expected to be generated from the funds. None of the goodwill is expected to be deductible for income tax purposes. The contingent consideration arrangement requires the value of assets held in the funds to meet specific criteria agreed between the parties. The potential undiscounted amount of all future payments that the Group could be required to make under the contingent consideration arrangement is between £nil and £690,000. The fair value of the contingent consideration arrangement of £344,000 was estimated by calculating the expected future value of assets held in the Sinfonia funds. The liability of £344,000 has been recognised in other payables in the Consolidated Statement of Financial Position. Acquisition-related costs (included in administrative expenses and separately disclosed in the Consolidated Statement of Total Comprehensive Income) amount to £97,000. Sinfonia contributed £151,000 to revenue and £81,000 to the Group’s profit for the period between the date of acquisition and the reporting date. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report90 22 RELATED PARTY TRANSACTIONS Ultimate controlling party The Directors consider there to be no ultimate controlling party. Relationships The Group has trading relationships with the following entities in which Paul Hogarth, a Director, has a beneficial interest: Entity Nature of transactions Amber Financial Investments Limited The Group provides discretionary fund management services, as well as accounting and administration services. Jargon Free Benefits LLP The Group provides accounting and administration services. Paradigm Investment Management LLP The Group incurs finance charges. Perspective Financial Group Limited The Group provides discretionary fund management services and compliance advisory services. Suffolk Life Pensions Limited The Group pays lease rental payments on an office building held in a pension fund by Paul Hogarth. From 20 December 2019 Perspective Financial Group Limited is no longer a related party. The transactions shown below are those which took place in the financial period during which the company was a related party. The balance receivable/ payable is the year end balance. Related party balances Terms and conditions Amber Financial Investments Limited Jargon Free Benefits LLP Paradigm Management Partners LLP Paradigm Investment Management LLP Perspective Financial Group Limited Suffolk Life Pensions Limited Hermitage Holdings (Wilmslow) Limited Repayment on demand Payable within 30 days Repayment on demand Repayment on demand Repayment on demand Payable within 30 days Payable in advance Balances with related parties are non-interest bearing. 2020 2019 Value of income/ (cost) (£’000) Balance receivable/ (payable) (£’000) Value of income/ (cost) (£’000) Balance receivable/ (payable) (£’000) 297 15 1 (5) 243 (57) 4 25 66 5 (234) 11 9 4 239 24 – (11) 369 (56) – (42) 43 4 (13) 72 9 – Key management personnel remuneration Key management includes Executive and Non-Executive Directors. The compensation paid or payable to key management personnel is as disclosed in note 10. Notes to the Consolidated Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202091 23 ALTERNATIVE PERFORMANCE MEASURES (“APMS”) Income statement measures Closest Reconciling items to APM equivalent measure their statutory measure Definition and purpose Adjusted Operating Profit before separately disclosed items Operating profit Exceptional items, share-based payments and amortisation of client relationship intangibles. See note 6. Adjusted Profit before tax; before separately disclosed items Profit before tax Exceptional items, share-based payments and amortisation of client relationship intangibles. See note 6. An important measure where exceptional items distort the understanding of the operating performance of the business. Allows comparability between periods. See also note 2.24. An important measure where exceptional items distort the understanding of the operating performance of the business. Allows comparability between periods. See also note 2.24 Adjusted earnings per share – Basic Earnings per share – Basic Exceptional items, share-based payments and amortisation of client relationship intangibles and the tax thereon. See note 9. An important measure where exceptional items distort the understanding of the operating performance of the business. Allows comparability between periods. See also note 2.24. Adjusted earnings per share – Diluted Earnings per share – Diluted Exceptional items, share-based payments and amortisation of client relationship intangibles and the tax thereon. The dilutive shares for this measure assume that all contingently issuable shares will fully vest. See note 9. An important measure where exceptional items distort the understanding of the operating performance of the business. Allows comparability between periods. See also note 2.24. Net cash generated from operations before separately disclosed items Net cash generated from operations Exceptional items, share-based payments and amortisation of client relationship intangibles. See note 6. Net cash generated from operations before exceptional costs. To show underlying cash performance. See also note 2.24. Other measures APM equivalent measure their statutory measure Definition and purpose Closest Reconciling items to Tatton – Assets Under Management (“AUM”) None Not applicable AUM is representative of the customer assets and is a measure of the value of the customer base. Movements in this base are an indication of performance in the year and growth of the business to generate revenues going forward. Paradigm Consulting members and growth Paradigm Mortgages lending, member firms and growth None None Not applicable Alternative growth measure to revenue, giving an operational view of growth. Not applicable Alternative growth measure to revenue, giving an operational view of growth. Dividend cover None Not applicable Dividend cover (being the ratio of diluted earnings per share before exceptional items and share-based charges) is 1.9 times, demonstrating ability to pay. 24 POST BALANCE SHEET EVENT There were no material post balance sheet events. 25 CAPITAL COMMITMENTS At 31 March 2020, the Directors confirmed there were no capital commitments (2019: £112,000) for capital improvements. 26 CONTINGENT LIABILITIES At 31 March 2020, the Directors confirmed there were no contingent liabilities (2019: none). Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic ReportCompany Statement of Financial Position As at 31 March 2020 Non-current assets Investments in subsidiaries Property, plant and equipment Deferred tax assets Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Total current liabilities Total liabilities Net assets Equity attributable to equity holders of the Company Share capital Share premium account Own shares Other reserve Merger reserve Retained earnings Total equity 92 31-Mar 2019 (£’000) 77,216 2 143 77,361 10,127 5,508 15,635 31-Mar 2020 (£’000) 77,216 5 235 77,456 9,264 7,657 16,921 94,377 92,996 (1,932) (1,932) (1,932) (383) (383) (383) 92,445 92,613 11,182 8,718 (996) 1,121 67,316 5,104 92,445 11,182 8,718 – 1,036 67,316 4,361 92,613 Note 5 17 13 14 15 16 12 The Company generated a profit of £5,706,000 during the financial year (2019: profit of £3,788,000). The financial statements were approved by the Board of Directors on 15 June 2020 and were signed on its behalf by: Paul Edwards Director Company registration number 10634323 Tatton Asset Management plc Annual Report and Accounts 2020 Company Statement of Changes in Equity 93 For the year ended 31 March 2020 At 31 March 2018 Profit for the period Dividends Share-based payments Deferred tax on share- based payments Share capital (£’000) 11,182 Share premium (£’000) 8,718 – – – – – – – – At 31 March 2019 11,182 8,718 Profit for the period Dividends Share-based payments Deferred tax on share- based payments Own shares acquired in the year – – – – – – – – – – At 31 March 2020 11,182 8,718 Own shares (£’000) – – – – – – – – – – (996) (996) Other reserve (£’000) 140 – – 766 130 1,036 – – 85 – – Merger reserve (£’000) 67,316 Retained earnings (£’000) Total equity (£’000) 4,672 92,028 – – – – 67,316 – – – – – 3,788 (4,025) (74) – 4,361 5,706 (4,920) – 3,788 (4,025) 692 130 92,613 5,706 (4,920) 85 (43) (43) – (996) 1,121 67,316 5,104 92,445 Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic ReportNotes to the Company Financial Statements 94 1 AUTHORISATION OF FINANCIAL STATEMENTS AND STATEMENT OF COMPLIANCE WITH FRS 101 The financial statements of Tatton Asset Management plc for the year ended 31 March 2020 were authorised for issue by the Board of Directors on 15 June 2020. Tatton Asset Management plc is incorporated and domiciled in England and Wales. These financial statements were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (“FRS 101”) and in accordance with applicable accounting standards. The Company’s financial statements are presented in sterling. These financial statements have been prepared on a going concern basis and on the historical cost basis. The principal accounting policies adopted by the Company are set out in note 2. 2 ACCOUNTING POLICIES 2.1 Accounting policies The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 March 2020. The Company has taken advantage of the following disclosure exemptions under FRS 101: a) the requirement in paragraph 38 of IAS 1 ‘Presentation of Financial Statements’ to present comparative information in respect of: 1) Paragraph 79(a)(IV) of IAS 1; 2) Paragraph 73(e) of IAS 16 ‘Property, Plant and Equipment’; b) the requirements of paragraphs 10(d), and 134–136 of IAS 1 ‘Presentation of Financial Statements’ and the requirements of IAS 7 ‘Statement of Cash Flows’; c) the requirements of paragraphs 30 and 31 of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’; d) the requirements of paragraph 17 of IAS 24 ‘Related Party Disclosures’; e) the requirements in IAS 24 ‘Related Party Disclosures’ to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member; and f) the disclosure requirements of IFRS 7 ‘Financial Instruments: Disclosures’. 2.2 Investments All investments are initially recorded at cost, being the fair value of consideration given including the acquisition costs associated with the investment. Subsequently, they are reviewed for impairment on an individual basis if events or changes in circumstances indicate the carrying value may not be fully recoverable. 2.3 Financial instruments Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, and trade and other payables. 2.4 Trade and other receivables Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. 2.5 Trade and other payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, where applicable or required. These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial period, which are unpaid. 2.6 Cash and cash equivalents Cash and cash equivalents comprise long and short-term deposits held with banks by the Company, and are subject to insignificant risk of changes in value. Tatton Asset Management plc Annual Report and Accounts 202095 2 ACCOUNTING POLICIES CONTINUED 2.7 Share-based payments The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of the Black-Scholes model or Monte Carlo model as appropriate. 2.8 Interest income and interest expense Finance income is recognised as interest accrued (using the effective interest method) on funds invested outside the Group. Finance expense includes the cost of borrowing from third parties and is recognised on an effective interest rate basis, resulting from the financial liability being recognised on an amortised cost basis. 2.9 Taxation Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Total Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred tax Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary difference and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each Statement of Financial Position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted at the Statement of Financial Position date. Deferred tax is charged or credited in the Statement of Total Comprehensive Income, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off the current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report96 2 ACCOUNTING POLICIES CONTINUED 2.9 Taxation continued Current and deferred tax for the year Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. 2.10 Dividends Dividend distributions payable to equity shareholders are included in other liabilities when the dividends have been approved in a Board meeting prior to the reporting date. 2.11 Retirement benefit costs The Company pays into a personal pension plan for which the amount charged to income in respect of pension costs and other post-retirement benefits is the amount of the contributions payable in the year. Payments to the defined contribution retirement benefit scheme are recognised as an expense when employees have rendered service entitling them to the contributions. Differences between contributions payable and paid are accrued or prepaid. The assets of the plans are invested and managed independently of the finances of the Company. 3 OPERATING LOSS The following items have been included in arriving at the operating loss for continuing operations: Share-based payment charges (note 11) 31-Mar 2020 (£’000) 108 31-Mar 2019 (£’000) 840 Share-based payment charges relate to the provision made in accordance with IFRS 2 ‘Share-based Payment’ following the issue of share options to employees. 4 SERVICES PROVIDED BY THE COMPANY’S AUDITOR During the period the Company obtained the following services provided by the Company’s auditor at the costs detailed below: Audit of the statutory financial statements of TAM plc Services provided by the Group’s auditor: Other taxation advisory services Non-audit services 5 INVESTMENTS Cost and net book value at 1 April 2018, 31 March 2019 and 31 March 2020 31-Mar 2020 (£’000) 31-Mar 2019 (£’000) 34 – 22 33 8 10 £’000 77,216 Notes to the Company Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202097 5 INVESTMENTS CONTINUED The principal investment comprises shares at cost in the following companies: Country of incorporation Holding Direct/indirect Name of subsidiary Nadal Newco Limited Paradigm Partners Limited Paradigm Mortgage Services LLP Tatton Capital Group Limited Tatton Capital Limited United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Tatton Investment Management Limited United Kingdom Tatton Oak Limited Tatton Crown Investments Limited Sinfonia Asset Management Limited United Kingdom United Kingdom United Kingdom 100% 100% 100% 100% 100% 100% 100% 100% 100% Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect All entities above are included within the consolidated financial statements for TAM plc and all have the same registered address as the Company. 6 DIRECTORS AND EMPLOYEES The average number of persons employed by the Company (including Directors) during each year was as follows: Administration Wages, salaries and bonuses Social security costs Benefits in kind Pension costs Share-based payment charges The remuneration of the highest paid Director was: Total 7 ULTIMATE CONTROLLING PARTY The Directors consider that there is no ultimate controlling party. 8 FINANCE INCOME Bank interest income 31-Mar 2020 12 31-Mar 2020 (£’000) 1,130 142 – 12 108 1,392 31-Mar 2020 (£’000) 347 31-Mar 2019 11 31-Mar 2019 (£’000) 1,095 132 – 12 312 1,551 31-Mar 2019 (£’000) 343 31-Mar 2020 (£’000) – 31-Mar 2019 (£’000) 2 Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report98 31-Mar 2020 (£’000) 31-Mar 2019 (£’000) – 4 (123) (16) (135) – (12) – – (12) 9 INCOME TAX Current tax expense Current tax on profits for the period Deferred tax income Share-based payments Adjustments in respect of prior years Difference in tax rates Total tax income The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to profit for the year are as follows: Profit before taxation Tax at UK corporation tax rate of 19% (2019: 19%) Expenses not deductible for tax purposes Income not taxable Difference in tax rates Share-based payments Adjustments in respect of prior years Group relief Total tax income 31-Mar 2020 (£’000) 5,571 1,059 25 (1,496) (16) 4 (123) 412 (135) 31-Mar 2019 (£’000) 3,776 717 7 (1,218) 1 145 – 336 (12) The deferred tax asset as at 31 March 2020 has been calculated based on a rate of 19% based on when the Company expects the deferred tax asset to reverse. 10 DIVIDEND PAID AND PROPOSED During the year, TAM plc paid the final dividend related to the year ended 31 March 2019 of £3,131,000, representing a payment of 5.8p per share. In addition, the Company paid an interim dividend of £1,789,000 (2019: £1,565,000) to its equity shareholders. This represents a payment of 3.2p per share (2019: 2.8p per share). In addition, the Directors are proposing a final dividend in respect of the financial year ended 31 March 2020 of 6.4p (2019: 5.8p) per share which will absorb an estimated £3.6 million (2019: £3.1 million) of shareholders’ funds. It will be paid on 28 August 2020 to shareholders who are on the register of members on 17 July 2020. 11 SHARE-BASED PAYMENTS Details of share-based payments are shown in note 20 to the consolidated financial statements. 12 OWN SHARES Details of own shares are shown in note 19 to the consolidated financial statements. Notes to the Company Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 202099 31-Mar 2020 (£’000) 9,184 50 30 9,264 31-Mar 2019 (£’000) 10,089 38 – 10,127 13 TRADE AND OTHER RECEIVABLES Amounts due from related parties Prepayments and accrued income Other debtors All receivable amounts are short term. All of the Company’s trade and other receivables have been reviewed for indicators of impairment and, where necessary, a provision for impairment provided. The carrying value is considered a fair approximation of their fair value. The value of the impairment charged to the Statement of Total Comprehensive Income is £nil (2019: £nil). Trade receivable amounts are all held in sterling. 14 CASH AND CASH EQUIVALENTS Cash at bank 15 TRADE AND OTHER PAYABLES Trade payables Amounts owed to related parties Accruals Other creditors 31-Mar 2020 (£’000) 7,657 31-Mar 2020 (£’000) 44 1,309 534 45 1,932 31-Mar 2019 (£’000) 5,508 31-Mar 2019 (£’000) 51 110 222 – 383 The carrying values of trade payables, amounts due to related parties and accruals are considered reasonable approximation of fair value. Trade payable amounts are all held in sterling. 16 EQUITY Authorised, called up and fully paid £0.20 ordinary shares Each share in TAM plc carries one vote and the right to a dividend. 31-Mar 2020 31-Mar 2019 (number) (number) 55,907,513 55,907,513 Tatton Asset Management plc Annual Report and Accounts 2020Financial StatementsCorporate GovernanceStrategic Report100 Share-based payments (£’000) Total (£’000) – 13 130 143 135 (43) 235 – 13 130 143 135 (43) 235 17 DEFERRED TAXATION Asset/(liability) at 1 April 2018 Income statement credit Equity credit Asset at 31 March 2019 Income statement credit Equity charge Asset at 31 March 2020 18 CONTINGENT LIABILITIES The Directors confirmed that at 31 March 2020, no contingent liabilities existed (2019: none). 19 CAPITAL COMMITMENTS The Directors confirmed that at 31 March 2020, no capital commitments existed (2019: none). 20 RELATED PARTY TRANSACTIONS The Company has taken advantage of the exemption under paragraph 8(K) of FRS 101 not to disclose transactions with entities that are wholly owned subsidiaries of TAM plc. There are no other related party transactions other than those that have been disclosed in note 22 to the consolidated financial statements. 20.1 Transactions with key management personnel Other than the Directors and Officers of the Group (see note 22), no other key management personnel have been identified. 21 EVENTS AFTER THE REPORTING PERIOD There were no events after the reporting period. Notes to the Company Financial Statements continuedTatton Asset Management plc Annual Report and Accounts 2020Consultancy, design and production www.luminous.co.uk Design and production www.luminous.co.uk Image credits: p20-21 photographed by Jeremy Yap p22-23 photographed by Grianghraf p24-25 photographed by Taylor Nicole T a t t o n A s s e t M a n a g e m e n t p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 2 0

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