Annual Report &
Accounts 2019
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HIGHLIGHTS
Our Purpose
Making you happier about money
We know there are hundreds of things to
worry about with money. Our bank won’t
be one of them.
We don’t want to be simply better than
the rest, we want to make banking better.
That’s the heart and soul of what
Virgin Money does.
Statutory loss after tax
Statutory RoTE
Underlying profit before tax
Underlying RoTE
£(194)m
2018 – £(145)m
(6.8)%
2018 – (6.9)%
£539m
2018 – £581m
10.8%
2018 – 11.0%
Net Interest Margin
Underlying Cost:Income Ratio
Cost of Risk
CET1 ratio
1.66%
2018 – 1.78%
Asset growth
+2.9%
Our strategic priorities:
57%
2018 – 59%
21bps
2018 – 15bps
13.3%
2018 – 15.1%
Relationship deposit growth
Group Net Promoter Score
Colleague Engagement
+7.1%
+37
76%
Pioneering
growth
Delighted customers
and colleagues
Super straightforward
efficiency
Discipline and
sustainability
Read more on page 16
Read more on page 17
Read more on page 18
Read more on page 19
BASIS OF PRESENTATION
Virgin Money UK PLC (‘Virgin Money’ or ‘the Company’), formerly known as CYBG PLC ('CYBG') (the Company was renamed on 30 October 2019), together with
its subsidiary undertakings (which together comprise ‘the Group’), operate under the Clydesdale Bank, Yorkshire Bank, B and Virgin Money brands. This Annual
Report and Accounts covers the results of the Group for the year ended 30 September 2019. The term 'Virgin Money' is used throughout this report either in
reference to the Group, or when referring to the acquired business of Virgin Money Holdings (UK) PLC or subsequent integration of the acquired business
within the newly combined Group.
Statutory basis: Statutory information is set out on pages 50 to 52 and within the financial statements.
Pro forma results: On 15 October 2018, the Company acquired all the voting rights in Virgin Money Holdings (UK) PLC by means of a scheme of arrangement
under Part 26 of the UK Companies Act 2006, with the transaction being accounted for as an acquisition of Virgin Money Holdings (UK) PLC. We believe that it
is helpful to also provide additional information which is more readily comparable with the historic results of the combined businesses. Therefore we have also
prepared pro forma results for the Group as if Virgin Money UK PLC and Virgin Money Holdings (UK) PLC had always been a combined group, in order to assist
in explaining trends in financial performance by showing a full year performance for the combined group for both the current year and prior year. A reconciliation
between the results on a pro forma basis and a statutory basis is included on page 51. The pro forma results are also presented on an underlying basis as there
have been a number of factors which have had a significant effect on the comparability of the Group’s financial position and results.
Underlying basis: The pro forma results are adjusted to remove certain items that do not promote an understanding of historical or future trends of earnings
or cash flows, which therefore allows a more meaningful comparison of the Group’s underlying performance. A reconciliation from the underlying pro forma
results to the pro forma basis is shown on page 52 and management’s rationale for the adjustments is shown on page 280.
Alternative performance measures (APMs): The financial key performance indicators (KPIs) used by management in monitoring the Group’s performance and
reflected throughout this report are determined on a combination of bases (including statutory, regulatory and alternative performance measures), as detailed
at ‘Measuring financial performance – glossary’ on pages 278 to 279. APMs are closely scrutinised to ensure that they provide genuine insights into the Group’s
progress; however statutory measures are the key determinant of dividend paying capability.
Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions.
Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.
001
INSIDE THIS
YEAR’S REPORT
002
Strategic report
How we performed in 2019
and our plans for the future
040
053
Financial results
An overview of our results for 2019
Governance
How we ensure we act responsibly
137
Risk report
How we ensure we manage risks
193
277
Financial statements
Independent auditor’s report
and results in detail
Additional information
Useful information for shareholders
and forward-looking statements
Chairman’s statement
Chief Executive Officer’s review
Who we are
The external environment
How we create value
Brighter stores
Overview of our strategy
Key performance indicators
Pioneering growth
Delighted customers and colleagues
Super straightforward efficiency
Discipline and sustainability
Divisional reviews
Risk overview
Stakeholder engagement
People with purpose
Sustainability
Chief Financial Officer's review
Chairman’s letter
Board of Directors
Executive Leadership Team
Corporate governance report
Governance and Nomination Committee report
Audit Committee report
Risk Committee report
Directors’ remuneration report
Directors’ report
Risk report
Risk classes
Credit risk
Financial risk
Regulatory, compliance and conduct risk
Operational risk
Technology risk
Financial crime risk
Strategic and enterprise risk
People risk
Independent auditor’s report to the members
Consolidated financial statements
Company financial statements
Measuring financial performance – glossary
Glossary
Abbreviations
Country by country reporting
Shareholder information
Forward-looking statements
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019
CONTENTS
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FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION
002
CHAIRMAN’S
STATEMENT
“2019 has been a year
of significant progress.
The launch of our new
Purpose and values,
allied to our refreshed
strategy, sets us up
for an exciting future
where we will
deliver for all of our
stakeholders and
disrupt the status quo.”
Dear stakeholder
It was a year of significant progress for the newly renamed
Virgin Money UK PLC as the integration of Virgin Money and
CYBG gives us the platform and capabilities to disrupt the status
quo. This has been a year of putting some of the major building
blocks in place to enable us to deliver on our strategic ambition.
The Group’s integration programme has made good progress and
this culminated in the completion of the FSMA Part VII banking
business transfer process in October 2019, which enables the
Group to commence the integration of our customer propositions.
Following this, the renaming of the Group from CYBG PLC to Virgin
Money UK PLC signifies the scale of change underway.
Underpinning these headline achievements has been a significant
programme of work across multiple teams, and I thank the Board,
Executive Leadership Team and all of our colleagues for their hard
work and focus on delivery. Bringing two organisations together is
always a major challenge, but the cultural alignment we identified
at the outset has been reflected in our cohesive teamwork to date.
Our Purpose, values and strategy
The launch of our new Purpose, ‘Making you happier about money’,
engaged over 2,000 colleagues to give us a clear guiding principle
that will drive our activities in future. Purpose-led companies have
been proven to deliver improved outcomes for stakeholders, and
I am confident this sets the Group up well for the years ahead.
Our new Purpose has been underpinned by our adoption of the
Virgin values, which were well aligned with CYBG’s existing values,
and are being used to drive optimal behaviours across the Group.
This will ensure we live up to the promise of the iconic Virgin brand
to deliver great outcomes for customers, embedding an ambitious,
customer-focused culture in the new Virgin Money.
The adoption of the Virgin brand and its customer-focused values
is at the heart of our new strategy for the Group. The Board and
I worked closely with the Executive Leadership Team to develop
what we believe is a differentiated strategy and ambitious set
of targets, culminating in their successful launch at our Capital
Markets Day (CMD) in June. As we deliver on our strategy in
the years ahead, we are confident that it will deliver sustainable
returns for shareholders, and value to all of our wider stakeholders.
Delivering for our stakeholders
We are of course already delivering for stakeholders. Pages 30
and 31 say more about this, showing how we are working with
and delivering for customers, colleagues, society, investors,
partners and suppliers, and government and regulators.
For investors, we recognise it has been a difficult year from a share
price perspective, reflecting a challenging operating environment
and the unexpected surge in PPI complaint volumes. However, our
new strategy was well received by the market, and we are
confident that its delivery will support shareholder value creation.
I particularly wanted to note our improving Group Net Promoter
Score (NPS) of +37 (2018: +34) as a measure of how we are
already delivering for our customers, as well as the strategic focus
we have developed on making a positive impact for society and the
environment, outlined in our new Sustainability report on page 34.
I was also pleased to see our colleague engagement score holding
up well, despite the significant amount of change that is underway,
and I thank our colleagues for their enthusiasm and resilience at
what can be a time of uncertainty for some.
I have also been heartened by the contribution our not-for-profit
business Virgin Money Giving Limited continues to make. As the
official fundraising partner of many UK events such as the Virgin
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 003
Our Purpose
Our strategic
ambition
Our strategic
priorities
Powered by our
Delivered
brilliantly in line
with our values
Making you happier about money
To disrupt the status quo
Pioneering
growth
Delighted
customers and
colleagues
Super
straightforward
efficiency
Discipline and
sustainability
Highly-trusted brand
People with Purpose
Digital leadership
Heartfelt service
Insatiable curiosity
Smart disruption
Red hot relevance
Straight up
Delightfully surprising
Money London Marathon and Sleep in the Park, it helped raise
£107m for UK charities in 2019 alone. More details are on page 36.
Our focus on governance
In addition to the considerable engagement required in creating
our new strategy, the Board has also been active in its usual
governance activities as well as taking deep dives into
understanding the acquired Virgin Money business (see the
Corporate governance report on pages 71 to 79 for further detail).
The Board and I have also been closely engaged in the Group’s
response to the unprecedented volume of PPI information requests
and complaints received during August. It was regrettable that
we were required to take £385m of additional PPI provisions and
this partly led to the Group reporting a statutory loss of £194m.
However, we will be pleased to finally draw a line under this legacy
matter once we complete the final remediation activities required.
The Board has also considered the impact of the additional PPI
provisions and subsequent capital reduction upon our strategy.
Given our prudent decision to maintain a strong capital position
earlier in the year, we have been able to absorb the PPI provision
without needing to change our strategy. It does however mean
some short-term adjustments to conserve capital, including
the difficult decision for us to suspend the dividend for 2019.
The Board, incorporating feedback from our major shareholders,
believe this is the right short-term decision to enable us to
continue delivering our long-term strategy and to provide capacity
for any shocks, given the uncertain outlook. We remain committed
to our ambition of progressive and sustainable dividends over time
and the Board will reconsider dividends in line with normal practice
in FY2020.
Outlook
The political and economic outlook remains uncertain. At the time
of writing we are facing into an impending General Election, and
the range of potential outcomes is wide, with the out-turn likely
to influence the shape of any Brexit arrangements that may follow.
We deliberately designed our strategy to mitigate a muted
economic outlook and the industry pressures, with a focus on the
significant self-help opportunities available to us. However, we are
not complacent and the work we have undertaken to prepare for a
range of scenarios should help to mitigate any short-term volatility.
I would like to take the opportunity to personally thank Clive
Adamson, who is stepping down from the Board to take up an
external appointment, for his significant contribution over the past
three and a half years. I am however delighted that Geeta Gopalan,
one of our existing Non-Executive Directors, will replace Clive as
the Chair of the Risk Committee, subject to regulatory approval.
Finally, I would like to close by thanking our colleagues and Board
members in advance for their continuing efforts into 2020 as we
execute on an exciting agenda of further change. Our customers
will really start to see the benefits of the combination next year as
we begin to integrate our customer platforms, rebrand the Group
as Virgin Money and launch our new and exciting propositions.
I am therefore very much looking forward to seeing the progress
we make in delivering on our ambition to disrupt the status quo.
Jim Pettigrew
Chairman
27 November 2019
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 004
CHIEF EXECUTIVE
OFFICER’S REVIEW
“In 2019 we refreshed
our strategy, launched
our three new
divisions and delivered
significant integration
milestones. We are
now one Bank with the
culture and capabilities
to deliver on our
strategy of disrupting
the status quo.”
Dear stakeholder
2019 has seen us build our platform for the future. Designing
our refreshed strategy was crucial and developing it with our
new Purpose and Values at its core gives us a clear direction
in support of our ambition to disrupt the status quo.
The combination of Virgin Money and CYBG has created a
unique digitally-enabled competitor that combines the strengths
of both the major banks and the neo banks, enabling us to offer
a differentiated customer proposition (see diagram overleaf).
Working closely with the Board, we formulated our strategy
and targets, which we announced to a positive reception at our
Capital Markets Day (CMD) in June. This strategy will support
what we believe is a compelling investment case and positions
us to compete effectively with current and alternative providers
of customer propositions in the banking models of the future.
A year of progress and achievements
Our integration programme has been a key focus throughout the
year. The critical achievement of this work was the FSMA Part VII
banking business transfer approval in October 2019, which we
delivered faster than expected. This means we can now begin the
integration of our customer propositions and offer the full range of
products and services from across the combined business. We can
also now launch the Group rebrand activity and proceed with the
platform integration activities that support our cost savings targets.
We have also made good progress in realising some of our initial
integration cost savings, including addressing senior management
duplication, starting the rationalisation of our office and branch
footprints, and commencing deduplication of suppliers. This has
enabled us to deliver £53m of run-rate net cost savings in 2019,
a strong start towards our targeted c.£200m of net cost savings.
Resilient operating performance
In line with the balance sheet optimisation strategy we outlined at
our CMD, we grew above market in Business (+4.5%) and Personal
(+16%), but tempered our growth in Mortgages. We also delivered
7% growth in relationship deposits, as we optimise our funding mix.
This strategy contributed to the delivery of a resilient operating
performance in a competitive environment. Although we increased
operating profit by 1% through our initial cost savings, underlying
profit before tax reduced by 7%, due to higher impairments from
IFRS 9 and normalisation.
Statutory loss driven by legacy conduct and acquisition costs
We, like the rest of the industry, were surprised by the scale of the
PPI information requests and complaints during August. We have
moved swiftly to address the issue and are leveraging innovative
technology solutions to enable us to deal with genuine customer
complaints as quickly, and as cost effectively, as we can. It is
nonetheless frustrating to incur a further £385m in provisions
in Q4 as we look to close out this legacy issue.
Our Group strategy will be brought to life for our customers through
our three new customer-facing divisions: Business, Personal and
Mortgages, each with their own customer-focused ambitions,
strategies and KPIs. Our divisional reviews are on pages 20 to 25.
The scale of PPI provisions and acquisition costs incurred during
the year led to a statutory loss of £194m for FY2019. However, as
outlined at our CMD, we have a clear path to statutory profitability
and a statutory return on tangible equity of >12% by FY2022.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 005
The combination of Virgin Money and CYBG
gives us a platform to disrupt the status quo
Primary relationships
Trusted brand,
loyal customers
Full personal and
business offering
Multiple distribution
channels
Digital capability
and Open Banking
Multi-product
customers
Better
than both
Strengths of
a major bank
Strengths of
a neo bank
Innovative brand and edge
Customer lifestyle
intelligence
‘Pay and play’
functionality
Innovative digital
platform
Savings pots
functionality
Limited back-end
legacy systems
Robust capital position supports our strategy
Although the sizeable PPI provision did impact our capital position,
the Board and I are confident that our CET1 ratio of 13.3% retains
both a significant buffer to our regulatory requirement of 11%
and provides the capacity to deliver our strategy. We have however
taken the difficult decision to suspend the dividend in 2019. The
Board, incorporating feedback from our major shareholders,
believes this is the right short-term action to enable us to deliver
on our longer-term strategy and targets.
Customer experience improvements
We have almost completed the transfer of all CYBG customers
and products onto our FinTech-friendly banking platform, and we
can now commence the integration of the Virgin Money customer
platforms too. We have launched EZBob as an SME solution, Salary
Finance for unsecured lending and a money-saving utility app with
GoCompare. We want to accelerate the pace of these and other
initiatives and we have therefore announced the creation of a new
digital disruption hub in Newcastle. This scaled capability will allow
our three business divisions to deliver disruptive propositions to
enhance the customer experience in a rapid and agile manner, with
our innovations benchmarked to all markets and industries globally.
Outlook
Our ambition is to deliver the product and service diversity and
benefits of a large-scale bank with the customer experience
and innovation of the neo banks, and we will also expand our
partnership platform to facilitate the delivery of further value-
based propositions like GoCompare. We are working on new
propositions with a number of the 25+ other Virgin Group
companies and plan to launch reward and loyalty offerings.
Ultimately, we hope to demonstrate the unique advantages of
being linked to the broader Virgin Group. We will be the only bank
that offers a full range of banking and lifestyle services through a
linked rewards programme that offers value back to our customers.
We will begin bringing these capabilities to market during 2020.
We recognise the continuously changing landscape in financial
services and will evaluate partnerships where we believe there is
an opportunity to provide our customers with a unique proposition,
a class-leading service and a value for money outcome. We need
to remain vigilant around the competitive landscape while at the
same time delivering a significant amount of change in our
organisation. Finally, we are reinforcing our governance to ensure
compliance with the regulatory requirements as a new Tier 1 bank.
We are a Purpose-driven organisation with a refreshed strategy
and priorities. We have a clear path to statutory profitability and a
statutory return on tangible equity of >12% by FY2022. We are also
focused on an ambitious sustainability strategy (page 34) centred
on inclusion, community engagement and protecting and nurturing
the environment. Our Virgin Money Giving platform and charitable
foundation will help us to achieve our goals in these areas.
2019 has been a year of immense work to build the foundations
for our future success across the Board, my Leadership Team and
all of our colleagues, and I would like to thank everybody for their
efforts. I am excited about what we will achieve together in 2020
as we start to deliver on our ambition to disrupt the status quo.
David Duffy
Chief Executive Officer
27 November 2019
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 006
WHO
WE ARE
Our Purpose
drives us
Brought to life in our manifesto
Our Virgin
values
How we deliver our Purpose
Money. It’s a pretty big deal.
It flows and twists through our entire lives.
From first payments to final pensions.
From saving for a holiday to running a business.
Money can be the beginning of things
and it can put an end to things.
It brings us joy as easily as it steals our sleep.
It takes up precious time we don’t always have.
Managing our money can be hard work.
Taxing.
Over-complicated.
So much jargon.
It shouldn’t have to be this way.
We’re here to change how people
feel about money.
The only way we can do this is by seeing
the world as our customers do.
By understanding what they really need.
By learning what frustrates them, what keeps
them awake at night, and what makes
them get up in the morning.
By sharing in their hopes, dreams and worries.
We will stand out by applying head and heart,
by living our values and using our expertise.
It’s what makes us so much more than a
set of products and services.
It’s what makes us experts in making
people happier about money.
We have the power to change the lives
of people and communities.
And we will do this with every single
one of us working together.
We are dedicated to making you
happier about money.
Heartfelt service
— we are warm, honest and authentic
— we care and aspire to deliver the best
for our customers
Insatiable curiosity
— we are open minded, ask questions and
keep on learning
— we keep searching for the best ideas,
approaches and solutions
Smart disruption
— we are innovative, focused and shake up the
things that matter, together
— we explore new boundaries, and balance
this with the risks
Red hot relevance
— we are inclusive, bold and progressive
— we lead the way today and anticipate
for tomorrow
Straight up
— we are straightforward, build trust and
act with positive intent
— we work together to make money simple
and easier
Delightfully surprising
— we look for the little things that make
a big difference
— we have fun and deliver experiences that
make people feel happier
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 007
Our highly
trusted brand
How we face the world
Our Purpose reflects our brand and
drives our culture, bringing our brand
to life through our values and behaviours
Our customer divisions
Supporting our 6.6 million customers
100%
Virgin brand awareness
87%
Virgin brand consideration
— Consumer champion brand
— Part of a wider family
— 26 million UK customers with an existing
Virgin relationship
— Scales fast
— Commands a premium
— Resonates with customers and prospects
BUSINESS
PERSONAL
MORTGAGES
Our ambition is to
help business owners
realise their potential and
achieve their dreams.
Our ambition is to help our
customers live and bank in
a more rewarding way.
Our ambition is to simplify
mortgages to make
consumers’ lives better.
A full relationship management
proposition to small and medium
enterprises across the UK, to meet
their borrowing, financing and business
account needs, helping them to reach
their potential.
As well as meeting our customers’
everyday retail banking needs for
current accounts, credit cards, loans
and savings, we aim to help our
customers live and bank in a more
rewarding way.
We meet all of our customers’
mortgage needs, from buying a first
home, to moving up, remortgaging or
investing in buy-to-let property, in a
simple way that makes our customers’
lives better.
With national
physical reach
and an innovative
digital platform
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 008
THE EXTERNAL
ENVIRONMENT
An uncertain economic and political environment
Market dynamics
Our response
Although UK economic performance has been relatively
stable throughout 2019, the outlook remains uncertain.
Recent GDP figures have been mixed, with relatively low
growth in 2019 to date, while 2020’s outcome will depend
on how the economy reacts to evolving Brexit arrangements.
The UK unemployment rate remains very low by historical
standards, at 3.8%. CPI inflation has been slowing, reaching
1.5% in October, the lowest reading since 2016. Business
investment has also remained muted, with heightened
uncertainty from slowing global growth and Brexit weighing
on capital expenditure decisions.
A degree of economic pessimism is likely to persist while the
political outlook remains uncertain. Our refreshed strategy
reflects this and isn’t predicated on material interest rate rises.
Our customer growth objectives focus on expanding our reach
nationally through the Virgin Money brand and using our
enhanced proposition to reshape our balance sheet. We will
continue to focus on high-quality asset growth within our
existing prudent appetite. We also have significant self-help
opportunities within our control in terms of reducing
costs through deduplication and transforming the Group
with digitisation.
Evolving customer
behaviour
A competitive
banking market
Customers are demanding far more from their bank, principally
an improved, digitally-enabled experience, better value and to
be rewarded for loyalty. We are well placed to capitalise on this.
UK banking remains extremely competitive, but our strategy
and new brand give us opportunities to attract and retain loyal
customers through offering a genuinely differentiated proposition.
Market dynamics
Market dynamics
Customer expectations continue to evolve driven by new
technology, competition and experiences in other sectors, and
this is having a profound impact on banking. Customer usage of
traditional branches is falling and the use of online is increasing.
Retail banking in the UK remains highly competitive. Incumbent
banks are increasingly focusing on UK markets as a consequence
of ring-fencing and new digital-only entrants are also seeking to
capture market share.
We have also seen customers demand more integrated propositions
to address more of their needs in one place, while seeking rewards
for loyalty. While some consumers have been prepared to open
accounts with newer, digitally-focused banking entrants, the trend
continues to be for most people to trust larger, more established
brands with their primary current accounts and savings.
While Open Banking presents a significant opportunity, low
customer adoption to date has been influenced by a lack of
effective propositions in the marketplace to address its potential.
Our response
Our strategy is designed to address customer preferences and
the increasing adoption of digital. However, we will still serve our
customers through the full range of channels at their convenience.
We have already invested heavily in our innovative digital
propositions and are now set to build our scale through
leveraging the Virgin Money brand. Continuing investment in our
digital platform will ensure we are at the forefront of new customer
technologies, with major roll-outs planned in the coming years
to upgrade our digital propositions and improve the customer
experience. We are also partnering with FinTechs and others
where opportunities exist to improve the customer experience.
We have been building innovative product propositions – offering
rewards such as Flying Club Miles in place of traditional interest.
We continue to develop our relationship-driven propositions, from
linked savings accounts offering customers better value than that
on offer from the major incumbents, to developing a loyalty and
rewards programme with the wider Virgin Group companies.
Competition in the mortgage market remains intense but low
growth, with the excess liquidity being deployed into mortgages
driving pricing lower and impacting margins. These dynamics have
led some smaller players to exit the market.
In business banking, competition has been driven by new entrants
targeting the smaller, micro segment of SME, while incumbents
have seen limited growth and typically focus on larger corporates.
Market growth has also been muted due to Brexit uncertainty.
The credit card market has become less competitive with
interest-free incentive periods shortening and a number of players
unable to offer competitive rewards-based propositions. Market
growth has also slowed as consumer confidence has softened.
The deposit and current account markets have shown solid growth,
with customers and businesses looking to save rather than spend
given economic uncertainty. Competitive intensity has been high
due to targeted activity by new entrants and some participants
looking to refinance Term Funding Scheme (TFS) borrowings, and
is seen in the proliferation of cash incentives for current accounts.
Our response
Our strategy reflects our desire to serve our customers with the
products and services they need within a competitive marketplace.
We are targeting lower mortgage volumes at better margins and
procured more efficiently. We seek to grow in our Business and
Personal divisions by enhancing the customer experience and
increasing our addressable market through the Virgin Money brand,
focusing on segments where competition is less intense and/or we
have a competitive advantage.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 009
The Brexit effect
Brexit continues to heavily influence the economic outlook,
and with an impending General Election, a wide range of
outcomes remain possible, making uncertainty the
predominant market force.
As such, our Board and management are focused on ensuring
our business is prepared for all eventualities and can mitigate
any short-term volatility. Our strategy focuses on actions within
our control, growing in underweight segments within our
prudent risk appetite and becoming more efficient.
In our Mortgage division, we are strategically choosing
to prioritise margin over volume, helping to partly mitigate
any market-dampening impact from the Brexit uncertainty.
In our Personal division we are seeking to capture more
business from our newly expanded customer base and to focus
on higher quality, more affluent customers in the wider market.
Brexit is particularly relevant for our Business customers,
and our dedicated relationship managers have been helping
businesses plan for the future. Our strategy is predicated
on leveraging the Virgin Money brand to expand nationally
but within our existing sector specialisms and risk appetite.
Resolution of the current, Brexit-induced uncertainty could lead
to increased demand for lending and a positive rate outlook.
Alternatively, a disruptive outcome could result in lower growth
and further pressure on margins as banks compete for volume.
More efficient, technologically-
enabled banking
An evolving regulatory
outlook
Banking is being disrupted by technology. We will capitalise
on this, building on our innovative digital platform to deliver
enhanced customer experiences and greater cost efficiency.
Regulation in UK banking is focused on making banks stronger
and supporting positive outcomes for customers. We will
continue to support and align to these developments.
Market dynamics
Market dynamics
With retail banking earnings being squeezed by competition,
persistent low interest rates and higher capital requirements, banks
are looking to cut costs to improve profitability. This has coincided
with customer demands for greater digitisation and simpler
technology offerings. Incumbent banks have been busy, through
significant additional investment, trying to reduce their operating
costs, but in most cases have yet to address outdated platforms.
At the same time, new FinTech entrants are looking to disrupt the
market, offering low-cost, easy-to-use digital banking solutions.
These range from new start-up banks to firms focusing on distinct
customer groups or individual segments of the value chain. We are
also seeing the technology giants looking to exploit Open Banking
and taking steps towards the industry, particularly in payments.
This trend of technological development, driven in part by the
ability and desire to reduce operating costs, leaves the industry
at a major inflection point.
The regulatory environment continues to develop at pace, with
numerous market reviews and the need to respond to the evolution
of new and existing regulations.
The FCA time-bar on PPI complaints in August 2019 led to a surge
in complaints and information requests across the industry,
particularly from Claims Management Companies.
Implementation of the Basel III framework continues, seeking to
improve the comparability of capital ratios, with changes to the
standardised approach to credit risk, operational risk and the
introduction of an RWA output floor. MREL implementation also
continues, with financial institutions busy issuing qualifying debt
to meet their requirements.
FCA final rules on high-cost credit and overdrafts have come into
effect leading to changes in the overdraft market to address pricing
for unarranged overdrafts, low consumer awareness of complex
pricing structures and the repeat use of overdrafts.
Our response
Our response
In this environment, winners will adapt flexibly and lead on
technology to deliver superior customer outcomes and cost
efficiency, while also leveraging the benefits of scale and trust.
We have already invested significantly in our technology platform,
which is Open Banking and FinTech partner ready, and hosted in
the Cloud. We will extend this to offer our customers a full digital
experience and improving on what we already have in place.
We will operate with a ‘digital by default’ ethos, driving up digital
adoption across the bank and allowing us to reduce costs. We will
also partner with FinTechs to gain access to leading-edge
technology and innovation.
These opportunities will allow us to offer our customers innovative
digital offerings and service them more efficiently, and will support
our target for a cost:income ratio amongst the best in our industry.
The Group will continue to invest in our business to ensure
compliance with the evolving regulatory landscape.
We moved swiftly to deal with the surge in PPI complaints and
are well prepared to deal with genuine customer complaints as
efficiently as we can.
The Group remains focused on ensuring that current and future
customer products and services meet conduct standards and
regulatory expectations, including changes to our overdraft pricing
in line with the FCA final rules.
We continue to progress towards meeting our MREL requirements,
with further issuance in 2019, while preparations are also underway
for the Group’s inaugural participation in the Bank of England’s
Annual Cyclical Scenario (ACS) exercise in 2020.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 010
HOW WE
CREATE VALUE
We create value through our
simple, UK-focused, disciplined and
digitally-enabled business model
Our business model draws on our Purpose, ambition, values and
culture, and is aligned to the environment we operate in. It uses our
unique combination of resources to deliver our core activities as a
bank which are aligned to our strategic priorities. This aims to
deliver positive outcomes for all of our stakeholders.
Using
our inputs
We draw on
our resources
To deliver our
core activities
Internal
Purpose
Making you happier
about money
Strategic ambition
Disrupt the status quo
Values and behaviours
The values of Virgin
Culture
Ambitious, inclusive
and customer-focused
External
Operating environment
What we do reflects
our environment
and industry
(SEE PAGES 8–9)
Stakeholders
We engage with all
of our stakeholders to
understand their views
(SEE PAGES 30–31)
National coverage and scale
We are the sixth-largest bank in
the UK with a national physical
network and scale, a trusted track
record and 6.6m customers.
Our people with Purpose
Our people, powered by our
Purpose, will help us deliver great
customer experiences and disrupt
the status quo.
Our highly-trusted brand
The Virgin Money brand is
nationally recognised and highly
trusted, known for its customer
focus and disruptive DNA. Our
consumer champion reputation
attracts strong customer
awareness and consideration.
Digital leadership
We have invested significantly
to develop an innovative, scalable
Open Banking-ready digital
platform that supports all of
our customers in one place.
Business Banking
Offering a full range of business banking
products for small and medium-sized businesses,
through our unique sector-focused relationship
management proposition.
Personal Banking
Brilliantly meeting everyday banking needs
for current accounts, linked savings and other
deposit accounts such as ISAs, along with
credit cards and personal loans.
Mortgages
Providing mortgages that meet customers’
individual needs, from first-time buyers to landlords,
both direct and through intermediaries.
Supporting society
Through our sustainability agenda and our
Virgin Money Giving platform that helps
charities raise money, we make a positive
impact on society.
Managing risk
This is a core capability for us as a bank.
We manage our business within our prudent
risk appetite through our experienced teams.
Delivering great customer service
We support customers through our comprehensive
physical and digital channels, and seek to offer
a great customer experience in every interaction.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 011
Through clear
strategic priorities
To deliver value for
all of our stakeholders
Pioneering
growth
Delighted
customers and
colleagues
Discipline and
sustainability
Super
straightforward
efficiency
Customers
Investors
Our customers are at the
heart of our business and
we aspire to delight them.
To achieve that, we listen
closely to what they tell us.
We aim to create long-term
shareholder value for our
investors through the delivery
of sustainable returns.
Colleagues
Partners and suppliers
Our colleagues are our
biggest asset – well engaged
and supported colleagues
help us deliver our Purpose.
We rely on our partners
and suppliers to help our
business run smoothly,
from day-to-day operations
to digital transformation.
Society
We have a responsibility and
desire to make a positive
contribution to civic society.
Government
and regulators
Successful relationships
with Government and
regulators are vital to
our long-term success.
PLEASE SEE PAGES 30 TO 31 FOR MORE ON EACH OF OUR STAKEHOLDERS.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 012
BRIGHTER
STORES
In 2019 we opened
B Works in Manchester
– a revolutionary
space that has turned
the traditional banking
branch on its head
Spread over three floors, B Works was designed to give the people
and businesses of Manchester a space to learn, work and bank.
With space to co-work, an exciting events programme, free media
production facilities and other innovative services, B Works offered
a unique experience for customers delivered by expert B Hosts.
B Works has disrupted the status quo of high street banking
and resulted in an increase in brand awareness, a +88 NPS score
and encouraged hundreds of new customers to join the bank.
Our events programme was curated to benefit the many start-ups
and SMEs in Manchester. It has seen over 3,500 guests attend,
and nearly 300 businesses starting a banking relationship as a
result, in addition to the hundreds of entrepreneurs that have
utilised the co-working space or media facilities to kickstart or
grow their business.
Platinum
Customer Experience
award by Manchester
Business Improvement
District
1,000+
accounts opened
(Business and Personal
Current Accounts
combined)
NPS +88
for B Works
£50m+
deposits in year 1
New Virgin Money Stores
The design of the new Virgin Money stores draws heavily
on the aesthetic and experience of B Works, coupled with
the energy, service and hospitality that the Virgin brand
is famous for.
This is reflected not only in the physical design of the stores,
but also in the clothes the staff wear and the service they
provide. The first stores will open in December 2019 in
Birmingham, London and Manchester, with a wider
refurbishment programme planned for 2020.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 013
OVERVIEW OF
OUR STRATEGY
“We have a clear ambition to disrupt
the status quo with the new Virgin
Money. The new Group combines
the ethos of Virgin, with its distinctive
and brilliant customer experience,
with CYBG’s technology, product
expertise and know-how. We believe
we have the winning formula that will
create a new force in personal and
business banking.”
David Duffy, Chief Executive Officer
Our refreshed strategy
We launched a refreshed strategy at our Capital Markets Day
in June 2019 that builds on our core capabilities and those added
by the acquisition of Virgin Money. Our strategic and financial plan
will see us deliver the full integration of Virgin Money while building
a simple, highly efficient, digitally-enabled business, with a
significantly improved customer experience. In a challenging
operating environment, our strategy is to deliver on the cost
efficiency actions within our control and optimise our balance
sheet mix to mitigate the industry pressures. This strategy is built
around four strategic pillars that provide focus and consistency to
our execution as we strive to create value for all our stakeholders.
Pages 14 and 15 set out the Key Performance Indicators that we
will use to measure our progress against our strategic priorities in
the years ahead. On the pages after that, we discuss what each
strategic priority means in more detail, how we have started to
deliver against it, and what more we will do on each priority in 2020.
Our Purpose and ambition drive
our strategic priorities
O u r s t r ategic ambition:
g
Pione e rin
gro w th
D
i
s
s
c
u
i
p
s
t
a
i
n
a
lin
e and
bility
Delig
and c
hte
d
c
u
o
ll
e
a
o
g
m
u
e
e
s
r
s
Our Purpose:
Making you
happier about
money
d
r
a
w
r s tr aightfor
e fficiency
S u p e
To disrupt the s t a t u s q u
o
Our strategic priorities:
Pioneering growth
Reshape balance sheet mix:
— grow margin accretive assets
— grow low-cost relationship deposits
s
t
(SEE PAGE 16)
Delighted customers and colleagues
— Enhance the customer experience
— Encourage digital adoption
— Colleagues delivering our Purpose
(SEE PAGE 17)
Super straightforward efficiency
— Realise integration synergies
— Digitise and simplify the business
— Streamline our operating model
(SEE PAGE 18)
Discipline and sustainability
— Maintain a disciplined risk
approach
— Optimise the Group’s RWAs
— Deliver sustainable returns
(SEE PAGE 19)
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT
014
KEY PERFORMANCE
INDICATORS
Pioneering growth
Delighted customers and colleagues
Asset mix: 75% mortgages, 15% business, 10% personal
Top 3 position in CMA service quality rankings by FY2022
2019 status
82%
Mortgages
11%
Business
7%
Personal
Definition: Divisional mix of our loans and advances to customers,
with the target to be achieved in the medium term.
Why it matters: Improving the mix will return balance to our portfolio as
well as enhance and diversify our earnings. Currently we are weighted
towards mortgages and underweight in business and personal.
2019 status
9th
Yorkshire
personal
5th
Yorkshire
business
12th
Clydesdale
personal
9th
Clydesdale
business
Definition: The CMA compiles bi‑annual service quality rankings
of current account customer satisfaction across all major UK banks.
Why it matters: A top 3 position will demonstrate a strong customer
experience and proposition, with deeper advocacy and relationships.
Over time, we will take part under the Virgin Money brand.
Above system asset growth
Increase digital adoption to >60% by FY2022
2019 status
2.9% vs. 3.0%
Growth in 2019
Market growth in 2019
2019 status
51%
Digital adoption
Definition: Annual growth in aggregate net customer lending
at a rate above the UK market across mortgages, business and
personal lending.
Why it matters: Growing our customer lending in a safe,
margin‑enhancing way supports our income and risk profile.
Definition: The proportion of active personal current account
customers who have used a digital channel in the last three months.
Why it matters: Customer behaviour has moved towards a preference
for digital banking; this will meet a key customer need and improve
our cost efficiency.
High single-digit CAGR in relationship deposits
Maintain and improve colleague engagement
2019 status
7.1%
Growth in relationship deposits
2019 status
76%
Colleague engagement
Definition: Relationship deposits are primary customer balances
held in personal or business current accounts plus balances held
in linked savings accounts.
Why it matters: Achieving a high single‑digit CAGR in relationship
deposits will accelerate loyal customer growth, and these low‑cost
deposits will reduce our cost of funds and enhance our NIM.
Definition: A measure indicating colleague engagement and job
satisfaction, drawn from our annual independent colleague survey.
Why it matters: Strong colleague engagement has been shown
to be positively correlated with improved company outcomes and
will demonstrate that our colleagues are motivated to deliver for
our customers.
Loan to deposit ratio <115% by FY2022
Senior gender diversity of c.40-45% by FY2022
2019 status
114%
Loan to deposit ratio
2019 status
36%
Senior gender diversity
Definition: The ratio of total customer lending to total customer
deposits.
Definition: The proportion of female colleagues in senior management
positions in the top two layers of the Company.
Why it matters: This indicates we have an appropriate balance
between stable customer deposits and diversification into
wholesale funding.
Why it matters: Companies with greater management gender diversity
have proven to be more successful and resilient; this metric also
supports our Women in Finance charter commitments.
Executing against our
strategic priorities and KPIs
will support shareholder value
creation through the delivery
of our sustainable returns
targets by FY2022.
>12% Statutory RoTE
by FY2022
2019 status
10.8%
Underlying RoTE
(6.8)%
Statutory RoTE
Definition: The return on tangible equity (RoTE) metric demonstrates
the return the bank is making on its tangible equity (defined as equity
less intangibles).
Why it matters: A >12% RoTE indicates we are making statutory returns
above our cost of capital at a level that is likely to compare well to our
sector, thus making us an attractive investment.
>100bps CET1 generation
Progressive and sustainable
Ordinary dividend with c.50% payout ratio over time
p.a. by FY2022
2019 status
77bps
of underlying CET1 generation
2019 status
No dividend in 2019
Definition: Common Equity Tier 1 (CET1) generation is CET1 capital
Definition: Our progressive and sustainable dividend ambition
that has been generated during the year after growth, investment
will see us grow our ordinary dividend distributions sustainably,
and AT1 coupons, but prior to any shareholder distributions.
with an ambition for a c.50% payout ratio over time.
Why it matters: >100bps of CET1 capital generation is a level that
Why it matters: The Board believes this level of dividend payout
will provide capacity for distributions to shareholders and investment
over time would provide shareholders with an attractive return
capacity for the sustainable growth of the Group.
on investment and underpin our investment case.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT
015
Metrics key
Remuneration driver (2019 LTIP)
Financial target
Non-financial target
Super straightforward efficiency
Discipline and sustainability
Deliver c.£200m of net cost savings by FY2022
<30bps cost of risk to FY2022
2019 status
£53m
Run‑rate net cost savings
2019 status
21bps
Cost of risk
Definition: Net cost savings are absolute cost reductions by FY2022
net of inflation and re‑investment, and relative to our FY2018 costs.
Definition: This measures the value of impairments relative to our
average gross customer loans.
Why it matters: This will help us to achieve greater cost efficiency,
provide capacity for re‑investment into the customer experience and
support our sustainable returns targets.
Why it matters: This is a key indicator of asset quality that helps
demonstrate the effectiveness of the Group’s underwriting capabilities
and is a standard metric that can be compared across the sector.
Operating costs of <£780m by FY2022
2019 status
£942m
Underlying operating costs
Risk scorecard
2019 status
On track
Risk scorecard status
Definition: Total operating and administrative expenses for the Group.
Why it matters: Our significantly reduced cost base will support a cost
efficient bank of sufficient scale to achieve our ambitions and support
the delivery of sustainable returns.
Definition: As a bank we monitor against a wide range of risks and
our risk scorecard captures some of the most critical of these including
bad debts, complaints and operational losses.
Why it matters: The scorecard acts as an early warning measure for
management to enable appropriate action to address emerging risks.
Cost:income ratio in mid-40s% by FY2022
c.13% CET1 ratio
2019 status
57%
Underlying cost:income ratio
Definition: The cost:income ratio is the ratio of operating
income to operating and administrative expenses.
Why it matters: The general trend of pressure on income
in banking means improving cost efficiency is a key source
of competitive advantage and supports sustainable returns.
2019 status
13.3%
CET1 ratio
Definition: The Common Equity Tier 1 (CET1) ratio is a key regulatory
indicator of the level of capital the Group holds relative to the amount
and risk characteristics of our lending as defined by RWAs.
Why it matters: The Board seeks to maintain a CET1 ratio that provides
a sufficient buffer above our minimum regulatory capital requirements,
and allows us to prudently achieve our strategic objectives.
Restructuring costs of c.£360m
Sustainable returns
2019 status
£156m
Restructuring costs
Definition: Our estimate of the total amount of restructuring
costs required to deliver the Group’s transformation programme.
Why it matters: Delivery of the integration and transformation
programmes within budget is key to supporting the delivery of
sustainable returns.
Definition: As our measure of shareholder value creation we have
identified three KPIs: statutory return on tangible equity, CET1 capital
generation and ordinary dividend distributions.
Why it matters: Delivering these three KPIs will ensure the Group
is an attractive investment proposition for shareholders into which
they can deploy their capital in exchange for competitive and
sustainable returns.
by FY2022
2019 status
10.8%
Underlying RoTE
less intangibles).
(6.8)%
Statutory RoTE
>12% Statutory RoTE
>100bps CET1 generation
p.a. by FY2022
2019 status
77bps
of underlying CET1 generation
Progressive and sustainable
Ordinary dividend with c.50% payout ratio over time
2019 status
No dividend in 2019
Definition: The return on tangible equity (RoTE) metric demonstrates
the return the bank is making on its tangible equity (defined as equity
Definition: Common Equity Tier 1 (CET1) generation is CET1 capital
that has been generated during the year after growth, investment
and AT1 coupons, but prior to any shareholder distributions.
Definition: Our progressive and sustainable dividend ambition
will see us grow our ordinary dividend distributions sustainably,
with an ambition for a c.50% payout ratio over time.
Why it matters: A >12% RoTE indicates we are making statutory returns
above our cost of capital at a level that is likely to compare well to our
sector, thus making us an attractive investment.
Why it matters: >100bps of CET1 capital generation is a level that
will provide capacity for distributions to shareholders and investment
capacity for the sustainable growth of the Group.
Why it matters: The Board believes this level of dividend payout
over time would provide shareholders with an attractive return
on investment and underpin our investment case.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT
016
PIONEERING
GROWTH
Reshape balance sheet mix:
— grow margin accretive assets
— grow low-cost
relationship deposits
What do we mean by Pioneering Growth?
At the heart of this strategic priority is the ambition to offer
outstanding propositions to our customers, new and existing,
to enable us to grow in a profitable and sustainable way.
The external macro-environment, competition and changing
customer behaviour (see pages 8 and 9) offer a challenging
landscape for UK banks. However, our existing position and
refreshed strategy offer us unique growth opportunities.
Our customer lending portfolio is currently weighted towards
mortgages, where competition and pressure on margins are most
pronounced, and we are underweight in lending segments with
better margin dynamics, such as business and unsecured lending.
We have a great opportunity to deliver above market growth
in these segments using the combined Group’s full-service
capabilities, innovative digital platform and the national recognition
of the Virgin Money brand.
Similarly, our customer deposits are weighted towards more
expensive term deposits and secondary, rate-driven savings
balances. Our strategy is therefore to drive growth in lower-cost
primary current accounts and linked savings relationship deposits
to help reduce our funding costs. We will do this by offering
a differentiated customer proposition that leverages the
Virgin Money brand, our innovative digital current account platform,
a Virgin Group loyalty programme, and by offering a fairer deal
to customers.
Our KPIs
Our 2019 performance
Asset mix in medium term:
75%
mortgages
15%
business
10%
personal
Above system
asset growth
High single-digit CAGR
in relationship deposits
<115%
Loan to deposit ratio
82%
mortgages
11%
business
7%
personal
2.9%
growth
7.1%
growth
114%
How have we delivered Pioneering Growth in 2019?
In 2019, we made good progress on our strategy, despite the
restriction of operating as two separate banks ahead of FSMA
Part VII approval.
In our lending businesses, we delivered strong initial progress
against our strategy, with loan growth of 2.9%, in line with market
growth of c.3.0%. The mix of lending in 2019 also saw progress
towards our medium-term ambition for our target mix, with
mortgages moving from 83% to 82% over the year, and personal
lending moving from 6% to 7%, with business lending of 11%.
In mortgages, disciplined balance growth of 1.7% across 2019
enabled us to improve margins, particularly in the second half.
In business lending, growth of 4.5% was above market growth
of 2.9% as our relationship proposition continues to resonate.
This was supported by initial volumes from the RBS Incentivised
Switching Scheme. Personal lending growth of 16.1% was
particularly strong, albeit from a low base, while all new lending
remained within our disciplined risk parameters. Personal loan
growth has been supported by digitisation of the customer
application process and our new partnership with Salary Finance,
while credit card growth has been supported by the Virgin Atlantic
partnership and its Flying Club rewards offering.
In deposits, we are building good momentum with our relationship
deposit growth, with balances increasing by 7.1% during the year.
We achieved strong growth in business current account and linked
savings balances, and growth in personal linked savings. Personal
current account balances did reduce slightly year on year due to
our decision not to participate in the cash incentive promotion
market, but the launch of the new Virgin Money current account in
late 2019 is an opportunity to start driving growth in these
balances. We continued to optimise our ‘non-relationship’ deposit
balances, including a reduction of 6.7% in term deposits, with
growth of 17.6% in non-linked savings such as ISAs.
Strong overall deposit growth during 2019 enabled us to reduce our
loan to deposit ratio to 114%, in line with our medium-term target
of <115%.
Our divisional reviews (pages 20 to 25) provide more detail about
movements in customer balances during 2019.
How will we achieve Pioneering Growth in 2020?
The completion of the FSMA Part VII banking business transfer
process in October 2019 was an important step that enables us
to deliver the core activities of our Pioneering Growth initiatives.
We will begin with rebranding the B digital banking service to
Virgin Money by the end of 2019, enabling us to offer customers
a digitally-enabled, Virgin Money branded current account and
linked savings product for the first time. In 2020, an enhanced
personal current account relationship proposition will be
introduced, we will launch Virgin Money for business customers
with an improved customer proposition, and the rebranding of
Yorkshire Bank and Clydesdale Bank to Virgin Money will also
commence. These initiatives will allow us to continue to reshape
our balance sheet mix.
More details can be found in the divisional reviews on pages 20
to 25.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT
017
DELIGHTED CUSTOMERS
AND COLLEAGUES
— Enhance the customer
experience
— Encourage digital adoption
— Colleagues delivering
our Purpose
What do we mean by Delighted Customers and Colleagues?
Simply what it says – we want to delight both our customers and
our colleagues. This means enhancing our customer experience
to attract and retain loyal customers, while leveraging our
innovative digital platform to deliver a seamless proposition that
encourages customers to use digital as their primary channel. We
believe that a superior customer experience will only be delivered
by colleagues who are motivated by a clear unifying Purpose, who
enjoy their working environment and where all colleagues feel they
have a supportive environment in which to progress.
How have we Delighted Customers and Colleagues in 2019?
We are in no doubt that we are on a journey towards creating
an outstanding customer experience and we have made initial
progress towards that aim in 2019 for our growing 6.6m
customer base.
Our NPS scores have continued to improve this year, across each
of our existing brands. As a combined Group, our NPS score
increased from a pro forma +34 in 2018 to +37 in 2019. Key drivers
have included improved service experiences across the Group and
continuing improvement in our digital propositions. Of note is the
NPS score for B which reached a record +52 thanks to improved
customer satisfaction with our leading mobile app. This is a strong
baseline from which to commence the rebrand to Virgin Money.
Our focus on customer experience was recognised through being
awarded the ‘Customers at the Heart of Everything – Initiative’
Silver Award for our internal customer experience programme
at the 2019 UK Customer Experience Awards.
Our KPIs
Top 3
In CMA business and personal
banking service quality rankings
by FY2022
Our 2019 performance
Yorkshire Bank:
5th position – Business
9th position – Personal
Clydesdale Bank:
9th position – Business
12th position – Personal
>60%
Increase digital adoption by FY2022
Maintain and improve
colleague engagement
c.40-45%
Senior gender diversity by FY2022
51%
76%
36%
A key target is to achieve a top three ranking in the CMA’s business
and personal banking service rankings by the end of FY2022.
In the latest survey results released in August, Yorkshire Bank
performed well at fifth place in the Business survey, with Personal
in ninth position, while our Clydesdale brand did not perform as
well as we would have liked. Over time we will participate in these
rankings under the Virgin Money brand. Key to improving our
position will be the launch of enhanced digital current accounts
for customers, alongside new propositions and the efforts of
colleagues to deliver an outstanding customer experience.
A further key indicator of customer satisfaction is our rate of digital
adoption, which we are looking to improve to over 60% by FY2022.
During FY2019, our rate of digital adoption improved to 51% from
47% at FY2018 as colleagues have encouraged customers to
migrate to our enhanced online facilities and as our self-service
capability has been rolled out.
For colleagues, this has clearly been a year of significant change
as we have embarked on bringing the combined Group together.
Over 2,000 colleagues engaged in developing our new Purpose,
while we have adopted the Virgin values as our own and rolled
out our leading online performance management process across
the Group.
There has been some impact on colleagues due to the scale
of integration activity which has led to uncertainty for many
colleagues but we have offered support throughout. We have
been delighted with the resilience, teamwork and commitment
shown by colleagues as demonstrated in our strong engagement
score of 76% for 2019. This compares well to the benchmark
of engagement scores for companies going through significant
change programmes, and we will focus on maintaining and
improving this as our significant organisational change continues.
We aim to create an inclusive culture for colleagues, driven
through meaningful actions across the business. We have five
colleague inclusion networks, each sponsored by a Leadership
Team member. It was positive to note that the recent survey told
us that 82% of colleagues believe their people leader creates an
inclusive and positive team atmosphere.
Another key indicator of our progress towards creating our
combined, inclusive culture for colleagues is management diversity,
which has been proven to correlate with beneficial outcomes for
stakeholders. 36% of our senior leaders are female, and we are
committed to improving this to c.40-45% by FY2022. Further
details on our colleague activities are provided on page 32.
How will we Delight our Customers and Colleagues in 2020?
The completion of FSMA Part VII in October was a key enabler
for us to deliver changes for customers in 2020. Coming together
as one entity means we can now truly leverage the Virgin brand,
rebrand the business and talk to customers with one unified
voice. We have a significant programme of customer experience
enhancements in 2020 across all three of our divisions and these
are outlined in more detail on pages 20 to 25.
For our colleagues, we will continue to embed our Purpose, values
and behaviours in 2020 and beyond, creating a culture that values
trust, individual growth, work-life balance, diversity and the free
exchange of ideas. We will continue to harmonise our reward
framework, terms and conditions and employment policies
across the Group and enable an enhanced working environment
for colleagues through the deployment of new digital capabilities.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 018
SUPER STRAIGHTFORWARD
EFFICIENCY
— Realise integration synergies
— Digitise and simplify the business
— Streamline our operating model
What do we mean by Super Straightforward Efficiency?
Super Straightforward Efficiency means making our business
as simple and as cost efficient as possible for the benefit of our
customers, colleagues and shareholders.
This will be delivered as part of our wider business transformation
programme and includes:
— the integration work to bring the businesses together and
deliver significant deduplication synergies; and
— a multi-year programme to drive digitisation and deliver change
in a more agile way.
The transformation programme will support the delivery of
c.£200m of net cost savings by FY2022.
How have we delivered Super Straightforward
Efficiency in 2019?
We have made strong progress in 2019 on our integration initiatives,
with the critical achievement being the delivery of the FSMA Part
VII banking business transfer process. This became effective on
21 October 2019 and means our customers are now served from
a single authorised and regulated banking entity. While it sounds
simple, this was a significant piece of work, involving over 350
colleagues and 3.1m initial customer notifications. Importantly,
it was also delivered ahead of our initial expectations.
The FSMA Part VII approval is a key enabler for bringing the
two businesses together. It means that we can now begin the
integration of our customer propositions which will enable us
to offer customers the full range of products and services from
across the combined Group. It also enables us to proceed with
the platform integration activities that support the delivery of
our targeted cost savings as well as commencing the full
rebrand of the Group under the relaunched Virgin Money brand.
Our KPIs
Our 2019 performance
c.£200m
£53m
of net cost savings by FY2022
Run-rate net cost savings
<£780m
Operating costs by FY2022
£942m
Underlying operating costs
Mid 40s%
Cost:income ratio by FY2022
57%
Underlying cost:income ratio
c.£360m
of restructuring costs across
FY2019-21
£156m
Restructuring costs
Given the need to complete Part VII before commencing this
work, customer-facing integration has been limited in 2019.
However, the operational integration activity has been significant.
We have launched our new unifying Purpose, values and
behaviours for colleagues. Senior management duplication in
the top layers of management was addressed as quickly as
possible and our new divisional structures were implemented.
Deduplication of other functional roles across the Group has
also commenced and will continue into 2020.
We have also designed and communicated our corporate office
location strategy, with the former Virgin Money London Head
Office already exited and with plans to close the Leeds and
Edinburgh offices, as well as our Norwich office over time. This
will rationalise our office footprint and optimise our property costs.
This programme of work has delivered £53m of annual run-rate net
cost savings in FY2019, with the bulk of these savings achieved
through organisational design changes and the elimination of
duplicated central costs.
This activity has supported a reduction in the Group’s underlying
operating expenses to £942m, in line with our FY2019 target
of <£950m, and has underpinned a reduction in our underlying
cost:income ratio to 57% (2018: 59%).
We have also spent 2019 identifying digitisation and change
transformation opportunities across the Group. A clear strategy
and governance programme to achieve these is now in place.
Cost savings will be delivered from three core areas including
digitisation, strategic sourcing, and agile, effective change delivery.
At our Capital Markets Day we estimated we would incur c.£360m
of restructuring costs over three years to deliver the total cost
savings. In FY2019 we incurred £156m of restructuring costs,
higher than our guidance for c.£120m, primarily due to the
acceleration of a redundancy programme into September 2019.
In 2020 we expect to spend a further c.£140m as we accelerate
initiatives to mitigate the timing of investments and inflation, but
continue to estimate a total spend of £360m over the three-year
period to end of FY2021.
How will we achieve Super Straightforward Efficiency in 2020?
The Group’s transformation activities will support the continued
optimisation of the Group’s cost base and operating model,
and contribute to the delivery of our FY2020 cost guidance of
<£900m. This will underpin our progress towards our FY2022
financial objectives and our strategic aim of creating a bank that
is cost efficient, fully digitised and ready for the next phase of
its strategic development.
FY2020 will be a year of significant integration activity. We will
rebrand our digital B current account to Virgin Money by the end
of 2019, before rebranding all personal loans and credit cards to
Virgin Money next year. We will commence the rebrand of Yorkshire
Bank and Clydesdale Bank to Virgin Money and roll out our new
brand identity across the existing Virgin Money network. We will
also commence the platform integration activities now Part VII
is complete.
The digitisation and change transformation work will also
commence in earnest in 2020, although material cost saving
benefits from these activities are unlikely to be realised until
2022 due to the longer-term nature of the initiatives.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 019
DISCIPLINEAND
SUSTAINABILITY
— Maintain a disciplined
risk approach
— Optimise the Group’s RWAs
— Deliver sustainable returns
What do we mean by Discipline and Sustainability?
To us, Discipline and Sustainability means building and operating
a bank for the long term.
We will achieve this by maintaining a disciplined risk approach
in all that we do. We will operate with a buffer above our minimum
regulatory capital requirements to absorb the peaks and troughs of
economic cycles. Ultimately, through delivering sustainable returns
we will ensure we are an attractive proposition in which to invest.
How have we delivered Discipline and Sustainability in 2019?
In 2019, we have continued to operate within our prudent risk
appetite, attracting high-quality customers as we start to reshape
our balance sheet. Cost of risk is a key indicator of this and
we delivered a good performance in FY2019, with a cost of risk
of 21bps. This was stable across the year, but higher than FY2018
(15bps) due to the implementation of IFRS 9 and normalisation,
but with no significant deterioration in asset quality.
We recognise that the economic environment is currently benign.
While we are not complacent, we believe that achieving the growth
and rebalancing of our balance sheet through attracting high-
quality, loyal customers will ensure our cost of risk remains below
our upper bound target of <30bps by FY2022.
Our risk scorecard is another key indicator, which monitors against
a range of KPIs such as bad debts, complaints and operational
losses. We reported performance in line with expectations in 2019
with an ‘on track’ status. We discuss risk management in more
detail in the Risk overview (page 26) and Risk report (page 93).
Our KPIs
<30bps
Cost of risk to FY2022
Risk scorecard
CET1 ratio
c.13%
Sustainable returns:
>12%
Statutory RoTE by FY2022
Our 2019 performance
21bps
On track
13.3%
10.8% / (6.8)%
underlying RoTE statutory RoTE
>100bps
77bps
CET1 generation p.a. by FY2022
Underlying CET1 generation
Progressive and sustainable
ordinary dividend
No dividend paid for 2019
Our CET1 capital position remains robust at 13.3%. While the
unprecedented surge of PPI information requests and complaints
ahead of the time-bar in August meant additional provisions of
£385m in Q4, we have been able to absorb this charge and remain
above our medium-term operating level due to the significant
capital buffer we were prudently holding. We remain focused on
seeking to ensure that current and future customer products and
services meet conduct standards and regulatory expectations.
With sustainability in mind, we have taken the decision,
incorporating feedback from our major shareholders, to suspend
the dividend for 2019. This is the right short-term decision to
enable us to continue delivering our long-term strategy and to
provide capacity for any shocks given the uncertain economic
outlook. The Board will reconsider dividends in FY2020 in line
with normal practice.
From a funding perspective we have taken the opportunity
to repay £1.3bn of TFS funding to date, prudently ahead of
contractual maturity as we have continued to generate healthy
growth in customer deposits. This has enabled us to move our
loan:deposit ratio below 115%. We have also broadened our access
to wholesale funding markets, including Virgin Money’s inaugural
covered bond issuance during 2019.
We are of course at the very start of our refreshed strategy
which will culminate in the delivery of strong and sustainable
returns for our investors. As expected, the statutory returns metrics
have been impacted by significant integration costs and conduct
charges this year. However, on an underlying basis the business is
demonstrating strong foundations on which we can build, with an
Underlying Return on Tangible Equity of 10.8% and Underlying
Capital Generation of 77bps.
Our focus on sustainability is more than just financial. As part of the
wider Virgin family we want to make sure we are a force for good
to create a better future for society. During 2019, we engaged with
our stakeholders, including the Board, to set our overall strategic
sustainability ambition – we talk more about this in our
sustainability report on pages 34 to 39.
How will we achieve Discipline and Sustainability in 2020?
We will continue to deliver our strategy within our prudent risk
appetite. Our Pioneering Growth ambitions will be delivered by
increasing our addressable market through the roll-out of the
Virgin Money brand, improving our propositions and offering
a broader range of products to our existing customers who we
know well – meaning there is no need to change our risk appetite.
We will continue to closely manage our capital position and improve
our returns profile, while balancing the capital utilisation in 2020
required by the integration, rebranding and growth initiatives that
will support the delivery of our ambitious strategy.
We will also develop our broader Environmental, Social and
Governance (ESG) and sustainability agenda, embedding our
strategy and developing clear roadmaps, milestones and targets to
measure our delivery. As well as ensuring a positive impact on
communities, climate change will be a major focus area as we align
to the United Nations Principles for Responsible Banking and work
towards the Task Force on Climate-related Financial Disclosure
(TCFD) recommendations.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT
020
DIVISIONAL
REVIEW
BUSINESS
Our ambition is to help business
owners realise their potential and
achieve their dreams
Divisional strategy
Our strategy is focused on expanding our business relationship
model nationally, including launching Virgin Money for business
customers with an enhanced customer experience:
Expand our relationship proposition nationally
INITIAL PROGRESS
NEXT STEPS
Expanded our national
deposits team.
Enhanced team structures
to create a national platform
for expanding our business.
Attracted customers outside
our heartlands, with c.40% of our
switching scheme customers
coming from the rest of the UK.
— Continue to expand our
successful proposition into
new addressable markets.
— Hire specialist relationship
managers, to capitalise
on and extend our reach,
further leveraging
our strengths.
Launch Virgin Money for business customers
INITIAL PROGRESS
NEXT STEPS
Preparation for the launch of our
new state-of-the-art Business
Current Account and market-
leading proposition.
— Finalise product and
propositional changes
along with our marketing
and creative campaign.
Progressed migration of our
products and systems while
preparing for our future digital
transformation.
— Deliver Virgin Money
for business customers
in FY2020.
Enhance the customer experience
INITIAL PROGRESS
NEXT STEPS
Launched a new, enhanced
digital platform and migrated
over 8,000 customers to it.
— Migrate our remaining
customers to the platform
during FY2020.
Implemented numerous journey
and digital enhancements.
— Roll out further
digital enhancements
and optimised journeys.
— Make our experience
business-led, not bank-led.
Q&A with
Gavin Opperman
Group Business
Banking Director
Q: What differentiates your division from your competitors?
A: Like our customers, we are ambitious and ideally positioned
to support and understand businesses as they grow. We stand
out through our customer focus, relationship management
proposition and dedicated sector and specialist teams. Being
nimble and niche, allied with our focus and credibility makes
us strongly positioned in the market and we are well-equipped
to proudly provide solutions to our customers’ needs.
Q: What will the Virgin brand bring to the Business division?
A: Launching Virgin Money for business customers will introduce
an exciting and fresh business bank to disrupt the national
market. The Virgin brand, with its entrepreneurial roots and broad
reach, resonates strongly with the aspirations of businesses
and positions us well in our ambition to disrupt. This will be the
first time we’ve had a national identity to appeal to a larger
addressable market. Blending our customer understanding, our
relationship specialists and products with enhanced capabilities
and a fantastic brand will create a compelling proposition.
Q: How will your division bring our Purpose to life for customers?
A: Purpose is in our DNA, we get immense pride from seeing our
customers succeed – from farmers to manufacturers, care home
providers to hotel developers and beyond. We strongly believe
that supporting British businesses helps to create jobs and
prosperity across the communities that Virgin Money serves.
Q: What are your key priorities for 2020?
A: Put simply, launching Virgin Money for business customers.
We will take our new brand and disrupt the market as we extend
our addressable market by taking our proposition nationwide,
expanding it out of our former heartlands in Yorkshire and
Scotland. We’ll support this with new products and digital
enhancements, as we create a leading digital hub backed
by experienced relationship managers, outstanding customer
service and a nationally resonating brand.
Business lending growth
+4.5%
Business lending balances
(£bn)
Relationship deposit balances
(£bn)
2019
2018
7.9
7.5
2019
2018
9.1
8.3
Relationship deposit growth
+9.3%
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 021
Our Business KPIs
GROUP STRATEGIC PRIORITY WHAT IS OUR KPI?
Pioneering
growth
Growth in Business
relationship deposits 9.3%
2019
Business Current
Account (BCA)
market share
3.8%
Business share
of balance sheet
11%
Delighted
customers and
colleagues
CMA business
banking service
quality rankings
Yorkshire Bank ranked
5th
Clydesdale Bank ranked
9th
Super
straightforward
efficiency
Businesses using
digital as primary
channel
Volume of Business
Current Accounts
opened digitally
52%
51%
Discipline and
sustainability
Business
cost of risk
45bps
gross cost of risk
Market context
Uncertainty creates market volatility but the business lending
market remains competitive, with new investment and digital
entrants typically focusing on the micro-end of SMEs.
Our SME Health Check (Q2, published Sept 2019) painted a
complex economic picture, but with positive signs. The labour
market remained resilient, with SMEs continuing to hire and wages
continuing to grow, although business confidence and investment
remain subdued. Brexit readiness is well-established at Virgin
Money, with our consistent commitment to supporting customers
while managing any increased risks.
Business banking continues to operate in an increasingly focused
regulatory environment, including the Business Banking Resolution
Service, LIBOR replacement and reviews of fees and tariffs.
2019 performance
We believe our results represent strong performance against the
current market. We attribute this to understanding the market and
delivering a strong, relevant and differentiated business model
which continues to attract customers.
Despite competitive pressures, front book lending pricing remains
resilient. In addition, business deposit pricing continues to offer
funding at rates that are beneficial to our overall Group funding.
We attracted one in five of all customers switching from RBS as
part of the Incentivised Switching Scheme, with our share of total
TARGET
High single-
digit growth
c.5%
medium term
15%
medium term
Top 3
by FY2022
70%
by FY2022
75%
by FY2022
COMMENTARY
— Business relationship deposits grew to
£9.1bn in FY2019, from £8.3bn, with a total
business deposit book of over £11bn
— BCA balances grew 8% during the year
with 14% growth in linked savings
— We have won over 20% of all customers
who have switched through the RBS
Incentivised Switching Scheme, with an
increasing share of flow in recent months
— 4.5% asset growth in 2019 to £7.9bn,
supported by strong originations of £2.2bn
— Balance sheet share up from 10% at FY2018
— Yorkshire Bank was ranked 5th in both
overall service quality and SME overdraft
and loan services, while Clydesdale Bank
ranked 9th
— Yorkshire Bank was ranked 4th by customers
asked whether they would recommend their
banking provider’s relationship/account
management to other SMEs
— Launched new Business Internet Banking
in FY2019, migrating over 8,000 customers
— BCAs opened digitally increased from 43%
at FY2018 to 51% following customer
journey enhancements
Support Group
net cost of risk
<30bps
— Higher cost of risk (FY2018: 36bps) reflects
a return to more normal impairment levels
— We maintain a diverse portfolio, using our
specialist underwriting and strict client limits
switching customers increasing in recent months. The scheme has
supported c.25% of our business lending growth in 2019.
We have seen continued growth in lending and deposits across the
Business division, supporting the delivery of our £6bn three-year
lending commitment to SMEs. The lending pipeline is 8% higher
than this time last year and we expect further growth in 2020.
The stable credit environment, along with our prudent underwriting
standards and controlled risk appetite all contributed to a portfolio
with strong asset quality and low and stable levels of default.
Business relationship NPS performance improved in Q4. We were
proud to be recognised by numerous awards during 2019, including
Bank or Lender of the Year 2019 at the Health Investor Awards and
Commercial Bank of the Year 2019 at the Yorkshire Financial Awards.
Outlook
We are investing in our business and are well-positioned to
continue our momentum after three years of consecutive growth,
ensuring responsible lending and managing risk through the cycle.
Many of our customers, for example farmers and care home
businesses, operate in needs-based sectors where demand for
products and services is less driven by exposure to the general
business cycle.
Our new brand, customer experience and expanded relationship
model will see us disrupt the traditional banks as we become a true
national competitor and realise our ambitions in the years ahead.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 022
DIVISIONAL
REVIEW
PERSONAL
Our ambition is to help customers live
and bank in a more rewarding way
Q&A with
Fergus Murphy
Group Personal
Banking Director
Divisional strategy
Our strategy is focused on transforming our relationship
proposition, enhancing the customer experience and deepening
our customer relationships:
Transform our relationship proposition
INITIAL PROGRESS
NEXT STEPS
We have been
developing
a compelling,
rewards-led PCA
and linked savings
proposition, that
will equitably share
value with
our customers.
— Launch our new Virgin Money PCA
(with linked savings), offering life-led
experiences and rewards combined
with innovative digital features.
— Full Virgin Money credit card
roll-out to all of our customers,
with enhanced credit card app
functionality and cashback rewards.
— Launch Virgin Money branded
personal loans.
Enhance the customer experience
INITIAL PROGRESS
NEXT STEPS
We continued to invest
in increasing digital
adoption and a leading
self-service capability,
while developing our
colleagues to provide
expert advice.
— Implementing our mobile-first digital
strategy and deliver a best-in-class
app, complementing our Virgin
Money PCA launch.
— Transform and invest in our branch
network and contact centres,
re-branding and re-purposing, and
promoting self-service to improve
digital adoption.
Deepen our customer relationships
INITIAL PROGRESS
NEXT STEPS
Through 2019 we have
enhanced our existing
lending propositions
across credit cards
(new app), personal
loans (new online
application process)
and partnerships
(Salary Finance).
— Target growth in relationship
deposits, deepening relationships
and lowering our cost of funding.
— Offer the full range of products and
services to our new enlarged
customer base.
— Leverage partnerships, to maximise
distribution capabilities and access
a larger market of customers.
Q: What will the Virgin brand bring to the Personal division?
A: The Virgin brand presents us with a unique opportunity
to extend our customer reach. With our digitally-enhanced
and transformed customer propositions we will deepen our
relationships and equitably share value with our customers.
The Virgin brand’s affinity with affluent customers and our scale
and footprint gives us a strong starting position to build from.
Q: How will you attract customers in what is a very
competitive marketplace?
A: We aim to transform the customer relationship by offering
a value-led, rewards-based proposition that will leverage the
unique rewards and benefits offered by the Virgin Group.
We will attract and retain customers through offering an
enhanced customer experience coupled with an equitable
sharing of value. We believe this will enable us to grow our
customers’ product holdings and increase customer advocacy.
Q: How will your division bring our Purpose to life for customers?
A: We will make our customers happier about money by taking
the opportunity to differentiate in a changing market. We will
do this by offering best-in-class propositions to help meet their
money needs and life goals.
We will deliver a richer PCA experience with smart, relevant
features, that will help customers manage their daily life as well
as key life events and reward them for loyalty.
Q: What are your key priorities for 2020?
A: Our focus will be on three key areas as we look to help
customers live and bank in a more rewarding way. We will create
a disruptive proposition that is scalable, optimises funding and
builds long-term customer relationships and value. We will do
this by constantly improving our app, transactional and servicing
capability. We will also reduce costs and transform our service
proposition to gain a competitive advantage by delivering an
operating model that amplifies our digital capabilities.
Personal lending growth
+16.1%
Personal lending balances
(£bn)
Relationship deposit balances
(£bn)
2019
2018
5.0
4.3
2019
2018
12.3
11.6
Relationship deposit growth
+5.5%
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 023
Our Personal KPIs
GROUP STRATEGIC PRIORITY WHAT IS OUR KPI?
Pioneering
growth
Growth in Personal
relationship deposits 5.5%
2019
Personal Current
Account (PCA)
market share
Personal share
of balance sheet
2.4%
7%
Delighted
customers and
colleagues
CMA personal
service quality
rankings
Super
straightforward
efficiency
Increase in
digital adoption
Yorkshire Bank –
9th
Clydesdale Bank –
12th
51%
Mobile app
transactional NPS
+52
Discipline and
sustainability
Personal
cost of risk
333bps
gross cost of risk
Market context
The personal deposits market remains competitive, including
targeted activity by new entrants and continuing cash incentive
offers to attract current account customers. Market growth of 4.3%
during the year was higher than 3.8% during the prior year, and we
believe that we will continue to be able to attract personal deposits
in line with our strategy.
Within the credit card market there was a reduction in competitive
intensity, with zero balance transfer incentive periods shortening
during 2019. We anticipate these conditions will continue in the
short term with fewer price movements and available products
in the market. Overall, the credit card market has remained broadly
flat compared to last year. The personal loan market remains
strong, with the market seeing competitive pricing, rapid
digitisation and the increasing influence of aggregators.
The high cost of credit review will have a marked impact on the
overdraft market as it repositions following the ban on fixed fee
charging, and the move to interest rate charging from April 2020.
Our performance
The Personal division has reported a positive operating
performance and initial momentum against our strategic priorities.
The execution of our deposits strategy delivered growth in lower
cost relationship deposits. We have also proactively managed
pricing to optimise our term deposit funding mix. Retention has
been strong with 84% of maturing savings balances retained.
TARGET
High single-
digit CAGR
c.3.5%
medium term
10%
medium term
Top 3
by FY2022
>60%
by FY2022
Improve from
+49
Support Group
net cost of risk
<30bps
COMMENTARY
— PCA and linked savings grew by 5.5%.
— Total personal deposit balance growth
of 3.5% during FY2019
— Stable market share from 2.4% at H1 2019
— Growth is expected to accelerate with the
Virgin Money PCA launch in late 2019
— Personal lending up from a 6% share a year
ago, driven by balance growth of 16.1% in
FY2019, in line with our strategy
— Latest August 2019 survey results set
a benchmark for future improvement and
our strategy is designed to help us achieve
a Top 3 customer experience
— Over time, we will participate under the
Virgin Money brand
— Increase in digital adoption from 47%
at FY2018, through our improved digital
proposition
— Improvement reflects improved user
experience, and positive customer reaction
to live chat and secure messaging facilities
— 30-day cards arrears of 1.1% are well below
industry average of 2.3%. 30-day arrears
for balances on book >18 months are 1.3%
— Enhanced scorecards and improved online
application supported Personal Loan growth
In personal lending we have delivered strong growth within risk
appetite. Our personal loan proposition has been significantly
enhanced with a >50% reduction in cost per sale. Our growth in
balances of c.£200m to c.£1bn was supported by c.£50m of new
balances from our joint venture with Salary Finance. Overall growth
has been focused on high credit quality customers in a sector in
which we remain underweight.
On credit cards, balances have grown by c.£500m to c.£4bn, as we
have attracted affluent customers with strong affordability. Our
digital customer engagement has been supported by the launch of
the Virgin Money credit card app and Apple Pay functionality. We
have also extended credit card pricing for risk capability to all of
our sales channels, further enhancing the resilience of our returns.
This year’s strong growth has been achieved without any
expansion of risk appetite. Portfolio credit performance remains
strong with no signs of deterioration or early warning signs.
Outlook
We look forward to embracing the opportunities that the Virgin Money
brand provides and using it to build on our strong existing platform.
The launch of our new Virgin Money branded PCA aspires to
provide a ‘best-in-class’ experience for customers and will support
our high single-digit relationship deposit growth target. We are also
aiming to improve our standing in future CMA surveys with further
customer journey and experience improvements in 2020.
We will continue our digital transformation and expect growth in
personal lending to be supported by offering Virgin Money credit
cards and personal loans to our enlarged customer base.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 024
DIVISIONAL
REVIEW
MORTGAGES
Our ambition is to simplify
mortgages to make consumers’
lives better
Divisional strategy
Our strategy is focused on digitising the customer experience,
maximising relationships and optimising the division:
Digitise the customer experience
INITIAL PROGRESS
NEXT STEPS
Throughout 2019 we have
laid the foundations to
transform the Mortgages
division. We have also
developed our new direct
to consumer online
remortgage proposition.
— In 2020 we will start to roll out
our digital API connectivity
to sourcing systems. This will
transform originations for
our intermediary partners,
who remain at the forefront
of our strategy.
Maximise relationships to create brand advocates
INITIAL PROGRESS
NEXT STEPS
— We will focus on maximising
consumer relationships in 2020
and deliver the initial version
of our new and innovative
mortgage coach.
Good progress is being
made on our transformation
programme. Underwriter
access and enhanced
fulfilment processes were
implemented, improving
application processing
speed. Our compelling
‘receive your offer in 10 days
or get £100’ service promise
was also rolled out across
the broker network.
Optimise the division for value
INITIAL PROGRESS
NEXT STEPS
We implemented over 20
proposition enhancements
during the year. This
included launching 15-year
fixed rate products to assist
new and existing customers,
further enhancing our
Shared Ownership and
Help to Buy offering, as well
as enhancing our policy for
self-employed contractors.
For landlords, we launched
10-year fixed rate products,
a first for the market.
— Optimisation of the operating
model and underlying cost
base is well underway with
consolidation of mortgage
advisors from branches into
three centres of excellence
to deliver significant
operational efficiencies.
— In 2020 we will refine our
service delivery for our two
distinct and differentiated
service propositions, Expert
and Everyday, ready for
launch in 2021.
Q&A with
Hugh Chater
Group Mortgages
Director
Q: How will you develop the Virgin Money mortgage brand?
A: Guided by our Purpose to make people happier about money,
we will transform the mortgage business so that it remains
relevant for customers and our broker partners. This is something
everyone expects from the Virgin brand.
The digital transformation of the division will be an integral part
of our journey. Parallel to this we will also reward customers
for their loyalty, and through our two distinct and differentiated
service propositions, Expert and Everyday, offer a pioneering
broker proposition that combines and enhances the core
competencies of our heritages.
Q: What differentiates your division from your competitors?
A: In short, expertise and efficiency. Virgin Money Expert will
enable us to extend our reach to intermediaries who historically
haven’t accessed our complex case expertise. Everyday will
reiterate our commitment to mainstream straight-through fast
processing capability. We will deliver the best of both. I see it as
combining our existing core competencies and extending that
reputation across new brokers under our new brand.
The synergies that result from operational integration mean
we have identified specific actions to optimise the financial
contribution from the Mortgages division.
Q: How will your division bring our Purpose to life for customers?
A: Our transformation strategy is underpinned by our ambition
to simplify mortgages to make consumers’ lives better. We want
to deliver a personal service experience that puts the customer
in the driving seat, so that they feel confident and empowered
to manage their finances.
Q: What are your key priorities for 2020?
A: Firstly, to transform originations by rolling out our API
connectivity to broker partners, who will remain at the forefront
of our strategy. For customers who choose to come to us directly
we will deliver the initial phases of our new and innovative
customer mortgage coach.
We will also continue our programme of ongoing improvements
to drive further efficiencies and service enhancements for
customers and broker partners.
Mortgage lending growth
+1.7%
Mortgage lending balances
(£bn)
2019
2018
60.1
59.1
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT
025
Our Mortgages KPIs
GROUP STRATEGIC PRIORITY WHAT IS OUR KPI?
Pioneering
growth
Mortgage stock
market share
2019
4.2%
TARGET
c.4%
Delighted
customers and
colleagues
Customer
transactional
NPS
+68
Direct lending
+75
Over time
COMMENTARY
— 2019 new lending of £10.5bn
— 74% retention of balances maturing
from a fixed or tracker rate product
— 1.7% growth in mortgage balances to
£60.1bn
— Direct lending NPS increased across
all of our existing mortgage brands
— The roll-out of the new ‘Expert’ proposition
to c.4,000 new intermediaries by FY2022
will be underpinned by integration activity
Super
straightforward
efficiency
Reduction in cost
of processing a
mortgage application
N/a
Direct applications
Discipline and
sustainability
Mortgage
cost of risk
16%
of total
1bp
gross cost of risk
Market context
The mortgage market remains resilient despite Brexit
uncertainty, underpinned by low unemployment and rising wages.
Modest growth in UK house prices continues, although there
are notable regional variations, with London and the South-East
experiencing reductions.
Market gross lending for the 12 months to September 2019 was
£266bn. The market continues to be supported by growth in the
remortgage and first-time buyer segments. Gross buy-to-let
lending remains stable.
The shift from two to five-year fixed rate products continues
as price differentials narrow and consumers look to lock into
historically low interest rates.
Product transfers (where customers take a new product with the
same lender) remain key with the product transfer market growing
by 12% on the previous year, and now at a run-rate of over £160bn
p.a., more than double the levels seen four years ago.
Large incumbents are still aiming to grow market share, putting
pressure on margins, particularly in the remortgage segment.
This is partially contributing to a small number of providers pulling
out of the market. In time, this is likely to benefit institutions with
a core mortgage business, who are willing to invest in efficiency
and customer experience.
Our performance
In line with our plan to optimise for value, we ended 2019 with
completions of £10.5bn. Mortgage balances grew by £1.0bn to
£60.1bn giving Virgin Money a stock market share of 4.2%. A key
part of our performance has been the successful retention of
£10.6bn of balances on to a new product with 74% of balances
maturing from a fixed or tracker rate product being retained.
20%
reduction by FY2022
— Work has commenced to restructure the
mortgage division. We are on course to
deliver benefits from 2020 onwards
25%
of total
Support Group
net cost of risk
<30bps
— Direct share of applications is unchanged
from 2018; the new online consumer
remortgage proposition will support growth
— High-quality book, reflecting our prudent
risk appetite and balanced portfolio
— Average LTV for new lending of 70% and
57% for stock
The intermediary channel remains central to our strategy,
representing 84% of applications. We have also grown the volume
of retention through our broker partners to 35% of all product
transfers by number, up from 28% in FY2018.
By optimising the volume and mix of business this allowed us to
protect the Group from the scale of compression seen in the wider
market. The Group is well placed to withstand further margin
compression with a substantial segment of the portfolio on product
pricing that is comparable to current front book pricing.
The book remains high quality; our percentage number of loans in
3 month plus arrears is 0.4%, against the industry average of 0.7%.
Outlook
We expect a slightly lower new lending market in 2020 as
remortgage activity falls due to lower product maturity volumes.
This reflects the increased popularity of longer-term fixed rates.
While the market has remained competitive in 2019, there has
been a slight reduction in competition of late. However, if gross
lending falls then competition could intensify.
We will look to maintain, rather than grow, our market share of c.4%
and this should help limit further reductions to our weighted
average mortgage rates. The expected gap between front and
back book pricing during 2020 is expected to be significantly lower
than the c.30bps experienced during FY2019.
We also recognise the imperative of providing an exceptional digital
experience that satisfies the expectations of consumers and
our broker partners. Our digital transformation will enable us to
achieve this objective and facilitate growth in our direct business,
so increasing its overall importance within our portfolio.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 026
RISK
OVERVIEW
Q&A with
Mark Thundercliffe
Group Chief Risk Officer
What does effective risk management mean to you?
As part of the journey to becoming one entity, we revised our
Three Lines of Defence model, our risk policies, risk appetite,
risk frameworks and structures to deliver a consistent approach
to risk across the Group. Risk’s focus, capabilities and skills will
continue to transform as fast as, if not faster than, the Group’s
evolution. We expect to continually refresh and enhance our
approaches, orientating our mandate to ensure delivery of the
best customer outcomes, quality control standards, and effective
and efficient risk oversight.
How will you maintain a Purpose-led Risk function?
We will continue to maintain a disciplined risk approach to
enable the bank’s strategy of disrupting the status quo. Our role
means we ensure regulatory obligations are met, we keep our
customers and the Group safe and we make processes better
able to support simple and effective customer interactions,
all the while challenging our approach and considering new
ways of doing things.
What were your key achievements in 2019?
We successfully guided and oversaw the FSMA Part VII transfer
process which concluded in October 2019. We also supported
significant areas of integration, transformation planning and
execution. Early in FY2019, we received accreditation to move
onto the IRB methodology for calculating credit risk weighted
assets (RWAs) on mortgages and business exposures, and
we have used this capability to better support prudent and
sustainable growth. We also supported the Group’s assessment
and onboarding of customers transferring via the RBS
Incentivised Switching Scheme.
What are your top priorities for 2020?
We will continue to oversee and support preparation for
the Group’s inaugural participation in the Bank of England’s
concurrent stress testing (ACS) exercise in 2020, alongside
initiatives to optimise our capital and risk weights. Following
the successful completion of the FSMA Part VII transfer, we will
intensify our focus on the oversight and support of integration
activity as we continue to grow as a combined Virgin Money.
The UK’s transition to a lower carbon economy presents
challenges and opportunities which we will tackle from a
customer and Group perspective, embedding sustainability
into our activities. Finally, the ongoing digital revolution brings
changing customer expectations and creates new risks which
we will help address in a safe, sustainable way.
Emerging risks
The Group’s risks are continually reassessed and reviewed
through a horizon scanning process, with escalation and reporting
to the Board. The horizon scanning process fully considers all
relevant internal and external factors, and is designed to consider
and capture those risks which are current but have not yet fully
crystallised, as well as those which are expected to crystallise
in future periods. These risks are allocated a status based on
their expected impact and time to fully crystallise, in line with
the definitions outlined in Risk Management Framework (RMF).
F I NANCIAL
>3 years
2-3 years
1-2 years
2
1
>12 months
GIC
E
T
A
R
T
S
4
3
C
O
M
P
LIA
N
CE
C
R
E
D
I
T
N A L
T I O
A
R
E
O P
REF EMERGING RISK
1
Geo-political and
Macroeconomic environment
DESCRIPTION
As a UK-focused bank, the Group is exposed to a variety of
risks resulting from a downturn in the UK’s economic environment,
namely macro-economic growth outlook, credit performance
and margin pressure.
Economic risks remain heightened as a result of the uncertainty
surrounding the UK vote to leave the European Union (Brexit),
and the upcoming General Election.
MITIGATING ACTIONS
The Group actively monitors its credit portfolios and undertakes
robust internal stress testing to identify sectors that may come
under stress as a result of an economic slowdown in the UK.
The Group continues to monitor economic and political
developments, in light of the ongoing uncertainty, considering
potential consequences for its customers, products and operating
model, including its sources of funding.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT Principal risks and uncertainties
The Group’s principal risk categories include those risks that
could result in events or circumstances that might threaten the
Group’s business model, future performance, solvency, liquidity
and reputation. In the 2019 refresh of the Group’s Risk Management
Framework, technology risk was classified as a standalone principal
risk, separate from operational risk, to align with the Group’s
strategy for digitisation and current industry focus on business
resilience and cyber risk.
Exposure to operational risk, people risk, technology risk and
strategic and enterprise risk has increased during the year as the
Group continues to undertake a significant volume of change and
integration activity. In relation to technology risk, this is alongside
heightened scrutiny by the regulators, given their focus on
cybersecurity incidents across the industry. Appropriate plans,
Executive and Board governance are in place to monitor our
progress in mitigating these risks and to ensure key delivery
milestones are met.
An overview of the Group’s principal risks and our mitigating
actions on each are set out on the following two pages, while
further information on all of the Group’s principal risks can be
found on pages 143 to 191 of the Risk Report.
Operational resilience
Operational resilience underpins all nine principal risks and is
defined as the ability of the Group to protect and sustain its
most critical functions and underlying assets, while adapting
to expected or unexpected operational stress or disruption,
and having the capacity to recover from issues as and when
they arise. The Group assesses its operational resilience in relation
to people, technology, third parties and premises, ensuring it aims
to provide a superior level of support and services to customers
and stakeholders on a consistent and uninterrupted basis.
027
REF EMERGING RISK
2
Competition
DESCRIPTION
Competition within the financial services sector has increased
as a result of newly ring-fenced banks re-establishing their focus
on the UK retail sector. In addition, regulatory initiatives, such as
Open Banking, may lead to material changes in the future provision
of financial products and services and the way in which our
customers access them.
MITIGATING ACTIONS
The Group recognises both the risks and opportunities resulting
from the changes and continues to develop strategies, products
and technologies to ensure it can take strategic advantage where
possible and mitigate any corresponding risks.
REF EMERGING RISK
3
Regulatory change
DESCRIPTION
The Group continues to face a significant and evolving agenda
of regulatory and legislative change.
MITIGATING ACTIONS
The Group continues to monitor emerging regulatory initiatives
to identify any potential impact on or change to its business model
and ensure it is well placed to respond with effective regulatory
change management.
The Group continues to work with regulators and the industry
to ensure it meets all regulatory obligations, with identified
implications of upcoming regulatory activity incorporated into
the strategic planning cycle.
REF EMERGING RISK
4 Climate change
DESCRIPTION
The Group is exposed to physical, transition and reputation risks
arising from climate change.
MITIGATING ACTIONS
The Group has developed a plan to fully consider the impacts
of climate change in line with the PRA’s Supervisory Statement
SS3/19, the Group’s Strategy for Sustainability and its broader
responsibilities to society.
The plan aims to deepen the Group’s understanding of the
financial risks from climate change, agree a Board level Group-wide
strategic response, and consider how decisions today affect future
financial risks.
A governance framework has been put in place to ensure
appropriate visibility of risks arising from climate change.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 028
RISK
OVERVIEW
Our Strategic Priorities
Pioneering growth
Delighted customers and colleagues
Super straightforward efficiency
Discipline and sustainability
PRINCIPAL RISK AND DESCRIPTION
PRIORITIES MITIGATING ACTIONS
FUTURE FOCUS
ALIGNMENT
TO STRATEGIC
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people or systems or from external events.
People risk
People risk is the risk of not having sufficiently skilled and motivated
colleagues, who are clear on their responsibilities and accountabilities
and behaving in an ethical way.
Financial risk
Financial risk includes capital risk, funding risk, liquidity risk,
market risk, model risk, pension risk and financial risks arising from
climate change, all of which have the ability to impact the financial
performance of the Group, if improperly managed.
Credit risk
Credit risk is the risk of loss of principal or interest stemming from
a borrower’s failure to meet contractual obligations to the Group
in accordance with their agreed terms. Credit risk manifests at both
a portfolio and transactional level.
— The Group has an established Operational Risk Framework to identify,
— The Group undertakes regular, forward-looking scenario analysis to
— The final Basel III framework replaces current approaches with a new
manage and mitigate operational risks.
— Internal and external loss events are categorised using Basel II risk
categories to ensure consistent assessment, monitoring and reporting
of risks and events.
gain insight into the stresses the business could be subject to in the event
standardised approach for operational risk. While some uncertainty
of operational risk events materialising.
remains on the final EU and UK implementation, preparations continue
for the phased introduction from 2022.
— The combination of integration and other strategic change initiatives
will present some level of increased operational risk that will require
to be assessed, monitored and managed.
— Roles, responsibilities and performance expectations are defined
in role profiles and expanded through objective setting and ongoing
performance management.
— The Group’s cultural framework has a clearly defined Purpose,
— We remain committed to embedding the new unifying Purpose for
with Values and Behaviours that form the foundation of the performance
the Group, to ensure better customer service, greater colleague
management framework.
engagement, higher standards of conduct, and enhanced business
— Funding and liquidity risk is managed in accordance with Board
approved standards, including the annual ILAAP, strategic, funding
and contingency funding plans.
— The Group completes an annual ICAAP which formally assesses the
impact of severe, yet plausible, stress events to ensure that appropriate
level and type of capital underpins the strength of the balance sheet
in both normal and stressed conditions. Furthermore, the Group will
be participating in the BoE’s ACS from 2020.
— Ongoing monitoring and approval of individual transactions, regular
asset quality reviews and independent oversight of credit decisions
and portfolios.
— The Group applies detailed lending policies and standards which
outline the approach to lending, underwriting, concentration limits
and product terms.
— The quality and continuity of the Group’s leadership is reviewed and
assessed through succession planning and talent management activity.
performance.
— The Group has a range of pension reforms available to reduce exposure to
— Our focus will be on managing the balance sheet in an environment
pension risk if required.
— The Group has policies and standards for managing the risks that arise
during the change, development, validation, implementation and usage
of its models.
of uncertainty created by the UK’s possible exit from the EU, while
ensuring that efficient use of capital and optimisation of the Group’s
risk weighted assets continue to support strategic growth objectives.
— We will continue to support and oversee preparations for the Group’s
first participation in the BoE’s ACS exercise in 2020.
— Portfolio monitoring techniques cover such areas as product, industry,
— Credit controls are considered to be operating effectively and as
geographical concentrations and delinquency trends.
— Stress test scenarios are regularly prepared with the outcomes reviewed
and relevant actions taken. Outputs will typically include impairment charges,
RWAs and write-offs.
intended, with no notable gaps. However, a potential economic
downturn would test and stretch these controls. We remain focused
on the monitoring and development of credit risk policies, processes
and controls in response to this.
Technology risk
Technology risk is the risk of loss resulting from inadequate or failed
information technology processes. It includes cybersecurity, business
resilience, information security, physical security, data privacy and
payment risk.
— The Group continues to invest in the protection and resilience of its
systems, processes, information and data across all three lines of
defence, recognising the changing cyber landscape, and increased
focus on digital capabilities, as well as the changing risk profile of
the business.
— The Payment Risk Framework outlines key scheme rules, regulations
— Improved Board reporting continues to be embedded, providing
and compliance requirements to ensure that payment risk is managed
detailed insight on people, technology, third parties and premises
within appetite.
risk and actions being taken to address any issues.
— The Board approved security strategy focuses on the management of
— Ongoing investment in the maintenance of existing platforms and
cyber risk, exposure and manipulation of confidential data and identity and
migration to target platforms during integration will ensure that
Regulatory and compliance risk
Regulatory and compliance risk is the risk of failing to comply with
relevant laws and regulatory requirements, not keeping regulators
informed of relevant issues, not responding effectively to information
requests, not meeting regulatory deadlines or obstructing
the regulator.
Conduct risk
Conduct risk is the risk of undertaking business in a way which
is contrary to the interests of customers, resulting in inappropriate
customer outcomes or detriment, regulatory censure, redress costs
and/or reputational damage.
Financial crime risk
Financial crime risk is the risk that the Group’s products and
services will be used to facilitate financial crime against the Group,
its customers or third parties.
Strategic and enterprise risk
Strategic and enterprise risk is the risk of significant loss of earnings
or damage arising from decisions or actions that impact the
long-term interests of the Group’s stakeholders or from an inability
to adapt to external developments, including potential execution risk
as a result of integration and transformation activity.
— The Group has a Data Management Framework governing the creation,
access management.
resilience, scalability and stability are at the core of any customer
storage, distribution, usage and retirement of data.
— These risks are managed by a number of controls that align to the industry
or franchise migrations.
— The Group continues to enhance its Privacy Framework to ensure data
recognised National Institute of Standards and Technology
subject rights are managed in line with GDPR.
(NIST) Framework.
— Clearly defined regulatory and compliance policy statements and
standards are in place, supporting both regulatory and customer
expectations.
— There is ongoing proactive and coordinated engagement with
key regulators.
— Formal monitoring of compliance is managed through oversight by the
— The Group recognises, and will continue to respond to, regulatory
Regulatory Management team, regular reporting to the Risk Committee,
change and associated requirements for systems and processes
and ongoing dialogue with regulators.
across the banking industry as a whole. It will seek to comply with
all regulations as they evolve, and as customer expectations continue
to develop.
— The Group has an overarching Conduct Risk Framework, with clearly
— Continual assessment of evolving conduct regulations, customer
— There will be new and incremental conduct considerations required
defined policy statements and standards.
expectations, and product and proposition development.
as the Group grows, and transitions to a new operating model,
— There is ongoing reporting and development of conduct risk appetite
— A risk-based assurance framework has been designed to monitor compliance
measures to the Executive Risk Committee and the Board.
with regulation and assess customer outcomes.
with the integration of business processes, technologies and systems
and the continued evolution of conduct regulation.
— The Group has an established Financial Crime Framework to support
the management, monitoring and mitigation of financial crime risk.
— The Group continues to monitor industry, fraudster and customer
dynamics within an evolving and volatile risk environment.
— The Group implements a framework of risk-based systems and controls
— Macro level pressures are evident around the growth in 1st and 3rd
to minimise the extent to which its products and services can be used to
party fraud, with continually evolving regulation including the potential
commit or be subject to fraud.
— The Group performs regular reviews of fraud mitigation strategies to ensure
they remain effective and in line with Board approved risk appetite.
for increased levels of early stage customer loss remediation and more
costly controls. In addition, the fast pace of evolution of Open Banking
and digital channels are changing how banks and customers interact.
— Strategic and enterprise risk is addressed through the Board approved
— The Group has a defined sustainability strategy that takes account of both
— Low interest rates and competitive threats are likely to persist over
5-year Strategic and Financial Plan.
— The Group considers strategic and enterprise risk as part of ongoing
risk reporting and the management of identified strategic risks is
allocated to members of the Group’s Leadership Team by the CEO.
the risks and opportunities in relation to environmental factors, including
the financial plan period. The economic environment will be closely
analysis and management of risks associated with climate change.
monitored with portfolio analysis carried out to ascertain any impacts.
— Regular oversight activity with workstreams focused solely on the execution
— We will increase our focus on integration and transformation activity
risk of delivering integration, placing customers’ interest at the centre of all
following successful completion of the FSMA Part VII transfer.
aspects of change.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT PRINCIPAL RISK AND DESCRIPTION
PRIORITIES MITIGATING ACTIONS
ALIGNMENT
TO STRATEGIC
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people or systems or from external events.
— The Group has an established Operational Risk Framework to identify,
— The Group undertakes regular, forward-looking scenario analysis to
gain insight into the stresses the business could be subject to in the event
of operational risk events materialising.
manage and mitigate operational risks.
— Internal and external loss events are categorised using Basel II risk
categories to ensure consistent assessment, monitoring and reporting
of risks and events.
029
— The Group’s cultural framework has a clearly defined Purpose,
with Values and Behaviours that form the foundation of the performance
management framework.
— The quality and continuity of the Group’s leadership is reviewed and
assessed through succession planning and talent management activity.
— The Group has a range of pension reforms available to reduce exposure to
pension risk if required.
— The Group has policies and standards for managing the risks that arise
during the change, development, validation, implementation and usage
of its models.
— Ongoing monitoring and approval of individual transactions, regular
asset quality reviews and independent oversight of credit decisions
— Portfolio monitoring techniques cover such areas as product, industry,
geographical concentrations and delinquency trends.
— Stress test scenarios are regularly prepared with the outcomes reviewed
and relevant actions taken. Outputs will typically include impairment charges,
RWAs and write-offs.
FUTURE FOCUS
— The final Basel III framework replaces current approaches with a new
standardised approach for operational risk. While some uncertainty
remains on the final EU and UK implementation, preparations continue
for the phased introduction from 2022.
— The combination of integration and other strategic change initiatives
will present some level of increased operational risk that will require
to be assessed, monitored and managed.
— We remain committed to embedding the new unifying Purpose for
the Group, to ensure better customer service, greater colleague
engagement, higher standards of conduct, and enhanced business
performance.
— Our focus will be on managing the balance sheet in an environment
of uncertainty created by the UK’s possible exit from the EU, while
ensuring that efficient use of capital and optimisation of the Group’s
risk weighted assets continue to support strategic growth objectives.
— We will continue to support and oversee preparations for the Group’s
first participation in the BoE’s ACS exercise in 2020.
— Credit controls are considered to be operating effectively and as
intended, with no notable gaps. However, a potential economic
downturn would test and stretch these controls. We remain focused
on the monitoring and development of credit risk policies, processes
and controls in response to this.
— The Group continues to invest in the protection and resilience of its
— The Payment Risk Framework outlines key scheme rules, regulations
— Improved Board reporting continues to be embedded, providing
and compliance requirements to ensure that payment risk is managed
within appetite.
detailed insight on people, technology, third parties and premises
risk and actions being taken to address any issues.
— The Board approved security strategy focuses on the management of
cyber risk, exposure and manipulation of confidential data and identity and
access management.
— These risks are managed by a number of controls that align to the industry
— Ongoing investment in the maintenance of existing platforms and
migration to target platforms during integration will ensure that
resilience, scalability and stability are at the core of any customer
or franchise migrations.
recognised National Institute of Standards and Technology
(NIST) Framework.
— Formal monitoring of compliance is managed through oversight by the
Regulatory Management team, regular reporting to the Risk Committee,
and ongoing dialogue with regulators.
— The Group recognises, and will continue to respond to, regulatory
change and associated requirements for systems and processes
across the banking industry as a whole. It will seek to comply with
all regulations as they evolve, and as customer expectations continue
to develop.
— The Group has an overarching Conduct Risk Framework, with clearly
— Continual assessment of evolving conduct regulations, customer
defined policy statements and standards.
expectations, and product and proposition development.
— There is ongoing reporting and development of conduct risk appetite
— A risk-based assurance framework has been designed to monitor compliance
measures to the Executive Risk Committee and the Board.
with regulation and assess customer outcomes.
— There will be new and incremental conduct considerations required
as the Group grows, and transitions to a new operating model,
with the integration of business processes, technologies and systems
and the continued evolution of conduct regulation.
— The Group implements a framework of risk-based systems and controls
— Macro level pressures are evident around the growth in 1st and 3rd
to minimise the extent to which its products and services can be used to
commit or be subject to fraud.
— The Group performs regular reviews of fraud mitigation strategies to ensure
they remain effective and in line with Board approved risk appetite.
party fraud, with continually evolving regulation including the potential
for increased levels of early stage customer loss remediation and more
costly controls. In addition, the fast pace of evolution of Open Banking
and digital channels are changing how banks and customers interact.
— The Group has a defined sustainability strategy that takes account of both
the risks and opportunities in relation to environmental factors, including
analysis and management of risks associated with climate change.
— Low interest rates and competitive threats are likely to persist over
the financial plan period. The economic environment will be closely
monitored with portfolio analysis carried out to ascertain any impacts.
— Regular oversight activity with workstreams focused solely on the execution
— We will increase our focus on integration and transformation activity
risk of delivering integration, placing customers’ interest at the centre of all
aspects of change.
following successful completion of the FSMA Part VII transfer.
People risk
People risk is the risk of not having sufficiently skilled and motivated
colleagues, who are clear on their responsibilities and accountabilities
and behaving in an ethical way.
— Roles, responsibilities and performance expectations are defined
in role profiles and expanded through objective setting and ongoing
performance management.
Financial risk
Financial risk includes capital risk, funding risk, liquidity risk,
market risk, model risk, pension risk and financial risks arising from
climate change, all of which have the ability to impact the financial
performance of the Group, if improperly managed.
Credit risk
Credit risk is the risk of loss of principal or interest stemming from
a borrower’s failure to meet contractual obligations to the Group
in accordance with their agreed terms. Credit risk manifests at both
a portfolio and transactional level.
Technology risk
Technology risk is the risk of loss resulting from inadequate or failed
information technology processes. It includes cybersecurity, business
resilience, information security, physical security, data privacy and
payment risk.
Regulatory and compliance risk
Regulatory and compliance risk is the risk of failing to comply with
relevant laws and regulatory requirements, not keeping regulators
informed of relevant issues, not responding effectively to information
requests, not meeting regulatory deadlines or obstructing
the regulator.
Conduct risk
Conduct risk is the risk of undertaking business in a way which
is contrary to the interests of customers, resulting in inappropriate
customer outcomes or detriment, regulatory censure, redress costs
and/or reputational damage.
Financial crime risk
Financial crime risk is the risk that the Group’s products and
services will be used to facilitate financial crime against the Group,
its customers or third parties.
— Funding and liquidity risk is managed in accordance with Board
approved standards, including the annual ILAAP, strategic, funding
and contingency funding plans.
— The Group completes an annual ICAAP which formally assesses the
impact of severe, yet plausible, stress events to ensure that appropriate
level and type of capital underpins the strength of the balance sheet
in both normal and stressed conditions. Furthermore, the Group will
be participating in the BoE’s ACS from 2020.
— The Group applies detailed lending policies and standards which
outline the approach to lending, underwriting, concentration limits
and portfolios.
and product terms.
systems, processes, information and data across all three lines of
defence, recognising the changing cyber landscape, and increased
focus on digital capabilities, as well as the changing risk profile of
the business.
— The Group has a Data Management Framework governing the creation,
storage, distribution, usage and retirement of data.
— The Group continues to enhance its Privacy Framework to ensure data
subject rights are managed in line with GDPR.
— Clearly defined regulatory and compliance policy statements and
standards are in place, supporting both regulatory and customer
— There is ongoing proactive and coordinated engagement with
expectations.
key regulators.
— The Group has an established Financial Crime Framework to support
the management, monitoring and mitigation of financial crime risk.
— The Group continues to monitor industry, fraudster and customer
dynamics within an evolving and volatile risk environment.
Strategic and enterprise risk
Strategic and enterprise risk is the risk of significant loss of earnings
or damage arising from decisions or actions that impact the
long-term interests of the Group’s stakeholders or from an inability
to adapt to external developments, including potential execution risk
as a result of integration and transformation activity.
— Strategic and enterprise risk is addressed through the Board approved
5-year Strategic and Financial Plan.
— The Group considers strategic and enterprise risk as part of ongoing
risk reporting and the management of identified strategic risks is
allocated to members of the Group’s Leadership Team by the CEO.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 030
STAKEHOLDER
ENGAGEMENT
Customers
Colleagues
Society
Our customers are at the
heart of our business and
we aspire to delight them;
to achieve that, we listen
closely to what they tell us
Our colleagues are our
biggest asset – well
engaged and supported
colleagues help us deliver
our Purpose
We have a responsibility
and desire to make a
positive contribution
to civic society
How we have engaged
How we have engaged
How we have engaged
Our CX (customer experience)
Success programme continuously
invites customers to tell us about
their experiences with us, both at
a relationship and operational level.
The programme impact over the last
12 months has been remarkable with over
200,000 pieces of customer feedback
and around 600 colleagues accessing
our real-time CX measurement platform.
What they told us
Customer comments have led to
improvements, with examples below:
“There were bank staff taking other
customers out of the queue who could
be helped away from the counter to limit
waiting time as much as possible.”
“The ease of applying, the fast response
for the document delivery. Timescale
was also much improved to our last bank
loan application.”
“Although your internet banking has
improved recently, it still lags other banks
in its accessibility and usefulness.”
“Help Desk has greatly improved…
friendly voices… and promises to return
calls are always fulfilled.”
Our response
In line with our strategy to drive up digital
adoption and delight our customers, we
are continuing to work on improvements
to our digital apps.
In addition, from a customer experience
perspective:
— insight-driven action has reduced
monthly complaint volumes by 26%.
— we have developed a new Smile
Score metric based on effectiveness,
ease and emotion bringing CX
measurement closer to our Purpose.
We ask our colleagues for their views,
thoughts and opinions on a regular basis,
including pulse checks and feedback
surveys, interactive digital content,
Let’s Talk sessions with the Leadership
Team and quarterly wellbeing and annual
aspirational discussions. Our insights go
well beyond our annual colleague survey.
What they told us
Our people are integral to our ongoing
success. That’s why we’re determined to
create exceptional experiences that truly
help our people thrive – from our benefits
and rewards package to our culture,
our style of working and our approach
to well-being.
Over 7,500 of our colleagues (79%)
completed our first Group-wide opinion
survey, myVoice, and our overall
engagement score was 76%, which
compares well with companies going
through similar levels of change.
As expected, the most common
concerns coming through our internal
communications channels are focused on
job security and the timeline of changes.
Our response
We fully appreciate the impact of change
on colleagues and the uncertainty it
creates. Any organisational changes
are made in consultation with our union
Unite and our newly formed Virgin Money
Colleague Integration Forum. We aim to
be open and transparent and provide
support to those impacted.
To ensure colleagues are supported
through the integration of two
businesses, we’ve equipped our People
Leaders to manage cultural and sensitive
change through our ‘leading through
change’ workshops.
We spend significant time engaging with
our communities, through our front-line
colleagues, volunteering, community
projects, the grassroots work that the
Virgin Money Foundation does and the
good causes that Virgin Money Giving
(VMG) supports. We also take our
environmental responsibilities seriously
and were pleased to see climate change
rise up the agenda. This year, we asked
stakeholders where they need us to
focus most as we refreshed our
sustainability strategy.
What they told us
Our communities rely on us to provide
employment and responsible financial
products and services and to help people
have a happier relationship with money.
We can make a positive impact by
helping communities grow and prosper
through the people and businesses we
support, giving our time and expertise,
continuing the good work of VMG,
and working with customers and
colleagues to reduce our collective
environmental impact.
Our response
Our refreshed sustainability strategy
has three main goals: to improve financial
well-being and inclusion, remove barriers
to business and community success,
and protect and nurture our environment.
Colleagues spent almost 8,000 hours
helping communities, over 30,000
young people got a taste for being
entrepreneurs through our Make £5 Grow
programme and VMG enabled £107m of
fundraising for good causes. We also met
all environmental targets CYBG had set
prior to the acquisition of Virgin Money.
More on how we support society is in our
sustainability report (pages 34 to 39).
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 031
Investors
Partners and
suppliers
Government
and regulators
We aim to create
long‑term shareholder
value for our investors
through the delivery of
sustainable returns
We rely on our partners
and suppliers to help our
business run smoothly,
from day‑to‑day
operations to creating
digital transformation
Successful relationships
with Government and
regulators are vital to
our long‑term success
How we have engaged
How we have engaged
How we have engaged
Our AGM in Melbourne in January
facilitated interaction with Australian
retail investors and was followed up
with a Board roadshow for institutional
investors. As well as meetings in the UK,
we held institutional roadshows in the
US and a second trip to Australia after
the Capital Markets Day (CMD).
Investors and analysts from the UK
and Australia also attended our CMD
in June, where we set out our refreshed
strategy and facilitated management
engagement. We also visited our major
shareholders in Australia after the PPI
announcement.
To inform communications, we undertook
a large independent investor perception
study with influential investors and
analysts on topics including strategy, the
acquisition, our investment proposition
and our investor communications.
What they told us
The perception study gave us useful
insights which shaped the CMD, which
was then well-received by the market.
Separately, investors told us they were
disappointed with the continuing burden
of legacy conduct and are concerned
about the macro environment and
competition impacting our ability to
deliver our strategy. Investors also
registered concern at the decline in the
share price and wanted to understand
the actions we were taking in response.
Our response
Alongside ongoing investor engagement
around the above, following the CMD,
we finalised our Long-Term Incentive
Plan targets. The Chair of the
Remuneration Committee explained the
approach in letters and phone calls with
our top investors and changes were
made in response to this consultation.
We have strong engagement with
our third-party partners and suppliers.
We tier our suppliers based on their
importance to the Group and tailor
our engagement with them accordingly.
There are approximately 20 providers
who are classified as Tier 1 – the most
important third-party providers, who
have a strategic relationship with us.
We also work with strategic partners
to provide customer propositions.
What they told us
Our suppliers said they were looking
for more opportunity to engage with us
and we launched our Supplier Spotlight
sessions in response. Partners and
suppliers are invited to showcase their
services and share opportunities where
they can work in closer collaboration
with us. We held 12 of these sessions
over the last year.
Our response
We launched our inaugural Annual
Supplier Awards in November 2018 and
had over 80 suppliers represented. We
shared with them the things that matter
most to the Group, including mitigating
risk, protecting data and encouraging
innovation. The feedback was that this
type of event is unique to our industry
and was hugely beneficial. We have
made it an annual event.
We currently have c.1,800 third-party
partners and suppliers and a key focus
is to reduce this number, creating deeper
relationships that add more value.
Our partnerships with Salary Finance
and Virgin Atlantic have helped us serve
more customers. We have also signed
a joint venture with Aberdeen Standard
Investments to provide new customer
propositions in future.
We have engaged extensively with
government stakeholders at all levels
over the past year. This includes
UK Government, Scottish Government
and regional/local government. We have
held one-to-one meetings, and attended
round tables and party conferences.
We have continued to engage
extensively with regulators, through
the regular schedule of engagement
and proactive communication and
consultations as matters have
progressed throughout the year.
What they told us
Interest has focused on our acquisition
of Virgin Money and the integration of
the two businesses. Government officials
have sought to understand the benefits
for customers, as well as the impact on
our physical footprint. Regulators have
focused on FSMA Part VII, and continue
to engage on the Group’s strategic plan
and transformation agenda, and the
implementation of the ACS stress test.
Brexit has also been a key issue, with
government and regulators seeking to
understand how we are preparing and
the support being provided to customers.
Our response
On Brexit, the Group is a member of
the UK Government’s Business Finance
Council and a signatory to the Business
Finance Charter. We have contributed to
key policy debates through our quarterly
SME Health Check Index and ‘Bank to
the Future’ report.
We continue to have an open and
proactive approach to engaging
regulators, and continue to invest
in our operations to ensure we are
well-placed to respond to the evolving
regulatory landscape.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 032
PEOPLE WITH
PURPOSE
“Our People are critical to delivering
our Purpose, ‘Making you happier
about money’. That’s why we’re
determined to create exceptional
experiences that truly help our
people thrive – from our benefits
and rewards package to our
culture, our style of working and
our approach to well-being.”
Kate Guthrie
Group Human Resources
Director
As we embed the Virgin Money brand, our customers will see and
feel the difference through our products, our delightfully surprising
service and through the little things we do that set Virgin Money
ahead of the pack.
So, we want to foster a culture which entices, engages and
encourages our people to deliver ambitious, customer-focused
outcomes, regardless of their role. After all, it’s our People with
Purpose who will make our customer experience extra special.
While our focus is on delighting our customers and colleagues,
every now and again we are delighted ourselves by delivering
on big milestones. Here are some of our 2019 achievements:
Celebrating culture:
Evolving engagement:
We ask colleagues for their views, thoughts and opinions on
a regular basis during the year. Our Leadership Team participate
in regular ‘Let’s Talk’ sessions, where colleagues have the
opportunity to ask questions, give their views and get a real view
from the bridge. We also undertake regular pulse check surveys,
where we ask colleagues their views on key milestones.
Colleague sentiment is a key measure of how well we’re doing,
so we keep our Board up to date on a quarterly basis as part of
a people update and culture dashboard.
We were really pleased that over 7,500 of our colleagues (79%)
completed our first Group-wide opinion survey, myVoice. Our
overall engagement score was a pleasing 76%, which compares
well with companies going through similar changes.
Impactful inclusion:
Our colleagues deliver for our customers when they can be
themselves at work. So, it goes without saying that inclusion is at
the heart of our culture. It is embedded in our values and is being
driven through meaningful actions across the business.
We have five colleague inclusion networks each with sponsors from
the Leadership Team: Aspire, Balance, Embrace, Enable and Vibrant.
Some of our highlights this year include:
— participating in the Women’s Ahead event in London, streamed
live across our different locations;
— attending the Employers Network for Equality and Inclusion
Annual Diversity event at the House of Lords after participating
in a six-month programme developing leadership awareness;
— promoting Pride ‘OUT the box’ and winning the Corporate Ally
award at the Proud Scotland Awards; and
— being awarded an Employer Recognition Scheme Gold Award
for outstanding support for the Armed Forces community.
Rightsizing and reshaping:
We’ve made good progress with our integration plans so far –
introducing the concept of our new customer divisions, finalising
our Extended Leadership Team structure and announcing our
location strategy.
Launching our Purpose has been a huge success. Almost 25% of
our colleagues contributed to shaping our Purpose both in person
through focus groups and online.
We know this activity creates real uncertainty for colleagues.
We are working hard to support colleagues and raise the quality
of leadership of change.
Adopting the Virgin values and behaviours this year has kept us
focused on how we deliver our Purpose. To us, it’s not a slogan,
gimmick or mouse-mat. It’s our core reason for being, our new
DNA. Things like our dress for your day guidelines and our
team-focused performance management and reward approach
demonstrate that we’re listening and working to create more
flexible, future-focused ways of working.
We have equipped our People Leaders to manage cultural and
sensitive change. Our Great Leadership framework and 360
feedback culture continues to raise the bar of leadership across
the Group. We are delighted that 82% of colleagues told us their
People Leader creates an inclusive and positive team atmosphere.
We have taken a holistic approach to health and well-being
initiatives that focus on four pillars: mind, body, finances and family.
Doing great work can be hard work. That’s why we’ve signed up
to the Mental Health at Work Commitment, adopting a framework
to promote the long-term positive mental health of our colleagues.
Future focus
While it’s important to pause and reflect on our journey so far,
we have more to do in the years ahead to realise our ambitions
and deliver on our promises. Here are some of the things we’re
focusing on in 2020:
— we will continue to embed our Purpose, Values and Behaviours
in 2020 and beyond;
— we will continue to build an agile organisational structure,
one which enables faster and more dynamic ways of working;
— we will look at opportunities to harmonise our reward
framework, terms and conditions and employment policies
across the Group; and
— we will enhance our digital capabilities, which will allow
us to improve our working environment for colleagues.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORT 033
GENDER
PAY
At Virgin Money we are passionate
about fairness, equality and inclusion.
We fully support the UK Government
initiative to improve equality through
collecting and reporting gender
pay data.
Our overall mean and median gender pay and bonus gap, based
on a snapshot date of 5 April 2019 (pay) and bonus paid in the
12 months to 5 April 2019, are:
We’re proud to have signed up to the Women in Finance
Charter which reflects our commitment to build strong female
representation at all levels within our organisation. We’ve set
measurable objectives for achieving gender diversity (with a target
of 40% women in senior management by 2020 and a long-term
aspiration for gender balance), and our progress towards achieving
these objectives is reported to the Board.
Progress is demonstrated by:
Board Members
Leadership Team
Extended Leadership Team
All Colleagues
FEMALE
4 (31%)
4 (33%)
32 (38%)
5,701 (59%)
MALE
9 (69%)
8 (67%)
53 (62%)
3,966 (41%)
MEASURE
Mean pay gap
Median pay gap
Mean Bonus pay gap
Median Bonus pay gap
% Males paid a bonus
% Females paid a bonus
VIRGIN MONEY
UK PLC*
31.8%
34.0%
55.4%
38.6%
89%
91%
*Our full gender pay report can be found on our website.
At Virgin Money men and women are paid equally for doing the
same or similar jobs. The key driver behind our pay gap is that
overall we still have more men than women in senior roles and
more women than men in our customer-facing roles, which are
often more junior.
Proportion of males and females in each pay quartile
(shown lowest to highest)
Lower
Quartile
Male 30
Female 70
Lower Middle
Quartile
Male 26
Female 74
Upper Middle
Quartile
Male 43
Female 57
Upper
Quartile
Male 63
Female 37
(Employee headcount at 30 September 2019.)
We have a large customer service organisation, where many of our
colleagues are employed. In our customer service areas we employ
over 70% women. Our upper quartiles are more gender balanced.
A large proportion of our customer service roles are part-time and
we have found that throughout the organisation the majority of
part-time roles are occupied by females, whereas full-time roles
are more gender balanced.
We are working hard to narrow our gender imbalance in our
customer service areas and create more opportunities for people
to progress their career while working part-time.
There are a number of other steps we are taking to improve our
gender balance that we expect to positively impact our gender
pay gap, including:
Our leaders
— Building awareness of our inclusion practices through
hiring workshops.
— Creating advice and guidance for people leaders to support
a flexible working culture.
— Promoting and role modelling a flexible working culture.
Our people
— Mandating diverse shortlists for applicant submission,
reviewing the make-up of our interview panels and our
approach to anonymised selection.
— Enabling our colleagues through technology which encourages
flexible working, remote learning and virtual networking.
— Continuing our ‘Return to Work’ programme, to support
women returners.
Our insight
— Understanding the make-up of our workforce from recruitment
to retirement to pinpoint leaks in the talent life cycle, allowing
us to track progress and shape direction.
We are encouraged that the changes we are making are having
an impact; we are proud that 88% of colleagues told us they can
be themselves at work in the recent myVoice survey.
However, we recognise that there is still a lot more to be done
and we will continue to shape a more diverse and inclusive culture
across the Group.
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 034
SUSTAINABILITY:
STRATEGY
“At Virgin Money, ‘sustainability’
describes our impact on society
and the environment and both
the opportunities and risks
associated with that. It’s all
about embedding sustainability
priorities into our core business
and strategic decisions (not a
side-of-desk CSR project!).
Virgin Money Giving is a great
example of using our financial
expertise to make the world
a brighter place.”
Emma Tottenham
Group Corporate
Communications and
Sustainability Director
Virgin Money’s refreshed
sustainability strategy
In bringing the two heritage banks together and uniting under
a shared purpose and brand, the Group took the opportunity
to develop a new sustainability strategy.
Our ambition is to embed sustainability into all our business
practices so that we can realise the long-term opportunities from
being a sustainable business and mitigate risks from climate
change and social inequality.
We conducted an exercise with stakeholders, including the Board, to
identify the areas where Virgin Money, as the new disruptive force in
banking, can make the most material difference to society through
its impact and influence on communities and the environment. This
generated three goals that form the bedrock of our sustainability
strategy, shown below. We have mapped these at a high level
against the United Nation’s Sustainable Development Goals (SDGs).
Underpinning these three themes is an ambition to set a high bar
on all Environmental, Social and Governance (ESG) areas. We have
also developed a partly-devolved model where our colleagues can
help us innovate as well as using their two volunteering days each
year to contribute to the causes that are most important to them
and their local communities.
The Board has been highly engaged in the development of the
Group’s sustainability strategy and receives quarterly updates on
the execution of this new strategy. The Board will remain closely
involved going forward as we develop stretching medium-term
targets and align our reporting and disclosure to the Task Force on
climate-related Financial Disclosure recommendations over time.
Virgin Money is a signatory to the United Nations Principles for
Responsible Banking and is using these to guide the evolution
of its sustainability strategy across all areas covered by the
Principles. Future reports will include self-assessment against
these Principles.
PRINCIPLE 1
Alignment
PRINCIPLE 2
Impact and
target setting
PRINCIPLE 3
Clients and
customers
PRINCIPLE 4
Stakeholders
PRINCIPLE 5
Governance
and culture
PRINCIPLE 6
Transparency
and accountability
3 BIG GOALS
Increase financial inclusion
and well-being (page 35)
Remove barriers to
business and community
success (page 35)
Protect and nurture the
environment (page 38)
ALIGNMENT
TO UNITED
NATIONS
SDGS
SETTING
A HIGH BAR
ON ESG
MAKING A
DIFFERENCE
DAY-TO-DAY
We hold ourselves to a high standard on all matters relating to environmental impact, social impact and governance and are
constantly improving our reporting and disclosure in these areas to meet evolving best practice (see page 39 for more).
We put in place devolved accountability and empowerment, enabling colleagues to engage in the issues they care about
most at a local and macro level. This incorporates our charity partnerships, volunteering days, match funding and colleague
network and innovation loops to deliver small changes. This year over 800 colleagues volunteered almost 8,000 hours in
our communities and raised a record-breaking £330k for our charity of the year, Dementia Revolution.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS
035
Goal 1: Financial inclusion and well-being
— Provided 325,000 people with basic bank accounts.
Our approach
This theme speaks to the core activities of our Personal division.
We use our expertise in money to support customers and
communities to be happier about money. We develop products
and services, on our own and with partners such as Salary Finance,
that support vulnerable customers and increase financial inclusion.
Our colleagues offer their time and financial know-how through
volunteering programmes to improve financial well-being across
the UK and we work with organisations that are experts in helping
people in financial difficulty to guide our focus so we deliver the
greatest possible impact. In Scotland, we are committed members
of Carnegie Trust’s Affordable Credit Action Group seeking to bring
new solutions to the problem of high cost credit.
We are in the process of setting ambitious medium-term targets.
Our impact this year
— 30,362 young people improved their financial well-being and
entrepreneurial skills through Make £5 Grow.
— 423 Make £5 Grow Ambassadors (see case study opposite).
— 238 financial well-being sessions delivered to both customer
and non-customer groups, reaching 4,000 people since launch.
— £53m lent through Salary Finance, helping people to avoid
expensive debt, like payday loans through salary-deducted loans.
— Supported customers in financial difficulty through
partnerships with StepChange, Citizens Advice Bureau,
and Money Advice Trust.
— Helpful budgeting and savings tools at the heart of our core
mobile banking service.
CASE STUDY:
Make £5 Grow
Make £5 Grow provides 9 to 11 year-olds with the experience
of starting a mini business using a £5 loan from Virgin Money.
Over 1,700 primary schools and over 113,000 pupils
have developed valuable skills and insight into the world
of work and money with our financial education programme
since 2011.
Mossnuek Primary set up stalls in the Virgin Money Lounge in
Glasgow to sell their products to customers, turning their £5 into
£2,000 profit which they donated to local charities.
Goal 2: Removing barriers to business and community success
— On track to provide a minimum of £6bn of lending to SMEs
Our approach
This theme speaks to the core activities of our Business and
Mortgages divisions in supporting SMEs and helping people get
on the property ladder. We also make a difference in a way that
no other bank can, through our not-for-profit digital fundraising
platform, Virgin Money Giving (VMG) (see page 36). In addition,
through our annual donation of £1m to, and covering the running
costs of, the Virgin Money Foundation (VMF), Virgin Money
supports grant making at a grass-roots level in some of the
most deprived areas of the UK.
Virgin Money has a further important role to play as a major
employer in its communities, particularly in its two key hub
locations in Glasgow and Newcastle. We also supported
Virgin Start Up, a not-for-profit company in the Virgin Group
which distributed over £6.5m to over 500 entrepreneurs this year,
through the hosting of events for entrepreneurs in our Lounges.
We are in the process of setting ambitious medium-term targets.
Our impact this year
— £107m donated to charities through VMG and 12,500 charities
supported through VMG’s service.
— VMF awarded grants of £2m in 2019 to organisations working
in areas including housing, employability, youth social action
and regeneration.
— We remain proud supporters of HM Treasury’s Women
in Finance Charter.
over three years to December 2019.
— Opening of B Works in Manchester offering co-working and
studio space and hosting events for local businesses.
— We have 105 apprentices across the business.
— Commitment to supporting and employing ex-Armed Forces
recognised with an Employer Recognition Scheme Gold Award.
— Continued to arm businesses with important market context
and trends through the quarterly SME Health Check report.
Modern Slavery Act Statement
Virgin Money has a zero tolerance approach to slavery,
servitude, forced labour and human trafficking (Modern
Slavery) and is committed to conducting business with
honesty and integrity and treating everyone with dignity and
respect. We are committed to working with our partners and
suppliers to raise awareness and understanding of modern
slavery and eliminating the practice from the supply chain.
The statements detailing the actions we have taken
to achieve this can be found on our website at:
virginmoneyukplc.com/corporate-responsibility/
modern-slavery-act/
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 036
SUSTAINABILITY:
VIRGIN MONEY GIVING
2019 has been a year of strong
growth in donations for Virgin
Money Giving (VMG), with
significant progress made
against key strategic objectives.
2019 highlights
Delivering strong donation growth
£107m
raised for UK charities this year
£792m
raised through Virgin Money
Giving since launch
Market-leading customer experience
+55
VMG fundraiser
Net Promoter Score
+81
London Marathon fundraiser
Net Promoter Score
Extending our reach and support
3,581
registered charities, a 352%
increase year-on-year
VMG was launched with the aim of helping fundraisers and
charities raise as much as possible for good causes. As a
not-for-profit business within Virgin Money, VMG is an embodiment
of our Purpose, ‘Making you happier about money’ and a clear
demonstration of business acting as a force for good.
In October 2019, VMG turned ten and, since launch, has helped
over 12,500 UK charities and 1 million fundraisers raise nearly
£800m to support their work in the UK and overseas. £107m has
been raised for charities this year alone.
VMG is the official fundraising partner of many leading UK events
including the Virgin Money London Marathon, Prudential Ride
London, the Royal Parks Half Marathon and Sleep in the Park.
The 2019 Virgin Money London Marathon raised a record-breaking
£66.4m for charities, setting a new world record for an annual
single-day charity fundraising event. It brings the overall sum
raised for charities since the event was founded in 1981 to more
than £1bn, of which over £198m has been raised through VMG
since 2010. In 2019 VMG launched an innovative fundraiser hub
offering advice and support from experts and past runners and
introduced a donation option to the Virgin Money London Marathon
app, a great new way for VMG fundraisers to drive donations on
the day. As a result, over £28m was raised on VMG by Virgin
Money London Marathon runners, an increase of 16% on 2018.
In its quest to help charities expand their income, VMG has
invested in the development of its donor and fundraiser
experiences in recent years, resulting in a strong fundraiser
NPS of +55 and an increase in the average amount raised
per fundraiser. In 2019 the business focused on both expanding
its charity partners and developing its offering to charities
by providing enhanced reporting and customer information.
As a result, over the last 12 months VMG has increased its total
live charity partners by 25%, with its low fees and customer service
attracting a high number of small to medium-sized charities that
had previously fundraised through other providers. Investment in
VMG’s reporting tools and charity hub, in addition to new Donor
Covers Fee enhancements and continued free collection of Gift
Aid, are all key to supporting an increasing number of UK charities
to take full advantage of digital fundraising as an important and
cost-effective income stream.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 037
CASE STUDY:
100% of what you give goes to your cause
CASE STUDY:
Raising more for good causes
Donor Covers Fee was launched in November 2018, giving
donors the opportunity to cover the 2% VMG platform fee.
Due to the popularity of Donor Covers Fee this was extended
to cover all transaction fees in September 2019, meaning
that the VMG service is now free on over 80% of donations.
Jane Emmerson, Chief Executive of Get Kids Going! said,
“We believe, at Get Kids Going!, that our long-standing online
giving partner, Virgin Money Giving, has revolutionised both
charity fundraising and donor giving over the last few years
– their dedication to ensuring the customer’s experience of
giving is so enjoyable and easy has proved invaluable to the
charity. Their free Gift Aid collection, not-for-profit ethos and
the launch of their ‘Donor covers the Fee’ feature is fantastic!
It means that we can now raise even more to support the
many wonderful disabled children and young people who
desperately need our help so they can participate in sport”.
Given the importance of online donation portals to the UK charity
sector, VMG fully supports the need for digital providers to be
well-governed, safe and transparent. A programme of work is
undertaken on a continuous basis to ensure that VMG complies
with the Payment Services Directive (PSD2), General Data
Protection Regulation (GDPR) and the Fundraising Regulator best
practice requirements. The company has also continued to invest
in the security of the service, and the website was once again
awarded the government-backed Cyber Essentials Plus standard
in 2019.
Cardiac Risk in the Young (CRY) give their views on using
VMG for their online fundraising:
“We’ve definitely seen a boost in fundraising since using
Virgin Money Giving. Last year was our best year for
fundraising since CRY launched in 1995 and while that’s
really down to the hard work of our supporters, platforms
such as Virgin Money Giving make it easier for them to raise
the necessary funds.
“Virgin Money Giving’s ‘In Memory’ pages are an important
tool for our supporters and have helped us boost our
donations. The new BETA reporting system has also really
helped us, by enabling us to produce reports much quicker
and thank supporters more efficiently.
“It’s really important to us that Virgin Money Giving is
a not-for-profit website. We’re often asked about how
much of the money people donate reaches the charity –
it’s something our supporters really take into consideration
and it’s great we can tell them that VMG is not-for-profit.
Virgin Money Giving also makes collecting Gift Aid really
easy as they sort all that out for us. All in all, we’ve always
found VMG a user-friendly and efficient way for supporters
to raise funds. It offers lots of useful tools for charities to
utilise, the not-for-profit stance is great.”
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 038
SUSTAINABILITY:
ENVIRONMENT AND ESG
Goal 3: Protect and nurture the environment
Reporting on Greenhouse Gas (GHG) emissions
Our approach
We are committed to combating climate change and doing
our bit to limit the global temperature rise to 1.5 degrees Celsius
this century, in line with the Paris Agreement. We are targeting
‘net zero’ carbon emissions by 2030.
Although our direct environmental impacts are comparatively low,
we have a major role to play in ‘greening finance’: helping our
customers, partners and colleagues transition to a low-carbon
economy. This generates both risks (such as transition risk)
and opportunities (such as supporting ‘green’ businesses) for us
as a bank, on top of the physical risks from the effects of climate
change on our operations and lending.
During the year we will develop a demanding benchmark for
appraising businesses that are actively engaged in activities that
advance the cause of environmental sustainability, recognising
the long-term commercial attractiveness of this sector. We will
target our activities such that, over a period of time, 5% of our
business loan book will be directed towards businesses meeting
this benchmark.
Our strategy supports the Group’s response to evolving regulatory
expectations regarding climate change risk.
Our impact this year
This is the first year of reporting as Virgin Money UK PLC. The
Group had historic targets that ran from 2016-2019, which are
reported below. The Group environmental data reported here forms
the baseline for delivering against future targets, which are in the
process of being developed. We will align reporting and disclosure
to the voluntary Task Force on Climate-related Financial
Disclosures (TCFD) recommendations. Other highlights include:
— lent £31m to the renewables sector;
The Group reports GHG emissions in accordance with the GHG
Protocol, which sets a global standard for how to measure, manage
and report emissions. The reporting period for GHG emissions in
the Group ran from 1 July 2018 to 30 June 2019. A copy of the
Reporting Criteria document is available on the Virgin Money
website.
The figures below use location-based emissions. Using market-
based emissions for energy would reduce total Scope 2 emissions
for the Group from 11,285 to 384*.
The only estimated emissions in the GHG emission data relate to
energy consumed in properties where the landlord controls the
supply and recharges the Group via a service charge arrangement
or where actual meter readings were not available before year end.
In these instances an average rate per kWh has been used.
Intensity ratio
The Group has chosen to use an intensity ratio of GHG per average
FTE for Scope 1 and 2 emissions. Using FTE offers a simple way to
measure and monitor Group performance on emissions and is also
a useful way to benchmark and compare with other organisations.
SCOPE (1 & 2)
GHG emissions
per average FTE
2019
2019 CYB
2018 CYB
1.95
2.01
2.25
Independent limited assurance
The Group engaged KPMG LLP to undertake an independent
limited assurance engagement over the selected information
highlighted in this report with a * using the assurance standards
ISAE3000 and ISAE3410. KPMG has issued an unqualified opinion
over the selected information. KPMG’s full assurance statement is
available on the Virgin Money website.
— zero waste to landfill;
Historic environmental targets
— removed single-use plastic cups from our offices, saving two
tonnes of carbon a year; and
— all 2016-19 environmental targets met (see table below).
We have four environmental targets to measure the Group’s
performance over a three-year period in comparison to a baseline
in June 2016. At 2019 all the targets have been met.
GHG emissions performance in 2019
SCOPE
Scope 1 emissions Generated from the gas and oil used in all buildings where the Group operates;
emissions generated from Group-owned and leased vehicles used for business travel; and fugitive
emissions arising from the use of air conditioning and chiller/refrigerant plant to service the Group’s
property portfolio.
Scope 2 emissions Generated from the use of electricity in all buildings from which the Group operates.
Scope 3 emissions Relate to business travel undertaken by all colleagues using rail, private vehicles,
hired vehicles, contracted taxi services, air travel, waste, water and paper.
Total
2019 GROUP
2019 CYB
2018 CYB
4,055*
11,285*
6,277
21,617
2,482
10,467
5,076
18,025
3,100
11,398
5,938
20,436
Environmental performance in 2019
AREA
GHG – measured by CO2
Energy (gas and electric) – measured by gigajoules (GJ)
Water consumption – measured by m3 volume
Recycling first-line waste – measured by % volume
2016
RESTATED
BASELINE
22,602
165,541
77,286
74%
2019
ACTUAL
18,025
141,538
73,560
80%
2016-19
% CHANGE
20%
14%
5%
6%
2019
% TARGET
9%
9%
5%
6%
2019
PERFORMANCE
Target met
Target met
Target met
Target met
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 039
Setting a high bar on ESG
Managing ESG risks
While we are focused strategically on our three big goals to
create a positive contribution to society, as a responsible business
we maintain high standards for all aspects of sustainability.
We are constituent members of FTSE4Good and the Dow Jones
Sustainability Index (DJSI). Our DJSI score increased by 15 points,
moving us in line with the sector average and we outperform the
industry average in FTSE4Good, scoring 3.5/5, compared to the
average of 2.9.
We recognise there are significant opportunities for further
improvement and will use these results to inform and drive
our efforts.
Non-financial reporting information
REPORTING REQUIREMENT
Environmental matters
POLICIES AND STANDARDS
WHICH GOVERN OUR APPROACH
Environmental Reporting Policy
Sustainability Policy
Employee Conduct Policy;
Fit and Proper Policy;
Health and Safety Policy;
Whistleblower Policy;
Physical and Personal
Security Policy;
Inclusion Policy
We are committed to managing ESG across our business. This year
we created an ESG screening policy to improve the sustainability
of our investment decision-making. This includes identification
of restricted and high-risk industries and sectors – for example,
we do not lend to unregulated gambling activities, weapons subject
to treaties and conventions, or nuclear-related activities. Policies
will be reviewed in line with the continued development of our
sustainability activities.
Non-financial reporting
As we develop more comprehensive disclosures in line with
emerging recommendations and principles, we aim to continue to
comply with the Non-Financial Reporting requirements contained
in sections 414CA and 414CB of the Companies Act 2006.
The below table is to help stakeholders identify where they can
find all relevant non-financial information in this report and online.
RISK MANAGEMENT AND ADDITIONAL INFORMATION
Sustainability report, pages 38
to 39; Stakeholder
engagement, page 30
Risk Overview, pages 26 to 29
Financial risk, page 182
Strategic risk, page 190
Strategic review, page 17
Stakeholder engagement,
page 30
People with Purpose, page 32
Gender Pay Gap, page 33
Risk Overview, pages 26 to 29
Corporate governance report,
pages 74 to 77
Whistleblowing, page 92
Directors report, page 134
Modern Slavery Statement;
Privacy and Data Protection Policy;
Information Security Policy
Modern Slavery Act, page 35
Corporate governance report,
pages 74 and 77
Risk Committee report,
page 99
Technology risk, page 187
Sustainability Policy;
Political Contact, Communications
and Donations Policy;
Responsible Lending Policy;
Sanctions and Embargo Policy
Anti-Bribery and Corruption Policy;
Anti-Money Laundering and
Counter Terrorist Financing Policy;
Preventing Fraud and
Cyber-Enabled Crime Policy
Sustainability report, pages 34
to 39
Strategic review, page 19
Stakeholder engagement,
pages 30 to 31
Corporate governance report,
page 77
Risk Committee report,
page 98
Technology risk, page 187
Financial crime risk, page 189
Policy embedding, due diligence and outcomes
Risk overview, pages 26 to 29
Risk report pages 143 to 191
Description of principal risks and impact of business activity
Description of the business model
Non-financial key performance indicators
Risk overview, pages 26 to 29
Sustainability report, pages 34
to 39
How we create value, pages 10
to 11
How we create value, pages 10
to 11
Who we are, pages 6 to 7
Our KPIs, pages 14 to 15
Strategic review, pages 16 to
19; Divisional reviews, pages
20 to 25
Stakeholder engagement,
pages 30 to 31
Sustainability report, pages
34 to 39
Colleagues
Human rights
Social matters
Anti-corruption
and anti-bribery
FINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019STRATEGIC REPORTSTRATEGIC REPORT 040
CHIEF FINANCIAL
OFFICER’S REVIEW
“In 2019 we delivered
a resilient operating
performance and
made good progress
against our financial
targets. We have a
strong balance sheet
and are well placed to
deliver our strategy.”
Ian Smith, Group Chief Financial Officer
Review of the year
2019 has seen the combined Group make a strong start.
We delivered a resilient operating performance in a challenging
environment, while executing on key integration milestones that
now enable us to commence the customer and platform integration
programme. We have also made good initial progress in the delivery
of our refreshed strategy and targets that we set out at our Capital
Markets Day (CMD) in June. The Group experienced an unwelcome
and unexpected surge in PPI claims ahead of August’s complaint
deadline, but we have been able to absorb the additional cost
impact and remain focused on implementing our CMD strategy.
Balance sheet progress
Our strategy to reshape the balance sheet is off to a good start
with asset growth of 2.9%. This was achieved through above
market growth in Business and Personal lending, with more muted
growth in Mortgages as we optimised for value in line with our
strategy. We also delivered strong growth of 7.1% in relationship
deposits as we look to rebalance our funding away from less sticky
and more expensive non-linked savings and term deposits.
Resilient operating performance
The Group delivered a resilient operating performance with
pro forma underlying profit before tax of £539m (2018: £581m)
and underlying return on tangible equity of 10.8% (2018: 11.0%).
The Group delivered slightly lower income of £1,639m (down 3%
year-on-year) in a challenging environment, but more than offset
this with reduced costs of £942m (down 6%) to deliver an
increased operating profit of £692m (up 1%). Impairments rose
to £153m (up 44%) following the adoption of IFRS 9 and
CFO review contents
Analysis of:
Income
Costs
Impairments
Exceptional items and statutory loss
Returns and TNAV
Balance Sheet
Capital
Outlook and guidance
Overview of Group results – pro forma basis
Overview of Group results – statutory basis
page 42
page 43
page 43
page 44
page 44
page 45
page 46
page 47
page 48
page 50
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 041
Statutory loss after tax
Underlying profit before tax
Underlying Return on Tangible Equity
£(194)m £539m 10.8%
2018: £(145)m
2018: £581m
2018: 11.0%
Net Interest Margin (NIM)
Underlying Cost:Income Ratio
Cost of risk
1.66% 57%
2018: 1.78%
2018: 59%
21bps
2018: 15bps
CET1 ratio
Asset growth
Relationship deposit growth
13.3% +2.9% +7.1%
2018: 15.1%
2018: N/A
2018: N/A
Basis of preparation note
The information and commentary in this section presents the
Group results on a pro forma basis as if CYBG PLC and Virgin
Money Holdings (UK) PLC had always been a combined group.
This assists in explaining trends in financial performance by
showing a full 12-month performance for the combined group
for both the current and prior year.
The acquisition has had a significant impact on the Group’s
statutory results and financial position and we believe that it
is most helpful to provide historical information which is more
readily comparable with the results of the combined businesses.
The statutory results, which include the results of Virgin Money
Holdings (UK) PLC from the date of acquisition on 15 October 2018
are set out at the end of this section on pages 50 to 51.
A reconciliation between the results on a pro forma basis and
a statutory basis is also included on page 51.
normalisation, but underlying asset quality remains strong.
As a result, underlying profit before tax was 7% lower than 2018.
Statutory loss driven by legacy conduct
In line with the rest of the industry, we received an unprecedented
surge in PPI information requests and complaints during August,
which required us to take additional PPI provisions of £385m in the
second half of the year (£415m for the full year).
The scale of the PPI provision, coupled with the restructuring and
acquisition costs incurred this year (£345m), meant that the Group
has reported a statutory loss after tax of £194m (2018: £145m loss
after tax).
Robust capital position supports strategy
While the PPI provision clearly had a significant impact on the
Group’s capital position, thanks to the significant buffer the Group
was prudently holding, we have been able to absorb the impact
and remain robustly capitalised. However we have, incorporating
feedback from our major shareholders, taken the prudent decision
to suspend the dividend in 2019.
Our CET1 ratio of 13.3% as at 30 September 2019 retains a
significant buffer to our CRD IV regulatory requirement of 11.0%
and provides sufficient capacity to deliver our CMD strategy.
Conclusion
2019 has been a year of building our foundations for the future,
while seeking to close out legacy issues. Our refreshed strategy is
predicated on actions within our own control and leverages the key
strategic advantages available to us. We look forward to another
year of strong delivery and progress in 2020.
STRATEGIC REPORTGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL RESULTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 042
CHIEF FINANCIAL
OFFICER’S REVIEW
Income
Summary for the year ended 30 September
Underlying net interest income
Non-interest income
Total underlying operating income
Net interest margin (NIM)
Average interest-earning assets
2019
£M
1,433
206
1,639
1.66%
86,362
2018
£M
1,457
228
1,685
1.78%
81,934
CHANGE
(2)%
(10)%
(3)%
(12)bps
5%
Overview
Total income of £1,639m was 3% lower year-on-year, reflecting
competitive market conditions impacting net interest income,
a lower contribution from our investments business, and adverse
fair value movements within non-interest income.
Net interest income and NIM
Net interest income declined 2% year-on-year reflecting the
continued competitive pressures in the marketplace.
In Mortgages, sustained competition in recent years has driven
front book mortgage pricing well below average back book rates.
This has impacted our book more than others over the past
few years as we have a less seasoned, shorter duration book.
The average yield on the mortgage book declined 12bps due to
a negative c.30bps average front book vs. back book variance
during 2019. However, growth in average mortgage balances
helped mitigate these pressures to deliver broadly stable mortgage
interest income. In Business, expanding yields due to higher rates
and growth in average balances has driven increased interest
income. In Personal, better yields due to the seasoning of the
credit card book and growth in average balances also increased
interest income.
Our customer deposit costs increased by 10bps in 2019 to 98bps,
4bps of which relates to the full year impact of the base rate
increase in August 2018. The remainder of the increase is due to
increased deposit pricing pressure on non-linked savings and term
deposits. Wholesale funding costs increased primarily due to rate
increases and additional MREL issuance.
As a result, and as expected and guided, the Group’s Net Interest
Margin (NIM) declined by 12bps to 1.66%. Mortgage pricing
pressures reduced NIM by 8bps and deposit pricing, including the
base rate increase impact, led to a further 10bps of NIM reduction.
This was offset by 7bps of benefit from growth in Business and
Personal lending, with a further 1bps of net reduction from other
items, including wholesale funding and liquidity impacts.
The Group manages the risk to its earnings from movements in
interest rates centrally, by hedging assets, liabilities and equity
which are less sensitive to movements in rates. The weighted
average life of this structural hedge was unchanged at 2.5 years
(2018: 2.5 years), in line with the expected life of liabilities of 5
years. The average hedge balance increased to £24.0bn (2018:
£21.5bn) due to the alignment of the treatment of some
administered rate deposits acquired from Virgin Money with the
Group’s policy. Total structural hedge balances generated gross
incremental net interest income of £228m (2018: £198m),
representing a yield of 0.9% (2018: 0.9%).
Average balance sheet
INTEREST-EARNING ASSETS
Mortgages
Business lending(1)
Personal lending
Liquid assets
Due from other banks
Swap income/other
Total average interest-earning assets
Total average non-interest-earning assets
Total average assets
INTEREST-BEARING LIABILITIES
Current accounts
Savings accounts
Term deposits
Wholesale funding
Total average interest-bearing liabilities
Total average non-interest-bearing liabilities
Total average liabilities
Total average equity
Total average liabilities and average equity
Net interest income
(1) Includes loans designated at fair value through profit or loss.
2019
INTEREST
INCOME/
(EXPENSE)
£M
AVERAGE
BALANCE
£M
AVERAGE
YIELD/(RATE)
%
AVERAGE
BALANCE
£M
2018
INTEREST
INCOME/
(EXPENSE)
£M
AVERAGE
YIELD/(RATE)
%
60,288
7,542
4,670
12,298
1,564
–
86,362
3,545
89,907
11,570
24,366
22,877
19,427
78,240
6,590
84,830
5,077
89,907
1,551
314
359
98
13
(11)
2,324
2.57
4.17
7.69
0.79
0.86
n/a
2.69
(19)
(214)
(370)
(288)
(891)
(0.16)
(0.88)
(1.62)
(1.48)
(1.14)
57,960
7,311
4,360
11,007
1,296
–
81,934
3,167
85,101
11,555
22,265
22,847
16,783
73,450
6,379
79,829
5,272
85,101
1,557
288
298
62
6
(38)
2,173
(12)
(143)
(364)
(197)
(716)
2.69
3.94
6.84
0.56
0.42
n/a
2.65
(0.11)
(0.64)
(1.60)
(1.17)
(0.98)
1,433
1.66
1,457
1.78
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS
043
Non-interest income
Non-interest income reduced £22m year-on-year (down 10%).
Fee income across Personal and Business was broadly stable. The
major drivers of the reduction were the contribution from our
Investments business, which was £12m lower in 2019 as a result
of our post-acquisition decision to reduce asset management fees
(c.£9m), and the initial impact of the transfer of the business into
the JV with Aberdeen Standard Investments (c.£3m). In addition,
there were adverse fair value movements relating to hedge
accounting ineffectiveness, which should equalise over time,
but reduced non-interest income by £9m year-on-year.
Costs
For the year ended 30 September
Personnel expenses
Depreciation and amortisation expenses
Other operating and administrative expenses
Total underlying operating and administrative expenses
Underlying cost to income ratio (CIR)
2019
£M
365
111
466
942
57%
2018
£M
423
121
454
998
59%
CHANGE
(14)%
(8)%
3%
(6)%
(2)%pts
Overview
Underlying operating and administrative expenses reduced by 6%
year-on-year to £942m, in line with our guidance for <£950m for
the year, as our integration programme gathers pace.
Personnel expenses reduced 14% reflecting early action to address
senior management deduplication as well as initial benefits from
our other integration workstreams. Other operating expenses
increased by 3% as we continued to invest in our customer
propositions and also reflected the cost of running two separate
banks ahead of the FSMA Part VII approval in October 2019.
Net cost savings target on track
We have made good initial progress in delivering against our
target of c.£200m of net cost savings by the end of FY2022,
with £53m of annual run-rate net cost savings achieved already.
This has been delivered primarily through deduplication of senior
management (c.£20m of run-rate savings), as well as the
realisation of initial central costs synergies such as harmonisation
of suppliers (c.£27m of run-rate savings) and operational efficiency
initiatives including deduplication of head office functions (c.£12m
of run-rate savings). This was partly offset by a £7m increase in
the Virgin Money brand trademark licence fee.
Improving efficiency
The 6% reduction in costs more than offset the 3% reduction
in income delivering positive jaws of 3%. This enabled the Group
to reduce its cost:income ratio by 2%pts to 57%, as we progress
on the path towards our target for a mid-40s% ratio by FY2022.
Impairments(1)
Gross cost of risk
Specific provision
releases and recoveries
Net cost of risk
2019
2018
MORTGAGES
BPS
1
BUSINESS
BPS
45
PERSONAL
BPS
333
TOTAL
BPS
27
MORTGAGES
BPS
1
BUSINESS
BPS
36
PERSONAL
BPS
250
(6)
21
TOTAL
BPS
20
(5)
15
TOTAL
CHANGE
(BPS)
7
(1)
6
(1) IFRS 9 transitional disclosures are available in note 5.4 within the notes to the consolidated financial statements.
Overview
The impairment charge increased by 44% or £47m, in line with
expectations. This reflected the full adoption of IFRS 9 across
the Group, portfolio seasoning and a return to more normal levels
of impairment in Business. The cost of risk of 21bps was therefore
6bps higher than FY2018, but was stable across the year as asset
quality has remained resilient.
Divisional performance
Mortgage impairment levels remain very low with no signs of asset
quality stress in the portfolio.
Business gross cost of risk increased to 45bps, which reflected
a more normalised level following an abnormally low level of
impairments in FY2018 with no significant one-off charges. We
remain focused on managing our Business risk profile through
maintaining a diversified portfolio, leveraging our sector specialist
underwriting experience and applying strict client exposure limits.
The underlying credit quality of the book remains strong, with the
probability of default improved on origination in 2019 and
unchanged across the portfolio relative to 2018.
Gross cost of risk in Personal increased by 83bps, reflecting the
adoption of IFRS 9 and the seasoning of the credit card portfolio.
Our focus in Personal is to grow our underweight position through
better accessing our existing customer base and leveraging the
Virgin Money brand to target more affluent segments of the
external market.
Asset quality in the credit card portfolio remains strong, with
30-day arrears of 1.1% well below the industry average of 2.3% and
customer affordability remaining robust. Customer indebtedness
is also lower than the industry with a debt to income of c.23% vs.
c.30% for the industry.
Performance in the personal loan portfolio has benefited from
enhanced scorecards and credit tightening strategies, with growth
in high-quality customers reducing 90 days past due rates on the
book to 0.6% from 0.7% a year ago.
STRATEGIC REPORTGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL RESULTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 044
CHIEF FINANCIAL
OFFICER’S REVIEW
Exceptional items and statutory loss
Underlying profit on ordinary activities before tax
Exceptional items
– Restructuring costs
– Acquisition costs
– Legacy conduct
– Other items
Pro forma (loss)/profit on ordinary activities before tax
Add/(deduct) Virgin Money Holdings (UK) PLC pre-acquisition loss/(profit)(1)
Statutory loss on ordinary activities before tax
Tax credit
Statutory loss for the year
2019
£M
539
(156)
(189)
(433)
(26)
(265)
33
(232)
38
(194)
2018
£M
581
–
(39)
(396)
(62)
84
(248)
(164)
19
(145)
(1) In order to reconcile the pro forma (loss)/profit to the statutory loss, the pre-acquisition results of Virgin Money Holdings (UK) PLC are removed.
Overview
The Group’s pro forma loss before tax was £265m, reflecting
£804m of exceptional costs incurred during the year, which have
been excluded from the underlying performance of the business.
These included significant legacy conduct costs, one-off
acquisition costs, as well as the first full year of restructuring
costs to achieve integration.
Restructuring costs
As outlined at the CMD in June the Group expects to incur
c.£360m of restructuring costs across FY2019-21. The Group
had anticipated incurring this evenly over the period with
c.£120m expected in 2019, however, due to the acceleration of
redundancy initiatives and property closures into September 2019,
we have incurred £156m of restructuring costs during the year.
We will see the synergy benefits of these initiatives in FY2020.
The Group expects to incur a further c.£140m in 2020 as we
accelerate initiatives to mitigate the timing of investments and
inflation, and the remainder in 2021. We continue to expect total
restructuring costs to be c.£360m over the three-year period.
Acquisition costs
The Group incurred acquisition costs of £189m during the year.
This included a one-off charge of £127m for intangible asset
write-offs following a review of the Group’s software estate.
This identified a number of assets (including £70m in relation to
the Virgin Money Digital Bank asset) that are no longer of value
to the Group’s future strategy and were therefore required to be
written down. However, this charge is capital neutral.
Other one-off impacts include £55m of transaction-related costs
incurred by Virgin Money Holdings (UK) PLC and an effective
interest rate (EIR) adjustment credit of £80m relating to the
mortgage portfolio following the harmonisation of accounting
policies.
The Group recognised fair value acquisition accounting
adjustments of £270m net that will be unwound through the
income statement over the lives of the related assets and liabilities
(c.5 years) and £87m was charged in 2019.
Legacy conduct
Legacy conduct costs of £433m include £415m of PPI provisions,
with an additional £385m taken in Q4 following the unprecedented
industry-wide surge in information requests and complaints in
August ahead of the PPI time bar deadline. This provision reflects
the costs of additional complaints (including those from the Official
Receiver), processing costs in relation to the large volume of
information requests, and the costs to process and remediate valid
complaints arising from the information requests. While we still
have a residual volume of requests to process, detailed sampling
has informed the provision we have taken and this is our best
estimate. The Group also incurred £18m of provision costs in
relation to a number of other smaller legacy items.
Other items
The Group incurred several other one-off exceptional costs during
the year, including £30m of costs in preparation for participating in
the RBS Incentivised Switching Scheme, an £11m charge for GMP
pensions equalisation, and an £18m charge for consent solicitation
fees incurred in relation to changing the obligor on Virgin Money
Holdings (UK) PLC’s outstanding debt instruments to the Group’s
holding company. These were partially offset by a £35m gain on
sale of c.50% of Virgin Money Unit Trust Managers to Aberdeen
Standard Investments.
Returns and TNAV
Underlying Return on Tangible Equity (RoTE)
Tangible Net Asset Value (TNAV) per share
2019
10.8%
249.2p
2018
11.0%
260.0p
CHANGE
(0.2)%pts
(10.8)p
Underlying RoTE of 10.8% was slightly lower than the prior year, reflecting lower underlying profit, but with a minimal impact on average
tangible equity from the conduct charges as the bulk of those costs were incurred on the last day of the financial year. Statutory RoTE was
negative reflecting the significant legacy conduct, restructuring and acquisition costs during the year.
TNAV per share reduced c.11p in 2019 to 249.2p, with TNAV build of 31p from underlying profit after tax being more than offset by 28p of
legacy conduct charges and a net 14p negative impact from other movements including restructuring and acquisition related adjustments.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 045
Balance sheet
As at 30 September
Mortgages
Business
Personal
Total customer lending
Relationship deposits(1)
Non-linked savings
Term deposits
Total customer deposits
Risk Weighted Assets (RWAs)
of which Mortgages
of which Business
of which Personal
Wholesale funding
of which Term Funding Scheme (TFS)
Loan to Deposit Ratio (LDR)
Liquidity Coverage Ratio (LCR)
(1) Current account and linked savings balances.
Overview
The Group began the execution of its balance sheet optimisation
strategy in 2019 in which we seek to rebalance our asset mix
towards higher-margin lending and to grow our lower cost
relationship deposits to enable us to replace more expensive
non-linked savings and term deposits.
Continued customer balance growth
Customer lending balances increased by 2.9% during 2019 with
above market growth in Personal and Business lending (as detailed
in the divisional reviews on page 20 and 22), and more muted
growth in Mortgages (covered on page 24). Our lending continues
to be underwritten within our prudent risk appetite and approach.
Customer deposits increased by 4.6%, including a strong 7.1%
growth in our lower cost relationship deposits. We also continued
to grow our non-linked savings balances (+17.6%) to enable us to
replace our more expensive term deposits and to help fund the
balance sheet.
The stronger relative growth in our customer deposits meant
that our Loan to Deposit ratio reduced to 114%.
Further progress on our wholesale funding strategy
Wholesale funding balances were broadly flat during the year,
although there were significant movements within the component
parts. Supported by strong deposit and wholesale funding
generation we repaid £1.3bn of TFS, as we follow a prudent
repayment schedule ahead of contractual maturity.
We were also active in other wholesale funding markets, with a
number of successful and over-subscribed transactions during
the year, including Virgin Money PLC’s inaugural Covered Bond
issuance. This new Covered Bond programme raised over £1bn
in funding across Euro and Sterling markets across two separate
trades. We also issued two further successful transactions from
our Lanark mortgage-backed securities platform, raising c.£1.1bn.
2019
60,079
7,876
5,024
72,979
21,347
20,197
22,243
63,787
24,046
8,846
7,124
4,042
18,506
7,342
114%
152%
2018
59,074
7,538
4,327
70,939
19,938
17,175
23,851
60,963
22,943
8,794
6,604
3,463
18,675
8,637
116%
161%
CHANGE
1.7%
4.5%
16.1%
2.9%
7.1%
17.6%
(6.7)%
4.6%
4.8%
0.6%
7.9%
16.7%
(0.9)%
(15.0)%
(2)%pts
(9)%pts
These were supported by £250m of AT1 issuance in March 2019
and £250m of Tier 2 subordinated debt issuance in December
2018 which strengthened our capital stack, as well as £400m
of senior unsecured debt issuance in August 2019 as we build
towards meeting our final MREL requirements in 2022.
Our balance sheet strength was also underpinned by the consent
solicitation activity undertaken to change the obligor on Virgin
Money Holdings (UK) PLC’s outstanding MREL and AT1 instruments
to the Group’s parent company. All of the Group’s regulatory capital
and MREL instruments are now issued out of Virgin Money UK PLC,
consistent with the single point of entry resolution model.
Further issuance in secured and unsecured formats is expected
in 2020, and we continue to expect that we will issue between
£1.5bn and £2.0bn of MREL eligible senior unsecured funding
by December 2021.
Liquidity and LCR
LCR remained strong at 152%. While the current position reflects
some excess liquidity to mitigate the risks from the FSMA Part VII
process and Brexit uncertainty, the 9%pts reduction in LCR
highlights the ability of the combined Group to operate more
efficiently while continuing to meet regulatory and internal risk
appetite metrics.
Risk weighted assets
RWAs have grown by 4.8% during the year, with overall risk weight
density increasing slightly, largely reflecting the shift in the mix
of the Group’s lending towards higher RWA density lending in
Business and Personal.
Mortgage RWAs remained stable due to lower lending in the year,
along with model improvements that have reduced the portfolio
risk weight density. RWAs in our Personal portfolios have grown
broadly in line with assets, while Business RWAs have increased
slightly above asset growth largely reflecting model updates
undertaken as part of the final implementation of IRB. Non-credit
risk RWAs of £2,989m were broadly stable year-on-year.
STRATEGIC REPORTGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL RESULTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 046
CHIEF FINANCIAL
OFFICER’S REVIEW
Capital
As at 30 September
CET1 ratio
Total capital ratio
MREL ratio
UK leverage ratio
Overview
Despite heavy capital utilisation during the year from legacy
conduct and restructuring and acquisition costs, the Group
maintained a robust capital position with a CET1 ratio of 13.3%
and a total capital ratio of 20.1% as at 30 September 2019.
Capital requirements
Following completion of the Group’s ICAAP the PRA has updated
the capital requirements for the Group. The Pillar 2A CET1
requirement was reduced from 3.6% to 3.0% and the Group’s
fully-loaded CRD IV minimum CET1 capital requirement is now
60bps lower at 11.0%.
CET1 capital movements
Underlying capital generation in the period was 77bps, largely
driven by strong underlying profits of 234bps, offset by growth
in lending, AT1 distributions and ongoing investment as we
continue to invest in developing the business to achieve our
strategic ambitions.
Restructuring and acquisition costs, which are elevated this
year due to the one-off elements, absorbed 84bps of capital
demonstrating that the Group’s underlying capital generation of
77bps was sufficient to fund its ongoing strategy. However, the
scale of the legacy conduct charge consumed 172bps of capital,
leaving the Group’s CET1 ratio at 13.3%.
2019
13.3%
20.1%
26.6%
4.9%
2018
15.1%
20.6%
24.1%
5.1%
CHANGE
(1.8)%pts
(0.5)%pts
2.5%pts
(0.2)%pts
Robust capital position supports strategy
While the PPI provision did have a significant impact on the Group’s
capital position, thanks to the significant buffer the Group was
prudently holding, we have been able to absorb the impact and
remain robustly capitalised.
However, after incorporating feedback from our major
shareholders, the Board has concluded that it is prudent to
conserve capital through the suspension of an ordinary dividend
for 2019.
Our closing CET1 ratio of 13.3% remains above our medium-term
operating level of c.13% and retains a significant management
buffer to our CRD IV regulatory requirement of 11.0%. The Group
has assessed its revised capital plan and determined that it has
sufficient capacity to deliver the strategy and targets as outlined
at the CMD in June.
MREL
The Group’s MREL ratio increased to 26.6%, reflecting £400m
of senior unsecured debt issuance in August 2019 and £250m
of Tier 2 subordinated debt issuance in December 2018. We are
comfortably ahead of our interim 2020 MREL requirement of 21.5%,
and while the final MREL requirements are not yet confirmed,
we expect to issue between £1.5bn and £2.0bn of further MREL
eligible senior unsecured between now and 2022 to meet our
estimated final MREL requirements.
Opening CET1 ratio
IRB accreditation impact
IRB pro forma CET1 ratio
Virgin Money acquisition impact
Opening Combined Group pro forma CET1 ratio (pre-IFRS 9 impact)
IFRS 9 transitional impact (bps)
Opening Combined Group pro forma CET1 ratio as of 1 October 2018 (post-IFRS 9 impact)
Generated (bps)
RWA growth (bps)
Investment spend (bps)
AT1 distributions (bps)
Underlying capital generated (bps)
Restructuring and acquisition costs (bps)
Legacy conduct (bps)
FY2018 ordinary dividends paid (bps)
Other (bps)
Net capital absorbed (bps)
Closing CET1 ratio
2019
10.5%
3.5%
14.0%
1.1%
15.1%
(2)
15.1%
234
(65)
(65)
(27)
77
(84)
(172)
(19)
18
(180)
13.3%
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 047
On track to deliver targets
FY2020 guidance
All CMD targets reaffirmed, including:
Net Interest Margin (NIM)
c.1.60-1.65%
Underlying costs
<£900m
CET1 ratio operating level
c.13%
>12%
Statutory RoTE by FY22
>100bps
CET1 generation p.a. by FY22
Dividend
Reconsider in FY2020
Progressive and sustainable
ordinary dividend c.50% payout ratio over time
Outlook and guidance
The political and economic outlook remains highly uncertain. With
the inevitable volatility arising from an impending General Election
and lack of clarity as to the final shape of any Brexit arrangements,
the UK’s near-term economic prospects remain hard to forecast.
Although sentiment has improved as the threat of a no-deal Brexit
has receded, GDP growth may remain muted and we are prepared
for an outcome in which other key economic indicators decline.
Our strategy was designed to mitigate a muted economic outlook
and the evident industry pressures, with a focus on leveraging the
significant self-help opportunities available to us from reshaping
our balance sheet and becoming more cost-efficient through
deduplication, platform integration and digital transformation.
Despite the short-term external challenges, we remain confident
in the prospects for the Group and we are reaffirming all of the
targets we set at our CMD. We continue to believe that the delivery
of our strategy and targets will deliver increased shareholder value
as measured by the achievement of a statutory RoTE of >12%
by FY2022, CET1 capital generation of >100bps per annum by
FY2022 and an ordinary dividend ambition that is progressive
and sustainable, moving towards a c.50% payout ratio over time.
In the near term, we foresee continuing industry pressures and
economic uncertainty, but our self-help strategy is well placed
to mitigate these. While 2020 will be a year of continued
integration activity and associated costs, it will also see some
exciting developments launched for our customers, now that the
FSMA Part VII banking business transfer process is complete.
Our Net Interest Margin (NIM) for FY2020 is expected to be in
a range of between 1.60% and 1.65%. Pressure from back book
repricing in our mortgage portfolio will ease in FY2020 as our
front book versus back book variance narrows. We will also start
to see benefits from further growth in margin accretive lending
and lower-cost relationship deposits, although pressures from
wholesale funding costs and TFS repayment will continue.
On costs, we will continue working towards our net cost savings
target of c.£200m by FY2022 and expect the Group’s underlying
operating expenses to be less than £900m in FY2020. This will be
underpinned by the delivery of further integration and digitisation
initiatives, but will be partly offset by continued cost inflation and
ongoing investment.
On capital, we intend to operate in line with our CET1 ratio
operating level of c.13%. Underlying capital generation will be used
to fund the capital consumption from restructuring and acquisition
costs, but we will also look to take further opportunities to optimise
our RWAs as we reshape the balance sheet.
While it was necessary to suspend our dividends in 2019 due to the
unexpected legacy conduct charge, we remain committed to our
dividend ambition and the Board will reconsider dividends in line
with normal practice in FY2020.
Lending and deposit growth will continue as set out at the
CMD, with above system growth in Business and Personal,
while Mortgages will grow in line with the market. On deposits,
we expect a high single-digit CAGR in our relationship deposits,
underpinned by the launch and development of the digitally-
enabled Virgin Money Personal Current Account at the end of 2019.
Finally, we will participate in the Bank of England’s annual cyclical
scenario (ACS) stress tests for the first time in 2020. We have
begun preparatory work which will be completed next year, with
the published results expected in late 2020.
In summary, the year ahead promises to be another busy but
exciting period as we execute our strategy in support of delivering
on our ambition to disrupt the status quo.
Ian Smith
Group Chief Financial Officer
27 November 2019
STRATEGIC REPORTGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL RESULTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 048
OVERVIEW OF GROUP RESULTS
– PRO FORMA BASIS
Summary income statement – underlying and pro forma basis(1)
Underlying net interest income
Non-interest income
Total underlying operating income
Underlying operating and administrative expenses
UK Bank levy
Underlying operating profit before impairment losses
Underlying impairment losses on credit exposures
Underlying profit on ordinary activities before tax
– Restructuring costs
– Acquisition costs
– Legacy conduct
– Other items(2)
Pro forma (loss)/profit on ordinary activities before tax
2019
£M
1,433
206
1,639
(942)
(5)
692
(153)
539
(156)
(189)
(433)
(26)
(265)
2018
£M
1,457
228
1,685
(998)
–
687
(106)
581
–
(39)
(396)
(62)
84
CHANGE
%
(2)
(10)
(3)
(6)
1
44
(7)
385
9
(58)
n/a
(1) The summary income statement is presented on an underlying and pro forma basis as explained in the Basis of Presentation.
(2) Other includes a £30m charge in relation to SME transformation, including preparations to participate in the RBS Incentivised Switching Scheme, £18m
of consent solicitation costs relating to the change in obligor of senior debt from Virgin Money Holdings (UK) PLC to CYBG PLC, a charge of £11m for
Guaranteed Minimum Pension (GMP) equalisation in the Group’s defined benefit scheme, £5m of legacy restructuring and separation costs, and £1m of
expenses relating to the transition of Virgin Money Unit Trust Managers (VMUTM) into the joint venture. Offsetting this is a £35m gain on the partial disposal
of VMUTM and a £4m gain recognised on the disposal of the Group’s VocaLink share.
Summary balance sheet – pro forma basis
As at 30 September
Customer loans
Other financial assets
Other non-financial assets
Total assets
Customer deposits
Wholesale funding
Other liabilities
Total liabilities
Ordinary shareholders’ equity
AT1 equity
Non-controlling interests
Equity
Total liabilities and equity
2019
£M
72,979
16,391
1,629
90,999
63,787
18,506
3,685
85,978
4,106
915
–
5,021
2018
£M
70,939
16,202
1,407
88,548
60,963
18,675
3,726
83,364
4,312
450
422
5,184
90,999
88,548
CHANGE
%
2.9
1.2
15.8
2.8
4.6
(0.9)
(1.1)
3.1
(4.8)
103.3
(3.1)
2.8
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 049
Key Performance Indicators(1)
PROFITABILITY
Net interest margin
Underlying RoTE
Underlying CIR
Underlying return on assets
Underlying EPS(2)
As at
ASSET QUALITY
Impairment charge to average customer loans (cost of risk)
Total provision to customer loans
Indexed LTV of mortgage portfolio(3)
REGULATORY CAPITAL
CET1 ratio(4)
Tier 1 ratio
Total capital ratio
MREL ratio
CRD IV leverage ratio
UK leverage ratio
TNAV per share(5)
FUNDING AND LIQUIDITY
Loan to deposit ratio (LDR)
Liquidity coverage ratio (LCR)
Net stable funding ratio (NSFR)
12 MONTHS TO
30 SEP 2019
12 MONTHS TO
30 SEP 2018
1.66%
10.8%
57%
0.54%
28.1p
1.78%
11.0%
59%
0.56%
29.8p
CHANGE
(12)bps
(0.2)%pts
(2)%pts
(2)bps
(1.7)p
30 SEP 2019
30 SEP 2018
CHANGE
0.21%
0.53%
57.2%
13.3%
17.1%
20.1%
26.6%
4.3%
4.9%
249.2p
114%
152%
128%
0.15%
0.51%
57.3%
15.1%
18.3%
20.6%
24.1%
4.6%
5.1%
260.0p
116%
161%
126%
6bps
2bps
(0.1)%pts
(1.8)%pts
(1.2)%pts
(0.5)%pts
2.5%pts
(0.3)%pts
(0.2)%pts
(10.8)p
(2)%pts
(9)%pts
2%pts
(1) For a definition of each of the KPIs, refer to ‘Measuring financial performance – glossary’ on pages 278 to 279. The KPIs include statutory, regulatory and
alternative performance measures.
(2) For pro forma purposes, the weighted average number of ordinary shares in issue assumes that the 540,856,644 share issuance arising on the acquisition
of Virgin Money was completed on 1 October 2017, and excludes own shares held.
(3) LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance. The Clydesdale Bank PLC portfolio is indexed using the MIAC
Acadametrics indices at a given date, while the Virgin Money portfolio is indexed using the Markit indices.
(4) The pro forma CET 1 ratio at 30 September 2018 reflects the impact of the acquisition of Virgin Money and IRB accreditation.
(5) The pro forma total number of ordinary shares in issue used in the TNAV per share calculation for the comparative periods is the number of ordinary
shares in issue on 15 October 2018 following the acquisition of Virgin Money (excluding own shares held). This has been applied across all periods for
comparability purposes.
STRATEGIC REPORTGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL RESULTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 050
OVERVIEW OF GROUP RESULTS
– STATUTORY BASIS
The following tables present the Group on a statutory basis. That is, they include the results of Virgin Money from the date of acquisition
on 15 October 2018. The acquisition has had a significant impact on the Group’s statutory results and financial position as shown below.
Therefore, we believe that it is more helpful to consider the more readily comparable pro forma information set out on the previous pages.
Summary income statement
For the year ended 30 September
Net interest income
Non-interest income
Total operating income
Operating and administrative expenses
UK bank levy
Operating profit/(loss) before impairment losses
Impairment losses on credit exposures(1)
Statutory loss on ordinary activities before tax
Tax credit
Statutory loss after tax
2019
£M
1,514
235
1,749
(1,724)
(5)
20
(252)
(232)
38
(194)
2018
£M
851
156
1,007
(1,130)
–
(123)
(41)
(164)
19
(145)
CHANGE
%
78
51
74
53
(116)
515
41
100
34
(1) Impairment losses on credit exposures for the current period are calculated on an expected credit loss (ECL) basis under IFRS 9, which the Group adopted
on 1 October 2018, and includes the IFRS 9 impairment impact on acquired assets (£103m charge). For all other periods, impairment losses are calculated
under the incurred loss basis as required by IAS 39.
The Group has recognised a statutory loss after tax of £194m (30 September 2018: loss of £145m). The increased loss reflects additional
costs relating to the acquisition of Virgin Money Holdings (UK) PLC in addition to further significant conduct charges. As outlined at the
CMD, the Group has a clear path to narrowing the difference between underlying and statutory profit over the next three years as we put
legacy conduct behind us and restructuring and acquisition costs reduce over time.
Summary balance sheet
As at 30 September
Customer loans
Other financial assets
Other non-financial assets
Total assets
Customer deposits
Wholesale funding
Other liabilities
Total liabilities
Ordinary shareholders’ equity
Additional Tier 1 (AT1) equity
Equity
Total liabilities and equity
2019
£M
72,979
16,391
1,629
90,999
63,787
18,506
3,685
85,978
4,106
915
5,021
2018
£M
33,281
9,234
941
43,456
28,854
8,095
3,321
40,270
2,736
450
3,186
90,999
43,456
CHANGE
%
119
78
73
109
121
129
11
114
50
103
58
109
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 051
Key Performance Indicators(1)
Profitability
Statutory return on tangible equity (RoTE)
Statutory cost to income ratio (CIR)
Statutory return on assets
Statutory basic loss per share
As at
Regulatory capital
CET1 ratio
Tier 1 ratio
Total capital ratio
MREL ratio
CRD IV leverage ratio
UK leverage ratio
Tangible net asset value (TNAV) per share
Funding and liquidity
Loan to deposit ratio (LDR)
Liquidity coverage ratio (LCR)
Net stable funding ratio (NSFR)
12 MONTHS TO
30 SEP 2019
12 MONTHS TO
30 SEP 2018
(6.8)%
99%
(0.23)%
(17.9)p
(6.9)%
112%
(0.34)%
(19.7)p
CHANGE
0.1%pts
(13)%pts
0.11%pts
1.8p
30 SEP 2019
30 SEP 2018
CHANGE
13.3%
17.1%
20.1%
26.6%
4.3%
4.9%
249.2p
114%
152%
128%
10.5%
12.7%
15.9%
19.8%
5.6%
6.5%
262.3p
115%
137%
119%
2.8%pts
4.4%pts
4.2%pts
6.8%pts
(1.3)%pts
(1.6)%pts
(13.1)p
(1)%pts
15%pts
9%pts
(1) For a definition of each of the KPIs, refer to ‘Measuring financial performance – glossary’ on pages 278 to 279. The KPIs include statutory, regulatory
and alternative performance measures.
Reconciliation of statutory to pro forma results
The statutory basis presented within this section reflects the Group’s results as reported in the financial statements, incorporating Virgin
Money Holdings (UK) PLC from 15 October 2018. The pro forma basis includes the consolidated results of Virgin Money Holdings (UK) PLC
as if the acquisition had occurred on 1 October 2018. The underlying results reflect the Group’s results prepared on an underlying basis
as presented to the CEO, Executive Leadership Team and Board. These exclude certain items that are included in the statutory results,
as management believes that these items are not reflective of the underlying business and do not aid meaningful period-on-period
comparison. The table below reconciles the statutory results to the pro forma results, and full details on the adjusted items to the
underlying results are included on page 280.
STATUTORY BASIS
INCLUDE VIRGIN MONEY
PRE-ACQUISITION RESULTS
PRO FORMA BASIS
Net interest income
Non-interest income(1)
Total operating income
Operating and administrative expenses
UK bank levy
Operating profit/(loss) before impairment losses
Impairment losses on credit exposures
(Loss)/profit on ordinary activities before tax
Restructuring costs
Acquisition costs
Legacy conduct
Other items
Underlying profit on ordinary activities before tax
2019
£M
1,514
235
1,749
(1,724)
(5)
20
(252)
(232)
2018
£M
851
156
1,007
(1,130)
–
(123)
(41)
(164)
1 OCT TO
15 OCT
2018
£M
22
9
31
(60)
–
(29)
(4)
(33)
2018
£M
606
75
681
(368)
–
313
(65)
248
2019
£M
1,536
244
1,780
(1,784)
(5)
(9)
(256)
(265)
156
189
433
26
539
2018
£M
1,457
231
1,688
(1,498)
–
190
(106)
84
–
39
396
62
581
(1) ‘Fair value gains and losses on financial instruments’ were previously treated as an adjustment to underlying profit within the Virgin Money accounts
but have been reclassified to underlying non-interest income in line with the Group’s presentation.
STRATEGIC REPORTGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONFINANCIAL RESULTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 052
OVERVIEW OF GROUP RESULTS
– STATUTORY BASIS
Reconciliation of pro forma to underlying results
The underlying results presented within this section reflect the Group’s results prepared on an underlying basis as presented to the CEO,
Executive Leadership Team and Board. These exclude certain items that are included in the pro forma results, as management believes
that these items are not reflective of the underlying business and do not aid meaningful period on period comparison. The tables below
reconcile the pro forma results to the underlying basis, and full details on the adjusted items are included on page 280:
2019 income statement
Net interest income
Non-interest income
Total operating income
Total operating and
administrative expenses
before impairment losses
UK bank levy
Operating profit/(loss)
before impairment losses
Impairment losses on
credit exposures
(Loss)/profit on ordinary
activities before tax
Financial performance
measures
RoTE
CIR
Return on assets
Basic EPS
2018 income statement
Net interest income
Non-interest income
Total operating income
Total operating and
administrative expenses
before impairment losses
Operating (loss)/profit
before impairment losses
Impairment losses on
credit exposures
(Loss)/profit on ordinary
activities before tax
Financial performance
measures
RoTE
CIR
Return on assets
Basic EPS
STATUTORY
RESULTS
£M
1,514
235
1,749
INCLUDE
VIRGIN MONEY
PRE-ACQUISITION
RESULTS
£M
22
9
31
PRO FORMA
RESULTS
£M
1,536
244
1,780
RESTRUCTURING
COSTS
£M
–
–
–
ACQUISITION
COSTS
£M
(103)
–
(103)
LEGACY
CONDUCT
£M
–
–
–
OTHER
£M
–
(38)
(38)
UNDERLYING
BASIS
£M
1,433
206
1,639
(1,724)
(5)
20
(252)
(232)
(6.8)%
99%
(0.23)%
(17.9)p
(60)
–
(29)
(1,784)
(5)
(9)
(4)
(256)
(33)
(265)
156
–
156
–
156
189
–
86
103
189
433
–
433
–
433
64
–
26
–
26
(942)
(5)
692
(153)
539
(0.7)%
1%
(0.03)%
(1.7)p
(7.5)%
100%
(0.26)%
(19.6)p
3.5%
(10)%
0.15%
9.3p
4.3%
(5)%
0.19%
11.2p
9.9%
(26)%
0.43%
25.7p
0.6%
(2)%
0.03%
1.5p
10.8%
57%
0.54%
28.1p
STATUTORY
RESULTS
£M
851
156
1,007
INCLUDE
VIRGIN MONEY
PRE-ACQUISITION
RESULTS
£M
606
75
681
PRO FORMA
RESULTS
£M
1,457
231
1,688
(1,130)
(368)
(1,498)
(123)
(41)
(164)
(6.9)%
112%
(0.34)%
(19.7)p
313
190
(65)
(106)
248
84
6.4%
(23)%
0.38%
18.4p
(0.5)%
89%
0.04%
(1.3)p
ACQUISITION
COSTS
£M
–
–
–
LEGACY
CONDUCT
£M
–
–
–
OTHER
£M
–
(3)
(3)
UNDERLYING
BASIS
£M
1,457
228
1,685
39
39
–
39
396
396
–
396
65
62
–
62
(998)
687
(106)
581
0.9%
(2)%
0.04%
2.4p
9.1%
(24)%
0.41%
24.8p
1.5%
(4)%
0.07%
3.9p
11.0%
59%
0.56%
29.8p
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL RESULTS 053
GOVERNANCE
Chairman’s letter
Board of Directors
Executive Leadership Team
Corporate governance report
Governance and Nomination Committee report
Audit Committee report
Risk Committee report
Directors’ remuneration report
Directors’ report
54
56
62
66
80
86
93
100
132
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 054
A LETTER FROM
OUR CHAIRMAN
“ The Board is
committed to
ensuring delivery
of our refreshed
strategy and believe
strong corporate
governance is a
key enabler.”
Jim Pettigrew, Chairman
Dear shareholder,
Strategy
I am pleased to present our corporate governance report for 2019
setting out our corporate governance practices, the work of the
Board during the year and including reports from the Chair of each
principal Board Committee.
Following the completion of the acquisition of Virgin Money
Holdings (UK) PLC in 2018, the Board has focused this year on
overseeing the programme to bring together the Clydesdale
Bank PLC and Virgin Money PLC businesses. Strong corporate
governance has been key in preparing for the FSMA Part VII
process which was completed in October 2019. The Board
remains focused on ensuring the highest standards of corporate
governance underpin the delivery of our refreshed strategy
and the commitments we made to shareholders at our Capital
Markets Day in June 2019.
Clive Adamson will step down from the Board on 29 November
2019. I am grateful for Clive’s contribution during his time
on the Board and as Risk Committee Chair. Geeta Gopalan,
a Non‑Executive Director on the Board will replace Clive as
Risk Committee Chair, subject to regulatory approval, and I
wish Geeta well in her new role.
A key focus for the Board this year has been working closely with
the executive management team to shape our refreshed strategy
that builds on our core capabilities and those added by the Virgin
Money Holdings (UK) PLC acquisition. The Board is fully committed
to our ambition to disrupt the status quo in UK banking and to
deliver increased shareholder value. During the year, the Board
spent considerable time engaging on the strategic planning
process and provided challenge and input across a series of
strategy workshops. You can read more about the Board’s
involvement on page 76.
Coming together as one business
The Board has been kept informed throughout the year on progress
in delivering the strategic and financial plan that will see us deliver
the full integration of Virgin Money Holdings (UK) PLC including
progress across the four strategic pillars explained on page 13 of
the strategic report. The Board has been, and will continue to be,
focused at all times on ensuring the strategy delivers long‑term
increased shareholder value. The Board has spent time in the run
up to the FSMA Part VII scheme effective date monitoring the
progress of the strategic integration programme to bring together
our two legacy businesses and will continue to do so over the
coming year. The Board has established an advisory group to
support the Executive Leadership Team in delivering the
integration and transformation programme, leveraging the skills
and experience of Board members. A new dashboard has been
introduced to regularly report to the Board on progress against
our Capital Markets Day commitments.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 055
Understanding what’s important for our stakeholders
Engaging and responding to all our stakeholders is a core part
of the Board’s agenda and ensures that we are focusing on the
things that matter. This year the Board continued to develop strong
relationships with all stakeholders and considered their feedback
when making key decisions throughout the year – you can read
more on pages 76 to 77. For example, this year the Board enhanced
its awareness of customer feedback through new reports from
each business division and monitoring Net Promoter Score. The
Culture Dashboard which was introduced in 2018 was further
developed to give insights on the thoughts and opinions of our
colleagues particularly as our new Purpose, Values and Behaviours
were developed and launched. The Board kept closer to the issues
that matter to stakeholders in our communities and supported
the refreshed Sustainability Strategy. Going forward, the Board
will receive more regular updates on our performance against
that strategy and how we are supporting society.
Directors were very pleased to have the opportunity to meet
with shareholders at our Annual General Meeting in January in
Melbourne and to discuss with shareholders a range of topics
including the future and opportunities for the Group following the
acquisition of Virgin Money Holdings (UK) PLC. The Board was,
however, disappointed that 20% or more of votes were cast against
the Board recommendation to approve the Directors’ Annual Report
on Remuneration for the year ended 30 September 2018 and also
the Board recommendations to authorise the Directors to allot
equity securities in connection with AT1 securities, issue further
AT1 securities and to dis‑apply statutory pre‑emption rights in
relation to those securities.
We have listened carefully to our shareholders and wider
stakeholders and have taken action in response to that feedback
and we issued an Update Statement in July 2019.
As disclosed in our Update Statement, our intention throughout the
year was to proactively engage with our shareholders and other
stakeholders to create better understanding of remuneration
matters concerning the Group.
Since the AGM, the Non‑Executive members of the Board
have been preparing for the review of our Executive Directors’
Remuneration Policy, which will be subject to shareholder approval
at the upcoming AGM and have engaged in open dialogue with our
largest shareholders, between them representing approximately
60% of Virgin Money UK PLC voting rights. In addition to listening
to our shareholders we extended this dialogue to include several
voting guidance services both in the UK and Australia.
It is clear from these discussions that there is majority support
for our approach but that shareholders expect us to act upon the
areas we previously identified for improvement. We have listened
carefully to our shareholders and more information on how we
intend to address their feedback, improve disclosures and ensure
our approach to remuneration supports our strategy can be found
in the Chair of Remuneration Committee’s statement on pages 101
to 103 of this report.
We confirmed in our Update Statement that to maintain compliance
with regulatory capital requirements and achieve balance sheet
efficiency, Directors believe it is in the best interests of the
Company and shareholders to have continued flexibility to issue
AT1 securities and that AT1 securities would only be converted
into equity in the unlikely event that the Group’s CET1 ratio falls
below 7%. As at 30 September 2019, the Group has a CET1 ratio
of 13.3%. Following feedback from shareholders, it is the
Company’s intention to seek to renew the Directors’ authorities
relating to AT1 Securities on an annual rolling basis rather than for
a period of five years, and the resolutions to be put to shareholders
at the 2020 Annual General Meeting will be on this basis.
Board effectiveness
A key part of my role as Chairman is to ensure the Board and its
individual members operate effectively. A highly effective Board is
key to supporting the delivery of our refreshed strategic priorities.
Our Board effectiveness needs to keep pace with the rapidly
changing environment our business operates in and the
expectations of consumers and other stakeholders. For these
reasons, the Board agreed to bring forward the timing of our next
externally facilitated review to commence in 2019 so that we
could get insights on Board effectiveness at the outset of delivery
of our refreshed strategy and in the early stages of the Group’s
transformation programme. The review is well progressed and the
Board is expected to discuss the findings and recommendations
by the end of this calendar year and will report on the key points
and action taken in our 2020 corporate governance report.
Looking ahead
In the year ahead, the Board will continue to monitor the progress
of the integration and business transformation programmes
and will continue to engage with all stakeholders, ensuring their
feedback is fully considered in the Board’s decision making.
Finally, I would like to thank fellow Board members and all
colleagues for their support and hard work throughout 2019.
Jim Pettigrew
Chairman
27 November 2019
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE
056
BOARD OF
DIRECTORS
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 057
TOP ROW
Jim Pettigrew
Chairman
David Bennett
Deputy Chairman and Senior
Independent Non-Executive Director
Clive Adamson
Independent Non-Executive Director
(will step down from the Board on
29 November 2019)
Paul Coby
Independent Non-Executive Director
Geeta Gopalan
Independent Non-Executive Director
MIDDLE ROW
Adrian Grace
Independent Non-Executive Director
Fiona MacLeod
Independent Non-Executive Director
Darren Pope
Independent Non-Executive Director
Dr Teresa Robson-Capps
Independent Non-Executive Director
BOTTOM ROW
Amy Stirling
Non-Executive Director
Tim Wade
Independent Non-Executive Director
David Duffy
Executive Director and
Chief Executive Officer
Ian Smith
Executive Director and
Group Chief Financial Officer
Lorna McMillan
Group Company Secretary
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 058
BOARD OF
DIRECTORS
Jim Pettigrew
Chairman
GOV REM
Joined the Group
September 2012 and became Chairman in 2014
David Bennett
Deputy Chairman and Senior Independent Non-Executive Director
AUDIT GOV REM RISK
Joined the Group
October 2015
Key strengths and experience
— Extensive financial services experience
— Has been Chairman of several public listed companies
Key strengths and experience
— Strong retail banking knowledge and experience
— Has led major organisational, operational and structural change
Jim was formerly Chief Executive Officer at CMC Markets PLC,
Chief Operating Officer at Ashmore Group PLC, Group Finance
Director at ICAP PLC and Deputy Group Finance Director and
Group Treasurer at Sedgwick Group PLC. He is a chartered
accountant and has extensive Non-Executive Director experience
in a listed environment. He was previously Chairman of The
Edinburgh Investment Trust PLC and Miton Group PLC, Senior
Independent Non-Executive Director of Crest Nicholson PLC,
Non-Executive Director at Aberdeen Asset Management PLC,
Non-Executive Director at AON UK Limited and Non-Executive
Director at Hermes Fund Managers Limited. He is a past President
of the Institute of Chartered Accountants of Scotland, a former
Chairman of Scottish Financial Enterprise, and a former Co Chair
of Scotland’s Financial Services Advisory Board. His breadth of
experience, credibility with key stakeholders and strong leadership
qualities make him an effective Chairman.
David was Group Finance Director of Alliance & Leicester plc for
six years before becoming its Group Chief Executive. Following the
acquisition of Alliance & Leicester plc by Banco Santander he was
appointed Executive Director on the Board of Abbey National plc.
His in-depth experience of retail banking and involvement in
organisational, operational and structural change is invaluable as
the Group executes its strategy. He was formerly Chairman of
Homeserve Membership Limited and Together Financial Services
Limited and has significant Non-Executive Director experience in
a listed environment which has included being a Non-Executive
Director of Bank of Ireland (UK) PLC, easyJet plc, and CMC
Markets PLC.
Key external appointments
Chairman of Ashmore Group plc and Non-Executive Director
of PayPal (Europe) S.a.r.l et Cie, S.C.A.
Key external appointments
Senior Independent Non-Executive Director of Rathbone
Brothers Plc and Director of a subsidiary company within the
Rathbone Brothers Plc group; and Chairman of RBC Europe
Limited and Director of subsidiary companies within the
RBC group.
Clive Adamson
Independent Non-Executive Director
(will step down from the Board on 29 November 2019)
RISK AUDIT
Joined the Group
July 2016
Key strengths and experience
— Significant experience of the UK financial services regulatory
regime
— Strong understanding of the UK and global banking industry
and related risks
Clive has considerable experience of UK and global economic,
banking and regulatory matters gained from an extensive career in
banking and financial services regulation. He held senior executive
and advisory positions with the Financial Conduct Authority (FCA),
the former Financial Services Authority and the Bank of England.
He was previously Head of Supervision and an Executive Director
of the Board of the FCA until May 2015 and Chairman of
J.P. Morgan International Bank until January 2019.
Key external appointments
Senior Independent Non-Executive Director at Ashmore Group
plc; Non-Executive Director of M&G plc and Director of a
subsidiary company within the M&G plc group; Non-Executive
Director at J.P. Morgan Securities PLC; and senior adviser at
McKinsey & Company.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 059
Key
REM Remuneration Committee
RISK Risk Committee
AUDIT Audit Committee
GOV Governance and Nomination Committee
Chair
Paul Coby
Independent Non-Executive Director
Adrian Grace
Independent Non-Executive Director
RISK
Joined the Group
June 2016
REM
Joined the Group
December 2014
Key strengths and experience
— Significant e-commerce, international and technology
Key strengths and experience
— Career has spanned a range of consumer and commercial
experience
financial services sectors
— Experience of leading strategy-led IT activity in public
— Extensive experience of designing and implementing substantial
listed companies
change programmes
Paul’s understanding of how technology has changed consumer
behaviour, how advances in digital technology can impact customer
outcomes and his appreciation of the end-to-end customer journey
in a strategic omni-channel context is invaluable to the Group as
we develop new products and digital capability. In April 2018, Paul
was appointed Chief Information Officer (CIO) of Johnson Matthey
PLC. Prior to this, Paul was the John Lewis Partnership’s CIO,
responsible for leading and coordinating IT across the John Lewis,
Waitrose and JLP Group. Previously, Paul was IT Director at John
Lewis and CIO at British Airways for 10 years. Paul’s other previous
roles include Chairman of the Société Internationale de
Télécommunications Aéronautiques (SITA), the global provider of
systems, solutions and telecommunications to the air transport
industry, Non-Executive Director at Pets at Home Group Plc and
at P&O Ferries Limited, Chairman of the eSkills UK CIO Board and
Chairman of the oneworld CIO Group which coordinated IT links
across the 10 airline oneworld Alliance partners.
Key external appointment
Chief Information Officer of Johnson Matthey plc.
Adrian has extensive financial, business leadership and general
management experience which has involved a variety of senior
roles. Adrian’s experience of delivering transformational growth
through simple customer-focused visions and plans is aligned to
the Group’s strategy. Having started his career with the Leeds
Permanent Building Society and then Mercantile Credit, Adrian
joined GE Capital where he spent time in the UK, Asia, and the
Americas. He became Managing Director of the Small Business
Division at Sage Group plc. He was Chief Executive at Barclays
Insurance and Managing Director of Commercial Banking within
the Corporate Division of HBOS. Since 2011 Adrian has been
Chief Executive Officer at Aegon UK having joined Aegon in 2009
as Group Business Development Director. He was previously on
the boards of the Association of British Insurers and Scottish
Financial Enterprise.
Key external appointments
Director of various companies within the Aegon group.
Geeta Gopalan
Independent Non-Executive Director
RISK
Joined the Group
October 2018
Key strengths and experience
— Over 25 years of experience of financial services and
retail banking
— Particularly experienced in payments and digital innovation
Geeta was Director of Payment Services with HBOS plc and
previously Managing Director, UK Retail Bank and Business
Development Head EME at Citigroup. Geeta was also formerly the
Chair of Monitise Europe and was previously a Non-Executive
member and vice-chair of the England Committee of the Big Lottery
Fund. Geeta joined the Board as part of the Group’s acquisition of
Virgin Money Holdings (UK) PLC and has been a Director of Virgin
Money PLC since June 2015. She is a chartered accountant.
Key external appointments
Non-Executive Director of Funding Circle Holdings Plc,
Ultra Electronic Holdings Plc and Wizink Bank S.A.
Fiona MacLeod
Independent Non-Executive Director
GOV REM RISK
Joined the Group
September 2016
Key strengths and experience
— Significant experience of mergers and acquisitions
— Extensive knowledge and experience of culture change
programmes and large scale change programmes
Fiona has 30 years of international business experience in leading
complex, large scale business transformation and in managing the
commercial, human resources and cultural aspects of change
programmes. She has demonstrated this both as an executive
and as an advisory consultant to both listed and governmental
organisations. A substantial part of her career was at BP Group plc
where she held various executive positions encompassing Mergers
and Acquisitions, Branding and Marketing and latterly the role of
President Retail, USA & Latin America. Fiona was formerly Senior
Independent Non-Executive Director of SThree plc.
Key external appointment
Non-Executive Director of Denholm Oilfield Services Limited.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 060
BOARD OF
DIRECTORS
Darren Pope
Independent Non-Executive Director
AUDIT
Joined the Group
October 2018
Key strengths and experience
— Significant recent and relevant financial experience
— Extensive UK banking and financial services knowledge
Darren has over 30 years of experience in retail banking and
financial services. Darren held the post of Chief Financial Officer
of TSB Bank plc, having taken a lead role in the design and
divestment of the TSB business from Lloyds Bank plc and its
subsequent IPO and takeover. He previously held a number of
executive and senior roles at Lloyds Banking Group plc including
Retail Bank Commercial Director. Darren joined the Board as part
of the Group’s acquisition of Virgin Money Holdings (UK) PLC and
has been a Director of Virgin Money PLC since March 2017. He is
a Fellow of the Chartered Institute of Certified Accountants.
Key external appointment
Senior Independent Non-Executive Director of Equiniti Group
plc and Network International Holdings plc.
Dr Teresa Robson-Capps
Independent Non-Executive Director
AUDIT
Joined the Group
October 2014
Key strengths and experience
— Career has included significant financial services and retail
experience
— A chartered management accountant with a Doctorate in
Accounting and Management Control
Teresa has a breadth of experience gained from executive
leadership roles with BT Mobile, Sears plc, Eagle Star/Zurich
Financial Services, Cable & Wireless, Reality and Accenture.
She joined HSBC Group in 2006 and from 2010 was Deputy Head,
Direct Bank & First Direct. Teresa also has strong board experience
gained from her previous roles as Chairman of ACS Clothing Group
Limited and Non-Executive Director of Broker Network Holdings
Limited, Paymentshield Group Holdings Limited, PowerPlace
Insurance Services Limited, Towergate Insurance Limited and
Yorkshire Water Services Limited.
Key external appointments
Non-Executive Director of Hastings Group Holdings PLC,
FIL Investment Services (UK) Limited and FIL Holdings
(UK) Limited.
Amy Stirling
Non-Executive Director
Joined the Group
October 2018
Key strengths and experience
— Has held board roles across a range of sectors including
financial services
— Strong financial expertise
Amy has extensive board, financial and management experience
from senior and board roles in a range of sectors including
telecommunications, financial services and commerce. She was
previously Non-Executive Director of Pets at Home Group Plc and
the UK Cabinet Office. Amy is a Fellow of the Chartered Institute
of Accountants of England and Wales. Amy’s appointment to the
Board is pursuant to Virgin Enterprises Limited’s right under a Brand
Licence Agreement.
Key external appointments
Chief Financial Officer of the Virgin Group and Non-Executive
Director of RIT Capital Partners plc.
Tim Wade
Independent Non-Executive Director
AUDIT GOV RISK
Joined the Group
September 2016
Key strengths and experience
— Significant recent and relevant financial experience
— Over 20 years of senior experience in retail financial services,
in both the UK and internationally
An Australian national, Tim is an experienced Chief Financial
Officer, a chartered accountant and a Fellow of the Institute of
Chartered Accountants of Australia. Tim was Managing Director at
AMP International, responsible for AMP Bank and the Virgin Direct
(now Virgin Money) joint venture. He began his career at Arthur
Andersen working in Melbourne and Singapore, and in 1994 he
joined Colonial Limited, the mutual financial services group, as
Chief Taxation Counsel. He became Group Chief Financial Officer
in 1997 and Executive Director of State Bank of New South Wales.
Tim subsequently oversaw the IPO of Colonial and was involved
in Colonial’s subsequent acquisition by Commonwealth Bank –
at the time the largest acquisition in Australian corporate history.
His previous Non-Executive Director board experience includes
Macquarie Bank International Limited, Friends Life Group Limited,
Monitise plc and The Access Bank UK Limited.
Key external appointments
Non-Executive Director of RBC Europe Limited, Chubb
Underwriting Agencies Limited and The Coeliac UK Trading
Company Limited.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 061
Key
REM Remuneration Committee
RISK Risk Committee
AUDIT Audit Committee
GOV Governance and Nomination Committee
Chair
David Duffy
Executive Director and Chief Executive Officer
Joined the Group
June 2015
Lorna McMillan
Group Company Secretary
Joined the Group
September 1994
Key strengths and experience
— Significant international finance and banking experience
— Proven ability to build and transform businesses and lead strong
Key strengths and experience
— Strong background in risk and governance
— Extensive knowledge of the Group
management teams
Lorna has broad experience and knowledge gained from over
25 years in the Group having held various roles in retail and
business banking, wholesale banking, risk management and legal
and governance areas. Lorna was appointed Company Secretary
in October 2014.
Prior to joining the Group, David was Chief Executive Officer at
Allied Irish Banks plc, one of the largest retail and commercial
banks in Ireland. He is a former Chief Executive Officer of Standard
Bank International where he had responsibility for operations in
the UK, Europe, Latin America and Asia. He was also previously
Head of Global Wholesale Banking Network with ING Group and
President and Chief Executive Officer of the ING wholesale
franchises in the United States and Latin America. David is a past
President of the Banking and Payments Federation of Ireland and
a past Director of the European Banking Federation. David’s
broad-based skills, leadership, energy and strategic vision are
invaluable to the Group as it continues its strategic journey and
cultural transformation.
Key external appointments
Senior Independent Non-Executive Director of UK Finance
Limited, the industry body representing leading firms providing
finance, banking, markets and payments-related services in
or from the UK; HM Treasury Fintech Envoy for England and
a board member of The Northern Powerhouse Partnership.
Ian Smith
Executive Director and Group Chief Financial Officer
Joined the Group
November 2014
Key strengths and experience
— Considerable financial and audit background
— Extensive retail banking experience
Ian has considerable experience in finance, audit and advising on
bank strategy and corporate transactions from a career spanning
more than 25 years. He has held senior finance roles in HBOS plc
and Lloyds Banking Group plc. He joined the Group in November
2014 from Deloitte LLP where he was a partner specialising in
financial services.
Key external appointment
Non-Executive Director of 67 Pall Mall Limited.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 062
EXECUTIVE
LEADERSHIP TEAM
The Executive Leadership Team
is responsible for delivering the
initiatives that underpin the Group’s
refreshed strategic priorities as
detailed in the Strategic Report.
The team operates under the
direction and authority of the
Chief Executive Officer.
David Duffy
Executive Director and
Chief Executive Officer
David joined the Group
in June 2015.
Read his full biography
on page 61
Ian Smith
Executive Director and
Group Chief Financial Officer
Ian joined the Group
in November 2014.
Read his full biography
on page 61
Hugh Chater
Group Mortgages Director
Joined the Group
October 2018
Key strengths and experience
Hugh has more than 25 years of experience in financial services.
He was an executive founder at MBNA Europe, joining in 1993
from KPMG Management Consulting.
At MBNA Hugh held executive roles in HR, Credit Management,
Customer Satisfaction and Marketing before becoming Chief
Operating Officer and then UK Managing Director. In 2007
Hugh joined RBS Retail to run the consumer credit card business.
He subsequently ran the current account, savings, investments
and insurance products. Hugh joined Virgin Money Holdings (UK)
PLC in June 2016 with responsibility for commercial performance,
customer outcomes and optimising distribution and
servicing channels.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 063
Lucy Dimes
Group Business
Transformation Director
Joined the Group
July 2019
Fraser Ingram
Group Chief Operating Officer
Joined the Group
February 2016
Key strengths and experience
Lucy has more than 30 years of international leadership experience
across the Technology, Media & Telecommunications and Financial
& Investment Services sectors. She has deep functional experience
in technology/digital product development and platform
management, operations, sales and marketing, strategy, M&A,
integration, transformation and regulatory compliance.
Lucy is responsible for improving the effectiveness and efficiency
of the entire Group and providing assurance and end-to-end
oversight on all costs, investments and benefits. As such, her role
spans day-to-day operating activities as well as integration,
transformation and strategic initiatives.
Lucy previously served as Chief Executive Officer EMEA for UBM
plc; Chief Executive Officer UK and Ireland for Fujitsu Services;
Chief Operating Officer for Equiniti Group plc; and CEO UK & Ireland
for Nokia. This followed a 19-year career in BT Group plc, latterly
as Managing Director, Group and Openreach Service Operations.
Key strengths and experience
Fraser’s career in financial services spans over 35 years and he
brings a wealth of experience in banking, innovation and Fintech.
Fraser’s main role is leading the technology and operational
functions of the Group, exploring new technologies and
opportunities, while shaping its future strategy.
Since joining the Group in 2016, as Chief Information Officer (CIO),
Fraser has led the digitisation and transformation of the Group,
both for customers and colleagues. Before joining the Group,
Fraser was Chief Operating Officer of Kleinwort Benson, and prior
to this he held a wide range of senior business and technology
roles, mainly in the Royal Bank of Scotland group, including CIO
of Citizens Bank in the USA.
A Fellow of the Chartered Institute of Bankers, Fraser holds an
MBA from Aston Business School. In addition, he is a founding
trustee of CUDECA, the first independent hospice in Spain,
which he has supported since 1992.
Kate Guthrie
Group Human
Resources Director
Joined the Group
January 2016
Enda Johnson
Group Corporate
Development Director
Joined the Group
September 2015
Key strengths and experience
Bringing more than 30 years of domestic and international
HR experience, Kate is responsible for the development and
implementation of the Group’s innovative People Strategy,
including the Group’s Purpose and Values.
Kate joined from Lloyds Banking Group, following 11 years of
service in a number of senior HR Director positions, most recently
HR Director for Culture, Capability and Engagement. During her
career, she has worked in six different blue-chip organisations
across four industrial sectors, including fast-moving consumer
goods and retail. She has extensive experience managing mergers,
acquisitions, organisational restructures, culture change, leadership
and talent development, in addition to employee relations.
Kate is a trustee on the board of Action for Children, one of
the UK’s leading children’s charities, and a trustee of the Virgin
Money Foundation.
Key strengths and experience
Enda is responsible for Strategy and Corporate Finance activity,
leading the strategic planning process across the Group.
Before joining the Group, Enda worked at Allied Irish Bank plc in
Dublin, where he was Head of Corporate Affairs and Strategy. Prior
to this, Enda was a member of the Banking Unit at the Irish National
Treasury Management Agency (NTMA), where he worked on the
recapitalisation and restructure of Irish banks following the global
financial crisis.
Before joining the NTMA, Enda worked with Merrill Lynch in
New York, London and California in the firm’s investment banking
and capital markets divisions, focusing on client advisory and
equity transactions for global clients on a cross-industry basis.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 064
EXECUTIVE
LEADERSHIP TEAM
Fergus Murphy
Group Personal Banking
Director
Joined the Group
January 2016
Helen Page
Group Brand and
Marketing Director
Joined the Group
December 2012
Key strengths and experience
Fergus has more than 25 years of experience in financial services
and is responsible for the delivery of the Group’s Personal Banking
activities: customer base, customer experience and strategy
across products, propositions channels, conduct, performance
and portfolio management.
Prior to joining the Group, Fergus held key roles at Allied Irish Bank
from 2011 until 2015, including Director of Products and Capital
Markets and, most recently, Director of Corporate Wholesale
and Institutional Banking. From 2008 until 2011 he served as CEO
and Managing Director of EBS Building Society and EBS Limited.
Fergus also held a number of senior positions at Rabobank
International between 1994 and 2007. He served as CEO Asia
region from 2003 and was previously a member of the firm’s
Global Financial Markets management team, holding roles as
Head of Global Treasury and Head of Global Investment Banks.
Key strengths and experience
Helen has more than 25 years of experience in marketing,
consultancy and product development, including over 15 years
in financial services.
Following the acquisition of Virgin Money Holdings (UK) PLC in
2018, Helen assumed brand, marketing and customer experience
responsibilities for all brands and she is responsible for creating
and implementing the Group’s marketing strategy and developing
initiatives to support growth in line with the commercial plan.
Prior to joining the Group, Helen spent eight years at RBS in a
number of roles, including Managing Director for Marketing and
Innovation, where she held responsibility for all UK brands across
the Retail, Commercial and Corporate divisions.
Helen was also Head of Brand Marketing at Argos, where
she relaunched the catalogue company as a retailer. She also
held several product and marketing roles at Abbey National
(now Santander), including Head of Marketing.
Gavin Opperman
Group Business Banking
Director
Joined the Group
November 2015
James Peirson
Group General Counsel
Joined the Group
November 2014
Key strengths and experience
Gavin brings more than 30 years of leadership experience in risk,
operations and front-line digital, retail, commercial, corporate and
investment banking services, across a wide range of geographies.
Gavin is responsible for developing and leading the Group’s
business banking strategy, helping to reinforce its position
as a full-service business bank.
Gavin was previously Regional Head of Consumer Banking
(Hong Kong, Taiwan and China), Standard Chartered based
in China. Prior to that he spent almost 20 years with Barclays/
Absa Group, where he progressed through various senior roles
before being appointed as Managing Director of Absa (Asia) Ltd
and later Chief Executive of Absa’s retail bank.
Key strengths and experience
James joined the Group’s former parent company in May 2005
and was appointed as General Counsel for the Group in 2014.
James is responsible for managing legal risk for the Group and for
providing high-quality legal, compliance and company secretariat
services to the Board of Directors, CEO and the Leadership Team.
This enables the business to meet strategic objectives and deliver
for its customers.
James’s previous roles include leading NAB’s London branch
legal team and roles supporting NAB and Clydesdale Bank
Treasury activities as part of NAB’s Capital and Funding legal
team in Melbourne and London. Prior to joining NAB, James
worked in private legal practice for Hogan Lovells in London,
Paris and Frankfurt.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 065
Mark Thundercliffe
Group Chief Risk Officer
Joined the Group
September 2016
Key strengths and experience
Mark has more than 30 years of financial services experience and
is responsible for managing and monitoring effective governance
of significant risks. He joined the Group from HSBC where he was
Chief Risk Officer responsible for management and oversight of
risk for HSBC’s Retail Banking and Wealth Management business
in 18 countries across the UK, Europe, the Middle East and Africa.
Mark has also held several senior international positions,
including President and CEO (Asia) with Home Credit in Hong Kong.
He was also an Executive Director and Business Head (Russia)
with Renaissance Capital in Moscow. With Citigroup he progressed
from Chief Risk Officer (UK and Ireland) to become CEO of
Citi Consumer (Russia). Prior to Citi, he worked with Associates
Capital Corporation, latterly as Executive and Business Head,
based in India.
Mark is a Fellow of the Chartered Institute of Credit Management.
Emma Tottenham
Group Corporate
Communications
and Sustainability Director
Joined the Group
January 2017
Key strengths and experience:
Emma was appointed as Group Corporate Communications and
Sustainability Director in 2019 and previously held the role of Chief
of Staff to the CEO. She is responsible for defining and sharing the
Group’s story with internal and external stakeholders through media
relations, public affairs and internal communications. She is also
responsible for developing and implementing the Group’s ambitious
sustainability strategy, which includes its not-for-profit digital
fundraising platform, Virgin Money Giving, and the Virgin Money
Foundation. Emma’s background is in financial services strategy
and she has held senior strategy roles in the Group, and previously
in Royal Bank of Scotland plc. She is also a chartered accountant.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 066
CORPORATE
GOVERNANCE REPORT
Our Board in 2019
Board and Committee composition and attendance1
BOARD MEMBER
BOARD MEETINGS
GOVERNANCE
AND NOMINATION
COMMITTEE
AUDIT COMMITTEE RISK COMMITTEE
JimPettigrew(Chairman)
11/11
5/5
Executive Directors
DavidDuffy
IanSmith
DebbieCrosbie3
Non-Executive Directors
CliveAdamson
DavidBennett
PaulCoby
GeetaGopalan
AdrianGrace
FionaMacLeod
DarrenPope
TeresaRobson-Capps
AmyStirling
TimWade
11/11
11/11
2/2
11/11
11/11
10/112
10/112
10/112
10/112
11/11
11/11
10/112
11/11
–
–
–
–
5/5
–
–
–
4/52
–
–
–
1/15
–
–
–
–
7/7
7/7
–
–
–
–
7/7
7/7
–
7/7
–
–
–
–
6/6
6/6
6/6
5/62
–
6/6
–
–
–
6/6
Chair
REMUNERATION
COMMITTEE
5/5
INDEPENDENT
(onappointment)
–
–
–
–
5/5
–
–
4/52
4/44
–
–
–
–
X
X
X
X
1 Dataisbasedonscheduledmeetingsonly.AdditionaladhocmeetingsoftheBoardandBoardCommitteesalsotookplaceduringtheyearasrequired.
2 Unabletoattendthemeetingduetoapriorunavoidablecommitment.
3 DebbieCrosbiesteppeddownfromtheBoardon19November2018.
4 FionaMacLeodwasappointedamemberoftheRemunerationCommitteefrom5November2018.
5 TimWadewasappointedamemberoftheGovernanceandNominationCommitteefrom20September2019.
Board diversity as at
30 September 2019
Gender diversity
Age
Role split
Female
Male
4(31%)
9(69%)
45–55years
56–65years
5(38%)
8(62%)
Executive
Non-Executive
Non-Executive
Chairmanindependent
on appointment
3
9
1
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 067
Our compliance with the UK Corporate Governance Code 2016
TheAnnualReportandAccountsfortheyearended30September
2019hasbeenpreparedinaccordancewiththeUKCorporate
GovernanceCode2016(‘Code’)whichisavailableatwww.frc.org.uk.
Wehavealsosoughttoincorporatesomeofthechanges
introducedbytherevisedCodepublishedin2018inadvanceof
therequirementtodetailourcompliancewithitinour2020Annual
ReportandAccounts.TheBoardconfirmsthattheCompany
appliedtheprinciplesandcompliedwithalloftherelevant
provisionsoftheCodethroughouttheyear,exceptwithregard
to membershipoftheRemunerationCommitteefrom1July2018
followingtheretirementofDavidBrowne,aformerindependent
Non-ExecutiveDirectorandmemberoftheRemuneration
Committee.FionaMacLeodwasappointedasamemberofthe
RemunerationCommitteewitheffectfrom5November2018and
theBoardconfirmsthatfrom5November2018tothedateofthis
report,theCompanyfullycompliedwithallrelevantprovisionsof
theCode.FurtherinformationontheCompany’scompliancewith
theCodecanbefoundonthefollowingpages.
A. Leadership
A1. The Board’s roleTheBoardistheprincipaldecision-makingbodyoftheGroupandiscollectivelyresponsibletoshareholders
for promotingthelong-termsuccessoftheCompany.
TheBoard’sroleistoprovideleadershipthrougheffectiveoversightandreview.Itsets,andmonitorsprogressagainst,theGroup’s
strategicprioritiesandestablishesitsculture,values,ethicsandstandards.ItsetstheGroup’sriskappetite,monitorsoperationaland
financialperformanceandreporting,ensurestheGroupisadequatelyresourcedwitheffectivecontrolsandremunerationpolicies,
and thatthereareappropriatesuccessionplanningarrangements.ManyofthesemattersareoverseenbyCommitteesoftheBoard.
ThekeyresponsibilitiesofBoardmembersandtheCompanySecretaryareoutlinedbelow.
Chairman
— LeadstheBoardinorganisingitsbusinessandagendatoensureitiseffective.
RESPONSIBILITY
— EnsurestheBoardasawholeisconstructive,forwardlooking,andprimarilyfocusedonstrategy,performance
andkeyvaluecreationmatters.
— GuidestheBoardtoestablishtheculture,valuesandethicsoftheCompany.
— Promotesthehigheststandardsofcorporategovernanceincludingensuringopennessanddebatearewelcomed.
— Ensuresthataccurate,timelyandhigh-qualitysupportinginformationisreceived.
— EnsuresBoardinduction,evaluationanddevelopmentareapriority.
— PromoteseffectivecommunicationwiththeCompany’sshareholders.
Deputy Chairman — SupportstheChairman.
— ActsastheChairman’sdelegate.
— EnsurescontinuityofChairmanshipintheabsenceoftheChairman.
— AvailabletotheBoardforconsultationandadvice.
— RepresentstheGroup’sinterestswithreviewbodiesandatofficialenquiries.
Senior Independent
Non-Executive
Director
— ProvidesasoundingboardfortheChairman.
— ServesasatrustedintermediarywithintheBoard.
— EnsuresthatallDirectors’viewsarecommunicatedtotheChairman.
— Availabletoshareholdersifmatterscannotberesolvedthroughtheusualchannelsofcommunication
with the ChairmanorotherDirectors.
— Maintainsrelationshipswithmajorshareholderstounderstandanyissuestheymayhave.
— MeetswiththeNon-ExecutiveDirectorswithouttheChairmanatleastannuallyandleadson theongoing
monitoringandannualevaluationoftheChairman’sperformance.
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A. Leadership (Continued)
RESPONSIBILITY
Chief Executive
Officer
— LeadstheExecutiveLeadershipTeamintheday-to-daymanagementoftheGroup,ensuringitseffectiverunning.
— MaintainsacloserelationshipwiththeChairman.
— Responsiblefordesigning, co-ordinatingandproposingtotheBoardallactivitiestoimplementtheGroupstrategy
andobjectives.
— RepresentstheGrouptoexternalandinternalstakeholders,ensuringeffectiveengagementprocessesareinplace.
Non-Executive
Directors
— Bringanexternalperspective,knowledge,experienceandinsight.
— Applysoundjudgement,objectivityandbringchallengetotheactivitiesoftheBoard.
— DevelopandsettheGroup’sstrategyandmonitoritsimplementation.
— ReviewtheRiskManagementFramework.
— SupportandconstructivelychallengeExecutiveDirectors.
— Satisfythemselvesontheintegrityoffinancialinformation,takingaccountoftheviewsandconcerns
of stakeholders.
— Haveaprincipalroleinappointingand,wherenecessary,removingExecutiveDirectors.
— CreateappropriatesuccessionplansandapproveappropriatelevelsofremunerationforExecutiveDirectors.
Chief Financial
Officer
— SupportstheChiefExecutiveOfficerinthedesignandimplementationoftheBoard-agreedGroupstrategy.
— ResponsibleformanagingtheGroup’sfinances,includingfinancialplanningandthemanagementoffinancialrisks.
— Ensuresaccurateandeffectivefinancialreporting.
— DevelopstheannualbudgetwiththeChiefExecutiveOfficerforrecommendationtotheBoard.
Company Secretary — EnsurestheBoardreceiveshighqualityinformationinatimelymanner.
— SupportstheChairmantoensureBoardeffectiveness.
— ProvidesadvicetotheBoard,inparticularinrespectofCorporateGovernancedevelopments.
— EnsurescompliancewiththeGroupCorporateGovernanceFramework.
— ManagesDirectorinductionandprofessionaldevelopment.
— Facilitatescommunicationswithshareholders,asappropriate,and ensuresdueregardispaidtotheirinterests.
A2. Division of responsibilities ThereisacleardivisionofresponsibilitiesbetweentheChairmanandChiefExecutiveOfficer.TheChairman’s
priorityistoleadtheBoardwhiletheChiefExecutiveOfficermanagestheday-to-dayrunningofthebusiness.
A3. Role of the Chairman TheChairmanleadstheBoardinorganisingitsbusinessandagendatoensureitiseffective.Theresponsibilities
oftheChairmanaresetoutabove.
A4. Role of the Non-Executive Directors TheresponsibilitiesoftheDeputyChairmanandSeniorIndependentNon-ExecutiveDirector
and theNon-ExecutiveDirectorsaresetoutabove.DavidBennettholdstherolesoftheDeputyChairmanandSeniorIndependent
Non-ExecutiveDirectorandprovidesasoundingboardfortheChairmanandChiefExecutiveOfficerandcanbecontactedbyshareholders
andotherDirectorsasrequired.
CORPORATE GOVERNANCE REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 069
B. Effectiveness
B1. Board composition Atthedateofthisreport,theBoardcomprisestheChairman,twoExecutiveDirectors,nineindependent
Non-ExecutiveDirectorsandoneNon-ExecutiveDirectorappointedbyVirginEnterprisesLimited.ThenamesoftheDirectorstogether
with theirfullbiographicaldetails,includingtheskillsandexperiencetheyeachbringtotheBoard,areonpages56to61.
Thebalanceofskills,experience,independence,andknowledgeontheBoardistheresponsibilityoftheGovernanceandNomination
Committeeandisreviewedannuallyorwheneverappointmentsareconsidered.HavingtherightbalanceacrossBoardandBoard
Committeemembershiphelpstoensuretheydischargetheirdutiesandresponsibilitieseffectively.
B2. Board appointments TheGovernanceandNominationCommitteeleadstheprocessforBoardappointments,makingrecommendations
totheBoard.InformationabouttheworkoftheGovernanceandNominationCommitteecanbefoundonpages80to85.
B3. Time commitments Non-ExecutiveDirectors,includingtheChairman,areinformedoftheminimumtimecommitmentrequired
prior to theirappointmentandtheyarerequiredtodevotesufficienttimetotheCompanytoeffectivelydischargetheirresponsibilities.
A Non-ExecutiveDirectorspreparationfor,andattendanceat,BoardandBoardCommitteemeetingsisonlypartoftheirrole.
ThetimecommitmentsofDirectorsareconsideredbytheBoardonappointmentandarereviewedannually.Externalappointments
must be agreedwiththeChairmananddisclosedtotheBoardbeforeappointment,withanindicationofthetimeinvolved.Duringtheyear,
the GovernanceandNominationCommitteekeptunderreviewthenumberofexternaldirectorshipsheldbyeachDirectorandconsidered
thelimitsonthenumberofdirectorshipsimposedbyrelevantregulations.Followingthisyear’sreview,theBoardissatisfiedthatthere
are noDirectorswhosetimecommitmentisconsideredtobeamatterfor concern.
NoExecutiveDirectorhaseithertakenupmorethanoneNon-ExecutiveDirectorroleataFTSE100companyortakenupthechairmanship
ofsuchacompany.
InformationabouteachDirector’sattendanceatBoardandBoardCommitteemeetingsissetoutonpage66.
B4. Training and development TheChairmanleadsthetraininganddevelopmentoftheBoardandofindividualDirectorsandregularly
reviewsandagreeswitheachDirectortheirindividualandcollectivetraininganddevelopmentneeds.TheCompanySecretarymaintains
a traininganddevelopmentlogforeachDirector.
ForDirectorsjoiningtheBoard,theChairmanensuresthatonappointmenteachDirectorreceivesafull,formalandtailoredinductionwhich
reflectsaDirector’sskills,experienceandBoardrole.Directorswhotakeonnewroles(orchangeroles)duringtheyearparticipateinan
inductionprogrammetailoredtotheirneworchangedrole.
B5. Information and support TheChairman,throughtheCompanySecretary,isresponsibleforensuringcommunicationflowsbetween
the BoardanditsCommitteeswiththesupportoftheExecutiveDirectorsandmanagement,andensuresthatthisinformationisofhigh
qualityintermsofitscurrency,clarity,accuracy,appropriatenessandcomprehensiveness.In-depthandbackgroundmaterialsareregularly
providedviaadesignatedareaonthesecureelectronicBoardportalandDirectorsareabletoseekclarificationorfurtherdetailfrom
managementwherenecessary.AllDirectorsareprovidedwithsufficientresourcestoundertaketheirdutiesandhaveaccesstotheadvice
oftheCompanySecretaryinrelationtothedischargeoftheirdutiesandmattersofgovernance.Inappropriatecircumstances,Directors
mayobtain,attheGroup’sexpense,independentprofessionaladvicewheretheyjudgeitnecessarytodischargetheirresponsibilities
as Directors.
B6. Board and Committee evaluation OntherecommendationoftheGovernanceandNominationCommittee,theBoardagreedto
acceleratethetimingoftheexternallyfacilitatedBoardevaluationwhichwasduetobeundertakenduring2020andthiscommenced
in September2019.Moreinformationcanbefoundonpage82.
Duringtheyear,areviewofBoardCommitteeperformancewascarriedouttoassesswhethereachCommitteehadmetitsrequired
responsibilitiesassetoutinitsCharter.AsummaryisprovidedwithineachBoardCommitteereport.
B7. Director re-election Atthe2020AGMallDirectors,otherthanCliveAdamson,willseekre-election.TheBoardisoftheviewthatall
Directorscontinueto be effectiveandcommittedtotheirroles.
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C. Accountability
C1. Fair, balanced and understandable TheCoderequirementthattheAnnualReportandAccountsisfair,balancedandunderstandable
formspartof theoveralldraftingandreviewingprocess.TheBoardhasconcludedthatthe2019AnnualReportandAccountsisfair,
balancedandunderstandable.TheDirectors’andAuditorStatementsofResponsibilitycanbefoundonpages136and202respectively.
C2. Risk management and internal controls TheBoardisresponsiblefortheGroup’ssystemsofriskmanagementandinternalcontrol.
The effectivenessoftheriskmanagementandinternalcontrolsystemsisreviewedregularlybytheRiskCommitteeandtheAudit
Committee.TheRiskCommitteeisresponsibleforprovidingoversightandadvicetotheBoardinrelationtocurrentandpotentialfuture
risk exposures.TheAuditCommitteeassiststheBoardindischargingitsresponsibilitieswithregardtoexternalandinternalauditactivities
andcontrolsincludingreviewingauditreports,internalcontrolsandriskmanagementsystems.
C3. Audit Committee and auditors TheAuditCommitteecarriesoutseveraldutiesdelegatedtoitbytheBoardincludingoversightof
financialreportingprocesses,reviewingtheeffectivenessofinternalcontrols,consideringwhistle-blowingarrangementsandoversight
of theworkoftheexternalandinternalauditors.Informationontheexternalauditorcanbefoundonpages91to92.
D. Remuneration
D1. Directors’ remuneration TheDirectors’annualreportonremuneration,whichissetoutonpages100to131,providesfulldetails
regardingtheremunerationofDirectors.TheDirectors’remunerationpolicy,whichissubjecttoshareholderapprovalatthe2020AGM,
can befoundintheDirectors’remunerationreportonpage105.DetailsofExecutiveservicecontractsandlettersofappointmentof
the Boardaresetoutonpages113and117respectivelyoftheDirectors’remunerationreport.
D2. Director remuneration policy and process ThekeyactivitiesandfocusoftheRemunerationCommitteeduringtheyearcanbefound
withintheDirectors’remunerationreportonpages117to118.
E. Relations with Shareholders
E1. Dialogue with shareholders TheBoardactivelyengageswithallstakeholders(includingshareholders).Detailonthewaysinwhich
it didsoduringtheyearcanbefoundonpages76to77.
E2. General meetings TheBoardconsiderstheAnnualGeneralMeeting(AGM)tobeakeydateforshareholderengagement.Membersof
theBoardwillbepresentatthe2020AGMtoanswershareholders’questions.
Allresolutionsproposedatthe2019AGMweretakenbywayofapolltoincludeallshareholdervotescast.Toallowmaximumshareholder
participation,electronicproxyvotingisavailable.
CORPORATE GOVERNANCE REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 071
What the Board did this year
Setting the Board agenda and running the meeting
TheBoardheld11scheduledmeetingsduringtheyear.Inaddition
toscheduledmeetings,theBoardholdsadhocmeetingswhen
mattersofatime-criticalnatureneedescalatingtotheBoardfor
informationordecision.
AllDirectorsareexpectedtoattendeachBoardmeetingand
the meetingsofBoardCommitteesofwhichtheyareamember.
In therareeventthataDirectorisunabletoattendameeting,
they nonethelessreceivetheagendaandpapersandhavethe
opportunitytodiscusswith,ornotify,theChairman,relevant
CommitteeChairortheCompanySecretaryofanymattersthey
wishtoraiseandtoconfirmtheirsupportorotherwiseforthe
mattersontheagenda.TheBoardorCommitteeChairman
subsequentlyrepresentsthoseviewsatthemeeting.
EachBoardmeetingfollowsatailoredagendaagreedinadvance
bytheChairman,ChiefExecutiveOfficerandCompanySecretary.
TheBoardrecognisestheneedtoprioritiseitstimetofocusonthe
mostmaterialstrategicandbusinesscriticalitems,whileensuring
thecontinualmonitoringandoversightofkeyissues.TheChairman
ensuresBoardmeetingsarestructuredtofacilitateopen
discussion,debateandchallenge.
MattersroutetotheBoardandBoardCommitteesviathe
managementgovernanceframeworkandrelevantitemsare
recommendedtotheBoardforapprovalfromBoardCommittees.
ThisescalationprocessensurestheBoardisengagedontheright
mattersandhastherightinformationtohelpDirectorsmake
decisions.Theprocessofagendasetting,Boardreportingand
escalationisreviewedaspartoftheBoardperformanceevaluation.
TheBoardagendasettingandmeetingprocessisillustrated
on page72.
DuringBoarddays,timeisalsoallowedfordeepdives,forexample
intoareasofstrategicimportanceortobriefDirectorsonemerging
issuesofrelevancetotheBoardincludingindustrydevelopments
andregulatoryorcorporategovernancechange.Deepdives
providetheopportunityforDirectorstogaindeeperinsightand
buildtheirknowledgebyhearingfromsubjectmatterexperts,
askingquestionsanddebatingtheimpactsfortheGroupinan
informalway.Duringtheyear,muchofthedeepdivetimewas
allocatedtoBoardStrategySessionswhicharedescribedinmore
detailonpage76,andtogivingDirectorsbriefingsonaspects
of theVirginMoneybusinessaspartoftheirwidertrainingand
development,andwhererelevant,induction.
BetweenBoardmeetings,Directorsareprovidedwithregular
writtenupdatesonmaterialissuesfromtheChiefExecutiveOfficer
andmembersoftheExecutiveLeadershipTeam.
Duringtheyear,theChairmanheldanumberofmeetingswith
Non-ExecutiveDirectorswithouttheExecutiveDirectorspresent.
ThelistofmattersreservedfortheBoardissetoutintheBoard
Charteravailableonourwebsite(www.virginmoneyukplc.com).
Board committees
TheBoarddischargessomeofitsresponsibilitiesthrough,andis
supportedby,itsCommitteeswhichprovideoversightandmake
recommendationsonthemattersdelegatedtothembytheBoard.
TheBoardhasestablishedfourprincipalBoardCommittees,
namelytheGovernanceandNominationCommittee;theAudit
Committee;theRiskCommittee;andtheRemunerationCommittee.
BoardCommitteemembershipandattendanceatmeetingsisset
outonpage66.EachCommitteeischairedbyanexperienced
ChairandmembershipisspreadacrossNon-ExecutiveDirectors
basedonskillsandexperience.
TheChairsofeachprincipalBoardCommitteeprovideareporton
CommitteebusinessateachBoardmeeting,includingthematters
beingrecommendedbyaCommitteeforBoardapproval.
TheCharterforeachprincipalBoardCommitteeisavailableonour
website(www.virginmoneyukplc.com).
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 072
TheprocessforsettingaCommitteeagendaandrunningaCommitteemeetingmirrorsthatoftheBoard.
Start of the
Board year
— TheCompanySecretaryworkswithmembersoftheExecutiveLeadershipTeamtosetacalendarofitems
requiringBoarddiscussionordecisionovertheyear.TheCompanySecretarykeepstheChairmaninformed
of agendaitemsrequestedbyNon-ExecutiveDirectors.
— ThescheduleofdeepdivesandBoardbriefingsisagreed.
Setting the
agenda for
each Board
The Board
pack is
prepared
and issued
— TheCompanySecretarydraftstheBoardagendabasedinitiallyonthecalendarandthenwithinput
from the ExecutiveLeadershipTeam.
— TheCompanySecretaryreviewsadraftoftheagendawiththeChairmanandChiefExecutiveOfficer
and agreestheallocationoftimeforthemostmaterialmattersandregularstandingupdates.
— ThemajorityofBoardpapersroutefirstthroughtheExecutiveLeadershipTeamorExecutiveRiskCommittee
andarethensenttotheCompanySecretary.A standardtemplateisusedtoensureBoardreportsaresuccinct
andkeptfocusedonthemostrelevantinformation.
— TheBoardpackispublishedonanonlineBoardportalusuallyoneweekpriortotheBoardmeetingtoensure
Directorshavesufficienttimetofullyprepareforthemeetingandrequestadditionalinformationifnecessary.
The Board day — TimeisallowedbeforeascheduledBoardmeetingfortheSeniorIndependentDirectortomeetwith
Non-ExecutiveDirectors,firstwithouttheChairmanandthenwiththeChairmanpresent.Thissessionisuseful
inagreeingthemattersofconcernorfocusthatNon-ExecutiveDirectorswouldspecificallyliketodiscuss
duringtheBoardmeeting.
— TheChairmanandtheSeniorIndependentNon-ExecutiveDirectorreportonthemainareasoffocusfor
Non-ExecutiveDirectorsatthestartoftheBoardmeetingandtheChairmanmakessuretheseareaddressed
asthemeetingprogresses.
— AtypicalBoardmeetingwillincludestandingupdatesonbusiness,customerserviceandexperience,financial,
risk,andoperationalperformance,includingreportsfromeachofthePersonal,MortgageandBusiness
divisions.
— TheChiefExecutiveOfficerreportsateachmeetingonprogressagainsttheStrategicPlanandkeystrategic
initiatives,generalbusinessperformance,andvariousinternalandexternalstakeholdermatters.
— AttheendoftheBoardmeetingNon-ExecutiveDirectorsusuallyholdaprivatesessionwithout
management present.
After the
meeting
— OftenDirectorsusethetimeaftertheBoardmeetingtomeetwithmembersofthemanagementteam,
undertakesitevisitsormeetwithcolleagues.
— TheCompanySecretaryproducestheminutesandcirculatesactionsfromthemeetingandroutinelymeets
withtheChairmantoreviewthemeetingandtoagreetheimmediatepointsoffollowup.
CORPORATE GOVERNANCE REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 073
Board activities
BelowaredetailsofthemaintopicsofBoarddiscussionanddecisionmakingduringtheyear.
Strategy
Financial and business performance
— ProvidedoversightofandapprovedthestepstoacquireVirgin
MoneyHoldings(UK) plcandmonitoredprogressinintegrating
theGroupandtheFSMAPartVIIprocess,includinggovernance
arrangements.
— ReceivedupdatesfromtheChiefExecutiveOfficeronkey
external,stakeholderandbusinessmattersandfromeach
businessdivision.
— ReceivedreportsfromtheGroupChiefFinancialOfficer
— ApprovedtherefreshedFY20-FY22StrategicPlanandupdated
medium-termstrategicandfinancialtargetsannouncedatthe
Company’sCapitalMarketsDayinJune2019.
providingoversightoffinancialperformanceandforecasts,
includingtheadequacyofcapital,fundingandliquidity,
and monitoredKPIs.
— ApprovedtherefreshedFY19FinancialPlansonastandalone
basisandtheFY20FinancialPlanfortheGroup.
— ApprovedtheproposalsforrebrandingasthenewVirginMoney.
— Approvedmattersinrelationtotheinvestmentsandpensions
joint venturewithAberdeenStandardInvestments.
— ApprovedtheannualGrouptaxstrategy.
— Approvedmajorcapitalandinvestmentexpenditure.
— Keptupdatedonprogressonprocessingandremediating
Payment ProtectionInsurance(PPI)complaints,monitored
performanceagainstprovisionassumptionsandapproved
the provisionincreases.
— ReceivedreportsfromtheGroupChiefOperatingOfficer
on customerserviceperformance,informationsecurity,
resilienceandconductmatters.
— Reviewedandmonitoredcustomerfeedbackandlevels
of satisfactionincludingtheactionstoimproveservice
quality rankings.
— Keptinformedofthescope,prioritiesandprogressofthe
Group’schangeandtransformationprogrammeincluding
projectstoimprovethecustomerexperienceanddigitally
enableourbusiness.
Structure and capital
Financial reporting and controls
— ApprovedtherefreshedCapitalPlanandtheFundingPlan
— ApprovedtheCompany’sAnnualReportandAccounts
for the Group.
and determinedtheywerefair,balancedandunderstandable.
— ApprovedtherefreshedInternalCapitalAdequacyAssessment
— ApprovedtheannualPillar3Disclosures.
Processoutcomes.
— Recommendedthefinaldividendforfinancialyearended
— ApprovedtherefreshedInternalLiquidityAdequacyAssessment
30September2018.
Processoutcomes.
— Approvedthe2019InterimFinancialReportandreviewed
— ReceivedbriefingsontheimpactsoftheBankofEnglandstress
quarterlytradingupdates.
testingrequirementsfortheGroup.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 074
Risk and control
Stakeholders and customers
— ReviewedandapprovedtheGroup’sRiskManagement
— ApprovedparticipationintheRoyalBankofScotland
Framework.
IncentivisedSwitching Scheme.
— ApprovedtheGroup’sRiskAppetiteFrameworkandStatement
— Reviewedfeedbackfrominvestorroadshowsfollowingthe
includingchangesthroughouttheyearandmonitored
performanceagainstriskappetite.
— ReceivedandreviewedreportsfromtheGroupChiefRisk
OfficerontheGroup’sriskprofilecoveringallprincipaland
emergingrisks.
2018 FullYearResultsandfromothermeetingswithinstitutional
investorsthroughouttheyear,includingbeforeandafterthe
CapitalMarketsDay.
— ApprovedtheannualstatementonModernSlaveryand
Human Trafficking.
— Reviewedandapprovedtheannualcomplianceandriskreports
— Receivedreportsonpoliticalandregulatoryissuesand
includingtheassessmentofthesystemofinternalcontrol.
developmentsandmonitoredtheimpactsontheGroup.
— Undertooktheannualreviewofunderwritingdelegated
commitmentauthoritiesincludingthoseoftheChief
Executive Officer.
— ApprovedtheGroup’sCybersecurityStrategy.
— ReviewedandapprovedtheannualMoneyLaundering
— ReceivedanewquarterlyreportontheGroup’sperformance
againstsustainabilityKPIs.
— ReceivedreportsfromboththePrudentialRegulationAuthority
(PRA)andtheFinancialConductAuthority(FCA)following
routineannualreviews.
ReportingOfficer’sreport.
— Reviewedthecorporatecommunicationsstrategy.
— ApprovedtherenewaloftheGroup’scorporateinsurance
— Approvedtherecommendedappointmentofanewcorporate
arrangements.
brokerfortheCompany.
— ReviewedanddecideduponactionstoensuretheGroup’s
compliancewithkeymattersofregulationandlegislation
includingforring-fencedbanks,andapprovedtheRecoveryPlan
intheeventofasignificantdeteriorationinfinancialstability.
People and culture
Corporate governance
— ProvidedfeedbackontheneworganisationalPurposeand
— ApprovedtheappointmentofFionaMacLeodtothe
ValuesfortheGroupastheyweredevelopedandapproved
the finalPurposeincludingthelaunchplans;receiveda
report oncolleaguereactiontothenewPurposeandValues.
— Discussedtalent,diversityandsuccessionplanningforthe
ExecutiveLeadershipTeamandthelayerbelow.
— Discussedmanagementcapacity,skillsandexperience.
— Reviewedanddiscussedtheresultsfromtheannualcolleague
engagementsurvey.
— Receivedregularupdatesoncolleaguesentimentatkeypoints
duringtheyearastheintegrationofCYBGPLCandVirgin
MoneyHoldings(UK)plcprogressed,andreviewedtheKPIs
in theCultureDashboard.
— Reviewedupdatesonhealth,safetyandwell-beinginthe Group.
RemunerationCommitteeandofTimWadetotheGovernance
and NominationCommittee.
— UndertookareviewoffeespaidtoNon-ExecutiveDirectors.
— ReviewedandapprovedtheBoardCharter,includingthe
Matters ReservedfortheBoard,theCharterforeachprincipal
BoardCommitteeandGovernancepolicies.
— ReviewedandapprovedtheNoticeofAGM,resolutionstobe
puttoshareholdersandrelateddocumentation;approvedthe
updatestatementrelatingto AGMresults.
— Discussedthefindingsfromtheinternally-facilitatedBoard
evaluationandagreedthefollowupactiontobetaken;
agreed therecommendationsoftheGovernanceandNomination
Committeeastothenextexternally-facilitatedreview.
— ConsideredthekeyprovisionsoftheUKCorporateGovernance
Code2018.
— Reviewedthestructure,sizeandcompositionoftheBoard;
consideredtheindependenceofNon-ExecutiveDirectors;
reviewedtheregisterofconflictsofinterest.
— ApprovedtheGroup’sDiversityandInclusionPolicytogether
withthetargets.
CORPORATE GOVERNANCE REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 075
Deep dive sessions and Board briefings
TheBoardregularlyholdsdeepdivesessionsandbriefingsessions
withmanagementonkeyareasofstrategicfocus.Deepdives
provideDirectorswithdeeperinsightandunderstandingofa
subjectmattertohelpdrivebetterqualityofdebateandenhance
knowledge.Duringtheyear,muchofthedeepdivetimewas
allocatedtotheseriesofBoardstrategysessionsdescribedon
page76.Inaddition,deepdivesessionsandbriefingswereheld
on thefollowingtopics:
— marketupdateandareasofinvestorfocusledbythe
Company’s broker;
— theVirginMoneyFoundation;
— commercialandoperationaloverviewofVirginMoney;
— cybersecuritylandscape;
— operationalresilienceframework;
— theVirginMoneycreditcardbusiness;
— organisationalpurpose,valuesandbehaviours;
— BankofEnglandconcurrentstresstestingrequirements
and Group impacts;and
— VirginMoneymortgagemodels.
The work of the Board outside Board meetings
Non-ExecutiveDirectorsspendtimeoutsideofBoardmeetings
increasingtheirunderstandingofthebusinessandfindingout
aboutthethingsthatmattertoourcustomers,colleaguesand
otherstakeholders.Directorsregularlymeetwithmanagement,
attenddeepdivesandbriefings,undertakesitevisitsandattend
colleague,customerandothereventsthroughouttheyear.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 076
Considering and engaging with our stakeholders
How we do it
Customers
Colleagues
Society
Investors
Partners and suppliers
Engagingandrespondingtoallourstakeholdersisfundamental
todeliveringonourCompanypurposeandambitionandthe
followingpagesprovideinsightintothewaysinwhichwe
do this.Therelationshipswehavewithourstakeholdersare
especiallyimportantduringthissignificantperiodofchangefor
ourbusiness.Maintaininggoodcommunicationsanddeveloping
strongrelationshipswithall ourstakeholdersis fundamentalto
buildingasustainablebusinessandthelong-termsuccessofthe
Groupandthisisa keyfocusforthe ExecutiveLeadershipTeam
andtheBoard.
Inthesectionswhichfollowyouwillalsofindexamplesofhow
the Boardhasconsideredourstakeholderswhenmakingkey
decisionsduringtheyear.Toensurestakeholderconsiderations
arecentraltodecisionmaking,papersrelatingtodifferent
stakeholdergroupsarepresentedthroughoutthe yeartothe
Board.Sometimes,likeanybusiness,certaindecisionsmay
adverselyimpactoneormorestakeholdergroups.Wealways
aimtoactinthebestinterestsoftheGroup andallstakeholders
andwewillalwaysaimtobefairandbalancedinourapproach.
MoreinformationonhowtheDirectorshavedischargedtheir
dutiesunders.172oftheCompaniesAct2006isavailablein the
strategicreportonpages30to31.
— TheBoardreceives
regularCustomer
ExperienceUpdates
with verbatimfeedback
receivedfromcustomers
collectedthrougha
varietyofmethods,
includingonlineand
telephonesurveys.
— TransactionalNet
PromoterScore
(NPS) awarenessand
understandingwas
embeddedacrossthe
businesstopromote
a customer-focused
culture.
— Aninitiativeof‘1000voices’
— TheBoardreceives
— RoadshowsinvolvingBoard
— TheGrouphasan
waslaunchedforthe
Group,gatheringopinions
fromcolleaguestofeed
into andshapethenew
organisation.
— TheBoardapproveda
new Purpose,Valuesand
Behavioursforthenew
combinedGrouptobring
thetwoheritagestogether
underoneambition.
— CapitalMarketsDay
briefingstookplaceacross
thecountrytoprovide
colleagueswithan
opportunitytohearabout
thenewstrategyfor
the Group.
quarterly sustainability
updates,encompassing
memberswereheldinthe
UKandAustraliafollowing
activitiesacrossCorporate
the2018yearend,for
Sustainability,VirginMoney
CapitalMarketsDay,andin
GivingandTheVirginMoney
relationtothePPIdeadline
Foundation.
toengagewithinvestors.
— TheBoardwasengaged
— TheBoardwasavailable
in developingthenew
SustainabilityStrategyfor
theGroupwhichinvolved
to investorsaspartofthe
CapitalMarketsDay,which
introducedthenewstrategic
discussionsbeingheldwith
prioritiesoftheGroup.
externalstakeholdersto
reachabalancedviewtaking
allstakeholderviewpoints
intoaccount.
— The2019VirginMoney
LondonMarathonraiseda
— Boardmembershavebeen
engagedwithinvestorson
elementsofRemuneration
includingLTIParrangements
andareregularlykeptupto
dateonfeedbackfromthe
record-breaking£66.4million
marketandthesentiment
— Ajointventurewith
of investorsmoregenerally.
AberdeenStandard
forcharityandsince
launchingTheVirginMoney
Foundationin2015,ithas
awardedover£8mto
charitiesandsocial
enterprisesacrosstheUK.
enhancedlevelofdue
— TheBoardwasprovided
diligencewhenitcomes
to dealingwithkey
supplierstoensurerisks
aremanagedandcodes
of conductareinplace
whichsetoutour
expectationsfrom
suppliers,particularly
in respectofModern
Slavery.
Government
and regulators
withapresentation
of the FCA’sannual
strategyforawareness
ofkeymessagesfor
the year.
— Extensiveengagement
withthePRAandFCA
wascarriedoutaspart
ofthetransferofassets
fromVirginMoneyPLC
— Collaborativedayswere
toClydesdaleBank
heldwithcompaniesin
the largerVirginGroup
PLC aspartofthemove
toonebankinglicence
to sharewaysofworking,
fortheGroup.
recentinitiatives,ethos
andambitions.
Investmentwas
completedinJulyto
widen thechoiceof
productsonofferto
— Ongoingupdates
in responsetoBrexit
developmentswere
receivedbytheBoard,
inordertomonitor
the developingissues
thatcouldpotentially
impacttheGroupand
customersoftheGroup.
itscustomers.
Governance in action
Shaping our refreshed strategy
A refreshed strategy that builds on our
core capabilities and those added by the
Virgin Money Holdings (UK) PLC acquisition
Thisyear,theBoardheldaseriesofStrategySessionsleadingto
theannouncementofourrefreshedstrategyatourCapitalMarkets
DayinJune2019.
TheChiefExecutiveOfficerandGroupCorporateDevelopment
DirectorledtheprocessengagingbothBoardmembersandthe
ExecutiveLeadershipTeam.
TheBoardcametogetherforsevenstrategysessionsbeginning
in February2019.Thesesessionstypicallyranforhalfadayand,
in additiontoBoardmembers,relevantmembersoftheExecutive
LeadershipTeamalsojoineddependingonthetopic.TheMarch
2019sessionfocusedondevelopingtheBoard’sunderstandingof
thewiderVirginGroup.TheapproachallowedtheBoardtoengage
directlywithmanagementtoshapeeachelementoftherefreshed
strategyprovidinginputandguidance.Managementwasthen
able toreflectonDirectors’feedbackaftereachsession,address
specificareasofchallengeandcontinuetorefineandreiterate
the strategicandfinancialplansbeforethefinalversionswere
presentedforBoardapproval.
ThesevenStrategySessionswereeachdesignedtocover
a specifictopicindetail.Boardmemberswereprovidedwith
briefingmaterialsinadvanceofeachsessionallowingDirectors
timetoprepareensuringeachsessionwasinteractiveand
discussion focused:
1
2
3
4
5
Scene setting–theinternalandexternalcontextagainst
whichtheStrategicandFinancialPlanswouldbedeveloped;
anoverviewofindustry,economicandmarketfactors
Virgin Group–overviewoftheVirginGroup,lifeasaVirgin
customerandaspecificfocusontheVirginbrand
Integration and rebranding–discussionontheplansfor
bringingtogethertheClydesdaleBankPLCandVirginMoney
PLCbusinessesasone Bank;theproposalstoapplyasingle
VirginMoneybrandacrosstheGroupandtorename
the Group
Division plans–theambitionsandplansforeachofour
Personal,MortgagesandBusinessdivisions
Initial draft financial plan–outlineofthedriversofthe
financialplan,itssensitivitytoexternalandinternalfactors
anddraftfinancialtargets
CORPORATE GOVERNANCE REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 077
How we do it
Customers
Colleagues
Society
Investors
Engagingandrespondingtoallourstakeholdersisfundamental
— TheBoardreceives
— Aninitiativeof‘1000voices’
— TheBoardreceives
todeliveringonourCompanypurposeandambitionandthe
followingpagesprovideinsightintothewaysinwhichwe
regularCustomer
ExperienceUpdates
do this.Therelationshipswehavewithourstakeholdersare
with verbatimfeedback
especiallyimportantduringthissignificantperiodofchangefor
receivedfromcustomers
ourbusiness.Maintaininggoodcommunicationsanddeveloping
strongrelationshipswithall ourstakeholdersis fundamentalto
collectedthrougha
varietyofmethods,
buildingasustainablebusinessandthelong-termsuccessofthe
includingonlineand
Groupandthisisa keyfocusforthe ExecutiveLeadershipTeam
telephonesurveys.
andtheBoard.
— TransactionalNet
Inthesectionswhichfollowyouwillalsofindexamplesofhow
PromoterScore
the Boardhasconsideredourstakeholderswhenmakingkey
(NPS) awarenessand
underoneambition.
decisionsduringtheyear.Toensurestakeholderconsiderations
understandingwas
arecentraltodecisionmaking,papersrelatingtodifferent
stakeholdergroupsarepresentedthroughoutthe yeartothe
Board.Sometimes,likeanybusiness,certaindecisionsmay
embeddedacrossthe
businesstopromote
a customer-focused
adverselyimpactoneormorestakeholdergroups.Wealways
culture.
waslaunchedforthe
Group,gatheringopinions
fromcolleaguestofeed
into andshapethenew
organisation.
— TheBoardapproveda
new Purpose,Valuesand
Behavioursforthenew
combinedGrouptobring
thetwoheritagestogether
— CapitalMarketsDay
briefingstookplaceacross
thecountrytoprovide
colleagueswithan
opportunitytohearabout
thenewstrategyfor
the Group.
aimtoactinthebestinterestsoftheGroup andallstakeholders
andwewillalwaysaimtobefairandbalancedinourapproach.
MoreinformationonhowtheDirectorshavedischargedtheir
dutiesunders.172oftheCompaniesAct2006isavailablein the
strategicreportonpages30to31.
quarterly sustainability
updates,encompassing
activitiesacrossCorporate
Sustainability,VirginMoney
GivingandTheVirginMoney
Foundation.
— TheBoardwasengaged
in developingthenew
SustainabilityStrategyfor
theGroupwhichinvolved
discussionsbeingheldwith
externalstakeholdersto
reachabalancedviewtaking
allstakeholderviewpoints
intoaccount.
— The2019VirginMoney
LondonMarathonraiseda
record-breaking£66.4million
forcharityandsince
launchingTheVirginMoney
Foundationin2015,ithas
awardedover£8mto
charitiesandsocial
enterprisesacrosstheUK.
— RoadshowsinvolvingBoard
memberswereheldinthe
UKandAustraliafollowing
the2018yearend,for
CapitalMarketsDay,andin
relationtothePPIdeadline
toengagewithinvestors.
— TheBoardwasavailable
to investorsaspartofthe
CapitalMarketsDay,which
introducedthenewstrategic
prioritiesoftheGroup.
— Boardmembershavebeen
engagedwithinvestorson
elementsofRemuneration
includingLTIParrangements
andareregularlykeptupto
dateonfeedbackfromthe
marketandthesentiment
of investorsmoregenerally.
Partners and suppliers
— TheGrouphasan
Government
and regulators
enhancedlevelofdue
diligencewhenitcomes
to dealingwithkey
supplierstoensurerisks
aremanagedandcodes
of conductareinplace
whichsetoutour
expectationsfrom
suppliers,particularly
in respectofModern
Slavery.
— Collaborativedayswere
heldwithcompaniesin
the largerVirginGroup
to sharewaysofworking,
recentinitiatives,ethos
andambitions.
— Ajointventurewith
AberdeenStandard
Investmentwas
completedinJulyto
widen thechoiceof
productsonofferto
customersoftheGroup.
— TheBoardwasprovided
withapresentation
of the FCA’sannual
strategyforawareness
ofkeymessagesfor
the year.
— Extensiveengagement
withthePRAandFCA
wascarriedoutaspart
ofthetransferofassets
fromVirginMoneyPLC
toClydesdaleBank
PLC aspartofthemove
toonebankinglicence
fortheGroup.
— Ongoingupdates
in responsetoBrexit
developmentswere
receivedbytheBoard,
inordertomonitor
the developingissues
thatcouldpotentially
impacttheGroupand
itscustomers.
6
Updated draft financial plan–includingdraftfinancialplans
foreachdivisionthroughtoFY22andupdateddraftfinancial
targets;adiscussionontheplanstodigitallyenableour
businessandimprovethecustomerexperience;areview
of theRiskteam’sassessmentoftherisksinherentineach
Division’splan
Thesebriefingswerethenfollowedbyvisitstotheteams
managing ourcybersecurityprogramme,mortgageoperationsarea
andthecustomercontactcentre.Inadditionto helpingtheBoard
gainadeeperunderstandingoftheoperationsofthesepartsof
ourbusiness,thevisitsgavetheBoardachancetointeractwith
colleaguesandtounderstandhowtheyfeltabouttheintegration.
7
Final Strategic Plan, Financial Plan and KPIs–thefinal
StrategicandFinancialPlanforBoardapprovalconsidering
priorBoardfeedbackandinput
YoucanreadmoreaboutourrefreshedstrategyintheStrategic
Reportonpage13.
The Board’s visits to Gosforth and Chester
TheBoardhelditsFebruarymeetingsatVirginMoney’s
Gosforth headquarters.
TheBoardmetwithseniormanagersleadingtheVirginMoney
teamsresponsiblefordeposits,mortgagesandcreditcardsand
receivedpresentationscoveringthecustomerstrategiesineach
of theseareasandthethingsthatmattermosttoourcustomers.
Directorsheardabouttheprojectsunderwaytomakeourbusiness
moreefficientandtoimprovethecustomerexperience.TheBoard
alsometwiththeChiefExecutiveOfficeroftheVirginMoney
FoundationtohearfirsthandhowtheFoundationissupporting
the communitiesinwhichwework.
InJuly,theBoardhelditsmeetingsatVirginMoney’sChestersite
wherethecreditcardoperationisbased.TheBoardreceived
a presentationfrommembersofthecreditcard’sleadershipteam
aboutthegrowthofthebusinessoverthepastfiveyearsand
futureplans.Boardmembersthentouredtheoperationalareas
and metwithteamsresponsiblefordifferentpartsofthecredit
cardprocessincludingbusinessdevelopment,customerservice
andunderwriting.ThisvisitalsogaveBoardmembersthe
opportunitytohearfromcolleaguesabouthowtheyfeltconnected
to our organisationalpurpose–‘Makingyouhappieraboutmoney’
–which waslaunchedinMarch.Toendthevisit,Directorsjoined
colleaguesforacelebratoryeventhostedbytheChairman,
Jim Pettigrewtorecognisethefive-yearanniversaryofthecredit
cardbusiness.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 078
Purpose, Values and Behaviours
Board changes
FollowingtheacquisitionofVirginMoneyHoldings(UK)PLCin
October2018,workimmediatelycommencedtoagreeandroll
out anewPurposefor theGrouptohelpbringthetwoheritage
businessestogether.TheBoardwasfullyengagedinthenew
PurposedesignandplanningprocesstoensurethatthePurpose,
ValuesandBehaviours,strategyandcultureoftheGroupwere
aligned.New valuesandbehaviours,basedonexistingVirgin
Groupvalues,havebeenadoptedandthesebehavioursarethe
ultimatedriverofourculturethatwillbedemonstratedtoour
customers.LeadershipanddeliveryofourPurposeiscarriedout
byourPurposeCouncil,ledbyJamesPeirson,GroupGeneral
Counsel,onbehalfoftheExecutiveLeadershipTeam.ThePurpose
CouncilismadeupofLeadershipTeammembersfromevery
businessunitwhodiscussanddevelopthebestwaystoembed
ourPurpose,ValuesandBehavioursacrosstheorganisationaswell
asmeasuringoursuccessusingexistingandnewcustomerand
colleagueinsights.
Continually monitoring and
improving our performance
Effectiveness
Board composition and independence
ThesizeoftheBoardisconsideredtobesuitableinthecontextof
ahighlycomplexcommercialandregulatoryoperatingenvironment
andconsistsoftheappropriatecombinationofExecutiveand
Non-ExecutiveDirectorssuchthatnoindividualorsmallgroup
of individualscandominatetheBoard’sdecisionmaking.
TheGovernanceandNominationCommitteemonitorswhether
thereareanyrelationshipsorcircumstanceswhichmayaffect
a Director’sindependenceandassessesindependenceannually.
It istheCompany’spolicythatatleasthalfoftheBoardshouldbe
independentNon-ExecutiveDirectors.Followingthisyear’sreview,
theGovernanceandNominationCommitteerecommendedtothe
BoardthatallDirectors,otherthanAmyStirling,areindependentin
characterandjudgement,andtheBoardsupportedthisconclusion.
AmyStirlingisnotconsideredbytheBoardtobeindependentas
herappointmentasaNon-ExecutiveDirectorispursuanttothe
rightofVirginEnterprisesLimitedtonominateadirectorunderthe
termsoftheGroup’sTradeMarkLicenceAgreement.TheChairman
wasconsideredindependentonappointment.
InformationontheBoardDiversityandInclusionPolicy
Statement canbefoundontheCompany’swebsite
(www.virginmoneyukplc.com).
GeetaGopalanandDarrenPope,independentNon-Executive
Directors,andAmyStirling,Non-ExecutiveDirectorwereappointed
totheBoardon15October2018.CliveAdamsonwillstepdown
as anindependentNon-ExecutiveDirectoron29November2019.
TheGovernanceandNominationCommitteeisresponsible
for the processforBoardappointmentsandmakesa
recommendationtotheBoard.Moredetailsaboutsuccession
planningcanbefoundonpage83.
DetailsabouttheresponsibilitiesandactivitiesoftheGovernance
andNominationCommitteearesetoutonpage83.
Conflicts of interest
TheDirectorshaveastatutorydutyundertheCompaniesAct2006
toavoidsituationsinwhichtheyhaveorcanhaveadirector
indirectinterestintheCompanyunlessthatinterestisfirst
authorisedbytheotherDirectors.Thisdutyisinadditiontothe
existingdutythataDirectorowestotheCompanytodiscloseto
theBoardanytransactionorarrangementunderconsiderationby
theCompany.Priortoappointment,potentialconflictsofinterest
aredisclosedandassessedtoensurethattherearenomatters
whichwouldpreventtheincomingDirectorfromtakingthe
appointment,andduringtheirtenureDirectorsareaskedtoconsult
withtheCompanySecretaryandtheChairmanbeforetakingup
anyexternalappointmentorresponsibilities.Anychangestothe
commitmentsofDirectorsarereportedtotheGovernanceand
NominationCommitteeandtheBoard.Directorsarereminded,at
eachBoardmeeting,oftheirdutytoreportanyactualorpotential
conflictassoonastheybecomeawareofanysuchevents.Ifany
actualorpotentialconflictarises,therelevantDirectorwillexcuse
himself/herselffromanymeetingordiscussionswherethe
potentialconflictsareconsideredandallrelevantmaterialwillbe
restrictedincludingBoardpapersandminutes.ADirectorwitha
potentialoractualconflictwillnotbepermittedtoformpartofthe
quorumorvoteuponthemattergivingrisetotheconflict.Directors
donotparticipateindecisionsconcerningtheirownremuneration
orinterest.AllpotentialconflictsauthorisedbytheBoardare
recordedinaRegisterofDirectors’ConflictsofInterestswhich
is reviewedbytheBoardannually.
Training, development and induction
Theprogrammeoftraininganddevelopmentincludesbothformal
andinformalopportunitiesforlearningandincludescomponents
coveringdeepdivesandBoardbriefingsessions;stakeholder
engagement;sitevisits;timespentwithoperationalareas;
one-to-onemeetingswithmembersoftheExecutiveLeadership
Teamandsubjectmatterexpertswithinbusinessunits;seminars,
coursesandroundtablestoprovideexternalinsights;andbriefings
fromexternaladvisers.
TheCompanySecretarydesignsandfacilitatestheinduction
programmehavingconsultedwiththeChairmanandprogress
is reviewedregularlybytheChairmanwitheachDirector.Theaim
oftheinductionprogrammeistoprovideanewDirectorwithan
understandingofhowtheGroupworksandtobringtolifethekey
opportunitiesandchallengestoensureeachDirectorisableto
makeaninformedcontribution.
CORPORATE GOVERNANCE REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE Reviews by the Board
Theeffectivenessoftheriskmanagementandinternalcontrol
systemsisreviewedregularlybytheRiskCommitteeandthe
Audit Committee.TheRiskCommitteeisresponsibleforproviding
oversightandadvicetotheBoardinrelationtocurrentand
potentialfutureriskexposures.TheAuditCommitteeassiststhe
Boardindischargingitsresponsibilitieswithregardtoexternal
and internalauditactivitiesandcontrolsincludingreviewingaudit
reports,internalcontrolsandriskmanagementsystems.
Control effectiveness
Areviewoftheeffectivenessofcontrolsisregularlyundertaken
acrosstheGroup,providinganassessmentandstatementonthe
effectivenessoftheGroup’scontrolenvironment.Thisprovides
assurancetotheRiskCommitteethatnonewmaterialcontrol
issueshavebeenidentifiedandthatrobustmanagementactions
areinplacetoaddressspecificknowngaps.
Overall assessment
Overthepastyear,theGrouphasmadefurtherenhancementsto
theRMFandriskreporting,appetiteandpolicysetting.Particular
focushasbeenonthedesignandimplementationofanRMFand
a set ofriskframeworksapplicablefortheenlargedGroup,which
are nowinplaceenablingacommonunderstanding,consistent
approachandabilitytoreportconsistentlyonriskmattersacross
theGroupupto,andincluding,theRiskCommittee.Thecontrol
environmentremainsstablewiththe2019ControlEffectiveness
Statementprovidingassurancethatineffectivecontrolsare
escalatedappropriatelyandhaveadequateactionplansinplace.
TheRiskCommittee,inconjunctionwiththeAuditCommittee,
concludedthattheGroup’sriskmanagementandinternalcontrol
frameworkinrelationtotheGroup’sriskprofileandstrategywas
effectiveandadequate,andwasrecommendedtoandapproved
bytheBoard.
079
Duringtheyear,GeetaGopalan,DarrenPopeandAmyStirling
completedaninductionprogrammewhichfocusedonthe
strategic,commercial,risk,customer,peopleandculturalissues
affectingtheGroupandbuiltontheirskillsandexperienceas
Virgin MoneyDirectors.Theinductionprogrammewasdelivered
throughacombinationofone-to-onebriefingswiththeChairman,
CompanySecretary,servingDirectorsandmembersofthe
ExecutiveLeadershipTeam;sitevisitstosomeoftheGroup’s
customer-facingandoperationalareas;andreadingmaterials
includingarchiveBoardandBoardCommitteepapersandother
keycorporategovernancedocuments.Meetingswerealso
arrangedwithotherselectedseniormanagersincludingtheGroup
DirectorInternalAuditandwithexternalstakeholdersincludingthe
externalauditor.Likewise,existingDirectorsontheBoardreceived
briefings,metwithmembersofthemanagementteamand
undertooksitevisitstodeveloptheirknowledgeandunderstanding
oftheVirginMoneybusiness.
Internal control
Board responsibility
TheBoardisresponsiblefortheGroup’ssystemsofinternal
control.Theinternalcontrolframeworkisdesignedtofacilitate
effectiveandefficientoperations,ensureahighqualityofinternal
andexternalreporting,andensurecompliancewithapplicablelaws
andregulations.TheDirectorsandmanagementarecommitted
to maintainingarobustcontrolframeworkasthefoundationfor
the deliveryofeffectiveriskmanagement.Owingtothelimitations
inherentinanyinternalcontrolframework,thecontrolshavebeen
designedtomanageandmitigate,ratherthaneliminate,therisk
of failuretoachievetheGroup’sbusinessobjectivesandcan
provideonlyreasonable,notabsolute,assuranceagainstmaterial
misstatementorloss.TheDirectorsacknowledgetheir
responsibilitiesinrelationtotheGroup’sinternalcontrolframework
andforreviewingitseffectiveness.
TheBoardconfirmsthatthroughouttheyearended30September
2019anduptothedateofapprovalofthisAnnualReportand
Accounts,therehavebeenrigorousprocessesinplacetoidentify,
evaluateandmanagetheprincipalrisksfacedbytheGroup,
includingthosethatwouldthreatenitsbusinessmodel,future
performance,solvencyorliquidity,thelikelihoodofariskoccurring
andthecostsofcontrolinaccordancewiththeGuidanceonRisk
Management,InternalControlandRelatedFinancialandBusiness
ReportingpublishedbytheFinancialReportingCouncil(FRC).
Inordertoassistintheidentificationandmanagementofthe
principalrisks,theBoardhasestablishedaRiskManagement
Framework(RMF)whichisintegratedintotheGroup’soverall
frameworkforriskgovernance,andhasdevelopedasystemof
regularreportsfrommanagement.TheBoardhasauthorisedthe
RiskCommitteetooverseetheGroup’scompliancewiththeBoard’s
approvedRiskAppetiteStatement(RAS),RMFandriskculture.
FurtherdetailscanbefoundintheRiskreportonpages137to192.
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GOVERNANCE AND NOMINATION
COMMITTEE REPORT
“ The Committee’s focus has
been on Board composition,
diversity, Board effectiveness
and succession planning.”
Chair
Jim Pettigrew
Chairman of the Board
Members
David Bennett
Fiona MacLeod
Tim Wade
The Governance and Nomination Committee (‘Committee’)
is composed solely of independent Non-Executive Directors.
In addition to Committee members, the Group Human
Resources Director and Group Company Secretary regularly
attend Committee meetings, with other individuals and
external advisers invited to all or part of a meeting
as appropriate.
The Committee had five scheduled meetings and one
additional meeting during the year. Details of meeting
attendance are set out on page 66.
Key objective
The Committee keeps the Board’s composition, skills,
experience, knowledge, independence and succession
arrangements under review and reviews the succession
plans for the Executive Leadership Team. The Committee
makes recommendations to the Board to ensure that the
Company’s arrangements are consistent with good corporate
governance standards.
Responsibilities
During the year, the Committee reviewed its Charter which
sets out its responsibilities. The Charter can be accessed
on the Company’s website (www.virginmoneyukplc.com).
Committee performance evaluation
During the year, the Committee met its key objectives and
carried out its responsibilities effectively, as confirmed by
the annual Committee performance evaluation, the results
of which were discussed by the Committee and reported
to the Board.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 081
Dear shareholder,
Succession planning
I am pleased to present the Governance and Nomination
Committee (‘Committee’) report for the year ended
30 September 2019.
This year the Committee’s focus has been on Board composition,
Board effectiveness, succession planning and preparing for the
adoption of the July 2018 version of the UK Corporate Governance
Code which will apply to the Company from 1 October 2019.
Set out on page 83 is an overview of the main topics of Committee
discussion and decision making during the year.
During the year, the Committee was strengthened with the
appointment of Tim Wade as a member from 20 September 2019.
Board composition
As I mentioned in my Chairman’s letter on page 54 we announced
our refreshed strategy at our Capital Markets Day in June 2019.
The Committee has spent time evaluating the Board skill set and
attributes relevant to the future of our business and to ensure
the Board’s effectiveness in driving our refreshed strategy and
integration programme forward. This builds on the work of the
Committee last year when areas to strengthen Board skills and
experience were identified, culminating in the appointment of
Geeta Gopalan, Darren Pope and Amy Stirling. The Board is
committed to the regular refreshing of Board membership.
Board evaluation
On the Committee’s recommendation, the Board agreed to
accelerate the timing of the externally-facilitated Board evaluation
which was due to be undertaken during 2020. The Committee
was of the view that it was important to obtain insights on Board
effectiveness at the outset of the delivery of our refreshed
strategy to allow any improvements to be made as early as
possible, and recognised the need for Board effectiveness to keep
pace with change across our business and in banking generally.
The evaluation will also consider the Committee’s performance.
During the year, the Committee also kept the leadership and
succession needs of our business under review including ensuring
the depth and diversity of the succession pipeline at both the
Executive Leadership Team level and the level immediately below.
The Committee was assured about the action being taken to
strengthen executive succession cover and broader succession
plans, in addition to the quality of the leadership cadre in place to
lead our business at a time of an unprecedented rate of change
and against the backdrop of a challenging operating environment.
Diversity and inclusion
The Committee is committed to promoting diversity and inclusion
across the Group and at Board level. As a Board we are proud that
diversity and inclusion is at the heart of our culture. This is because
we are striving to build a workforce that reflects the diversity of our
customers and the communities we serve. As set out in the Board
Diversity and Inclusion Policy Statement, which was reviewed
during the year, our ambition is to achieve a target of 33% female
Directors on the Board by 2020 and to improve diversity on
the Board in other forms. We are committed to following the
recommendations of the Parker Review to improve the ethnic
and cultural diversity of the Board. The Committee takes these
considerations into account, as well as knowledge, skills and
experience, when recommending new Board appointments. The
Committee reviews the Group’s Diversity and Inclusion Policy each
year and monitors progress made at Board and management level.
Lastly, following the publication of the New Code, which the
Company will be reporting against in next year’s Annual Report and
Accounts, the Committee and the Board reviewed the impact of
the new requirements on the Company, including a detailed review
of our approach to workforce engagement, and action was taken
to change certain of our corporate governance practices to bring
them in line with the New Code. More details of our approach
to workforce engagement are set out on page 85.
Jim Pettigrew
Chairman, Governance and Nomination Committee
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Activities during the year
GOVERNANCE AND NOMINATION
COMMITTEE REPORT
Below are details of the main topics of Committee discussion and decision making during the year.
KEY ISSUES / AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Board and
Board
Committee
composition
Board and
executive
succession
planning
Annual Board
and Committee
evaluation
The Committee:
— undertook the annual review of the structure, size and composition of the Board and Board
Committees and made recommendations to the Board;
— recommended to the Board the appointment of Tim Wade, Non-Executive Director, as an additional
Committee member; and
— agreed the methodology for, and oversaw an evaluation of, the skills and experience of the Board;
reviewed the resulting Skills Matrix and considered how this would shape the Board succession plan.
The Committee:
— received reports on the depth and quality of the succession pipeline at both the Executive
Leadership Team level and the level immediately below; and
— kept engaged on changes to the Executive Leadership Team including the appointment
of a permanent incumbent to the Group Chief Operating Officer role, and the appointments
of the Group Director Corporate Communications and Sustainability and the Group Business
Transformation Director.
The Committee:
— considered the merits of bringing forward the 2020 Board evaluation and recommended
an accelerated timetable to the Board;
— led the process to select and appoint a third-party facilitator for the 2020 Board evaluation
including agreeing the scope, methodology and timing;
— undertook an assessment of whether the Committee had carried out its duties and met
its responsibilities;
— reviewed the Committee’s Charter; and
— commenced the external Board effectiveness process.
Governance
The Committee:
— held a round table discussion to agree the Committee’s priorities and work plan for the year, agreed
the areas of focus for each Committee meeting throughout the year and monitored progress;
— reviewed the Company’s corporate governance framework relative to the Code including the gaps
and action to be taken;
— had a detailed discussion about the Company’s approach to workforce engagement and
recommended to the Board how workforce engagement should be strengthened; and
— reviewed the Board Composition and Renewal Policy.
Diversity
The Committee:
— reviewed and recommended to the Board the Board Inclusion and Diversity Statement including
the target for female Directors on the Board; and
— monitored progress against the Group Inclusion and Diversity Policy.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 083
Board performance evaluation
In accordance with the Code, the Company conducts an annual
evaluation of Board and Board Committee performance and
that of individual Directors, which is externally facilitated by
an independent third party at least once every three years.
The Committee led the process to select an external provider
for the evaluation, which commenced in September 2019, and
selected Oliver Ziehn from Lintstock Ltd. Lintstock has no other
connection with the Company.
The objective of the evaluation is to provide an independent
assessment of areas where the Board, its Committees and
individual Directors, including the Chairman, could improve their
effectiveness including insights and practical suggestions to drive
continuous improvement.
The Committee is overseeing the evaluation process. Highlights
from the evaluation will be reported in the Company’s 2020 Annual
Report and Accounts.
Progress following the 2018 review
As we reported last year, the 2018 performance evaluation was
an internal review led by the Chairman with the support of the
Group Human Resources Director and Group Company Secretary.
The review identified that for 2019 the focus would be on further
developing the Board agenda and the quality of information
provided to the Board. This means the Board is able to balance its
time on business performance, the integration of the businesses
and future thinking, in particular continuing to involve customer
experience insights more fully in Board discussions.
During the year, actions were taken to improve the Board’s
effectiveness following the findings from the 2018 evaluation:
— the Board agenda was restructured to allow time for a
discussion led by the Chief Executive Officer on strategic
progress and business priorities including external influences
and stakeholder feedback;
— a programme of Board engagement to support the development
of the refreshed strategy was put in place and the Board
held a series of Strategy Sessions; these sessions took place
outside of the main Board meeting allowing Board time to
be used effectively;
— a new Board paper format was introduced and guidance issued
to all Board paper authors to ensure Board reporting is suitably
tailored and focuses on the key issues for Directors’ attention;
— new reports were introduced and presented to the Board
by the head of each business division giving an overview
of key customer and commercial issues and business
performance; and
— agenda time was allocated to a new report on progress in
integrating the businesses and the Group Integration Director
attended Board meetings to respond to questions from the
Board; an escalation framework was introduced to ensure
the Board was notified of the most critical integration matters
including those impacting customers.
In addition, each Board Committee assessed whether it had
carried out its duties and met its responsibilities as set out in
each Committee’s Charter, the results of which were discussed
by each Committee and reported to the Board. Each Committee
met its key objectives.
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GOVERNANCE AND NOMINATION
COMMITTEE REPORT
KEY ISSUES / AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Independence
and time
commitments
Management
of conflicts
of interest
Training,
development
and induction
The Committee:
— reviewed the time commitment of serving Directors including external appointments, considering
amongst other matters the impact of limits placed by CRD IV on the number of directorships that
can be held by the Directors, and found them to be appropriate;
— reviewed the independence of serving Directors relative to the Code in assessing independence,
the Committee did not rely solely on the Code criteria but considered whether the Non-Executive
Director was demonstrably independent and free of relationships and other circumstances that
could affect their judgement. Based on the assessment for 2019, the Committee is satisfied that
throughout the year all Non-Executive Directors, other than Amy Stirling, remained independent
in character and judgement. Jim Pettigrew was considered independent on appointment as Board
Chairman. Amy Stirling is not considered to be independent as she was appointed to the Board
as the representative Director of Virgin Enterprises Limited pursuant to its right under the Group’s
Trade Mark Licence Agreement; and
— is recommending the re-election of all Directors who served during 2019, and who wish to continue
to serve, to shareholders at the 2020 AGM.
The Committee undertook the annual review of the Conflicts of Interest Register.
The Committee:
— kept informed of the Group’s talent management and leadership development programme; and
— oversaw the arrangements for the training and induction plan for Directors.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 085
Diversity and inclusion
Workforce engagement
The Board is committed to delivering the Group’s diversity and
inclusion strategy and although new appointments are always
based on merit, careful consideration is given to the benefits of
improving and complementing the diversity, skills, experience
and knowledge of the Board. In making recommendations to the
Board, the Committee makes sure that the Board is made up of
competent colleagues with the necessary balance of diversity,
skills and experience required to ensure that the Board can
function effectively.
The Board remains committed to building strong female
representation at all levels within the Group including at Board,
executive and senior management levels. The Committee and the
Board remain committed to their target to achieve 33% female
representation on the Board by 2020, achieved through the natural
cycle of Board renewal. It remains the Board’s intention to broaden
diversity on the Board beyond gender diversity alone, to reflect the
communities in which the Group operates and the diversity of our
customers. As at 30 September 2019 there were four female
Directors (31%) on the Board.
The Group supports the Women in Finance Charter and has
a target of 40% women in senior management roles by 2020.
We are on track to meet this target with female colleagues holding
38% of senior management positions in the top two layers of the
Company as at 30 September 2019. During the year, the Board
tracked progress in both gender diversity and broader inclusion
metrics and commitments through the Culture Dashboard.
During the year, the Committee reviewed in detail the Group’s
existing programme of workforce engagement and considered
how this should be developed to ensure the Board complies with
New Code requirements about understanding colleague views
in Board discussion and decision making.
The Committee made a recommendation to the Board and the
Board has discussed and agreed the approach to engagement
with the wider workforce through 2020, including how workforce
views will be presented to and considered by the Board on a
regular basis.
Board members already take part in a range of colleague
engagement activity and the Board receives reports on colleague
viewpoints. This includes a report following the periodic colleague
engagement survey, a quarterly Culture Dashboard, opportunities
to speak directly to colleagues during site visits, Q&A sessions
and one-to-one meetings. These provide the opportunity to gain
insights firsthand into the culture, areas of focus and issues that
matter to colleagues. As an example, in 2019 the Board took into
account colleague feedback on the proposed purpose, values and
behaviours when providing its own input.
For 2020, it has been agreed to enhance current engagement
activities to allow feedback from the wider workforce to be
brought to the attention of the Board for discussion in the context
of the Board’s decision making and to further develop meaningful
dialogue between Directors and the workforce. Insights will
be shared with the Board through a quarterly people update –
based on the current Culture Dashboard report to the Board
supplemented by qualitative and quantitative insight available
for the period, for example from surveys, Let’s Talk sessions
and other activity. The Group Human Resources Director will lead
Board discussions on key workforce related metrics, and themes
of feedback. There will be a refreshed programme of opportunities
for the Board to attend colleague engagement sessions and an
ability to arrange in-depth discussions with a representative group
of colleagues about a particular issue.
The Group’s existing whistleblower framework allows colleagues
and the wider workforce to raise concerns in confidence.
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AUDIT COMMITTEE
REPORT
“ The Committee provided robust
challenge and oversight of
financial reporting and internal
control matters during a year of
significant activity for the Group.”
Chair
Tim Wade
Members
Clive Adamson
David Bennett
Darren Pope
Teresa Robson-Capps
The Audit Committee (‘Committee’) is composed solely
of independent Non-Executive Directors who have current
or recent experience in the financial services and banking
industries and their biographies can be found on pages 58
to 60. Tim Wade, Chair, has recent and relevant financial
experience for the purposes of the Code, having held several
senior finance roles. In addition to Committee members,
the Board Chairman, Chief Executive Officer, Group Chief
Financial Officer, Group Chief Risk Officer, Group General
Counsel, Group Director Internal Audit and the external
auditor are invited to attend Committee meetings.
Regular private sessions were held with the external auditor
and Internal Audit during the year to provide additional
opportunity for open dialogue and feedback without
management being present.
The Committee recognises the common interest in issues
relevant to both the Risk Committee and Audit Committee
and in particular the responsibilities of both in relation to
the effectiveness of internal control. Joint meetings of the
Committees took place during the year where business
control self-assessments and oversight and assurance plans
from the three lines of defence and IFRS 9 reporting were
reviewed and challenged. To support the coordination of
information between the committees, the Chairs of each
of the Audit and Risk Committees are members of
both committees.
The Committee had seven scheduled meetings and one
additional meeting during the year. Details of meeting
attendance are set out on page 66.
Key objective
The Committee provides effective oversight in relation to
the Group’s financial reporting, the Group’s systems of risk
management and internal control and the performance
of the Internal Audit function and External Audit.
Responsibilities
During the year, the Committee reviewed its Charter which
sets out its responsibilities. The Charter can be accessed
on the Company’s website (www.virginmoneyukplc.com).
Committee performance evaluation
During the year, the Committee met its key objectives and
carried out its responsibilities effectively, as confirmed by
the annual Committee performance evaluation, the results
of which were discussed by the Committee and reported
to the Board.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 087
Dear shareholder,
Whistleblowing
As Chair of the Audit Committee (‘Committee’) during a year of
great significance for the Group, I am pleased to present this report
on behalf of the Committee. The year ended 30 September 2019
was significant due to the Virgin Money Holdings (UK) plc
acquisition in October 2018, and as a result, it was an extremely
busy and important year for the Committee.
Virgin Money Holdings (UK) PLC acquisition and integration
In addition to fulfilling its primary functions, the Committee
focused on the complex ‘fair value’ accounting issues associated
with the acquisition of Virgin Money Holdings (UK) PLC.
Considerable time was also spent monitoring activities and updates
in relation to the integration of Virgin Money Holdings (UK) PLC
into the Group. For example, the Committee reviewed reports
on the governance, structure and mobilisation of the integration
programme from PricewaterhouseCoopers and Internal Audit,
and the implementation of related actions. The expected impacts
of the FSMA Part VII transfer, which combines the banking
operations of Clydesdale Bank PLC and Virgin Money plc, on the
financial statements of the Group entities was also considered
with a focus on the proposed IFRS reporting treatment and key
accounting principles to be applied. The Committee will continue
to provide oversight of key internal control and financial accounting
aspects of the integration programme as it matures.
PPI and conduct issues
During the year, the regulatory deadline for claims relating to
Payment Protection Insurance (PPI) matters passed and the
Committee kept existing liabilities for conduct related issues under
close review, regularly challenging the assumptions underpinning
this complex provisioning process. The volume of PPI claims
received in the days leading up to the regulatory deadline was
far greater across the industry than was foreseen and as a result,
a £415m provision increase has been recorded. The Committee
will continue to give significant attention to conduct issues.
Annual assurance and audit plans
In conjunction with the Risk Committee, the Committee considered
several matters including the FY20 Risk Management Assurance
Plan and the FY20 Internal Audit Plan which are crucial to the
identification, management and mitigation of risks. Oversight of the
Group’s financial controls continued to be carried out and, together
with the Risk Committee, it was concluded that sound systems of
risk management and internal control are in place.
The Committee continues to receive regular updates on the
Group’s Whistleblowing Programme and as Group Whistleblowing
Champion I am responsible for ensuring and overseeing the
integrity, independence, and effectiveness of the programme.
Day-to-day operation of the programme is managed by the
whistleblowing team in the Group’s Regulatory, Conduct and
Compliance Risk team. The Committee was content that
management’s response and handling of reported cases
remained appropriate.
Internal and external audit
Regular updates were received throughout the year from the Group
Director Internal Audit and his team. These included a review of
the status of Integration Programme controls, which raised various
actions around the governance of the programme. A ‘deep dive’
pilot exercise into the culture within the Customer Assist team was
also conducted during the year which the Committee recognised
as being extremely thorough and insightful and it requested sight
of the resulting action plan. Finally, the Committee oversaw the
successful integration of the heritage internal audit departments.
Regular updates were also received from the external auditor with
a particular focus on material areas of management judgement.
The Committee continues to consider and assess the
independence and effectiveness of the internal and external
audit activities.
Looking ahead
The Committee’s accountabilities are clear and the members will
seek to continue to provide effective governance in respect of the
Group’s financial reporting and disclosure requirements. This will
be achieved by challenging management on key judgements and
the material assumptions on which they are based.
Tim Wade
Chair, Audit Committee
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AUDIT COMMITTEE
REPORT
Activities during the year
Significant financial reporting judgements
The areas of judgement considered, and key conclusions and actions taken by the Committee during the year, which ensure that
appropriate rigour has been applied to the 2019 Annual Report and Accounts, are detailed below. The Committee also considered
management’s review of the disclosed critical accounting estimates and judgements and concluded that the judgements had been applied
appropriately and that the disclosures were sufficient. This includes the decision to remove the fair value of financial instruments as a
separately disclosed estimate and judgement in this financial year. This is as a result of the reduction in the Group’s fair value loan portfolio,
meaning that the judgement applied in arriving at the Credit Risk Adjustment (CRA) has diminished and is now regarded as immaterial.
KEY ISSUES/AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Accounting,
tax and
financial
reporting
Accounting
policies and
practices
To review and challenge the
appropriateness of the Company’s financial
statements, including the content of the
Interim Financial Report, Annual Report
and Accounts, and related results
announcements, quarterly results
announcements and supporting analyst
presentations.
To review and challenge the critical
accounting policies, disclosure obligations
and changes in accounting requirements
including those relating to the Group’s
implementation of IFRS 9 and IFRS 15 with
effect from 1 October 2018. Further detail
on the adoption of these Standards can be
found in notes 1.9 and 5.4.
Further information on and disclosures
relating to the acquisition of Virgin Money
Holdings (UK) plc and the FSMA Part VII
transfer are set out in notes 3.19 and 5.6
respectively.
Further detail on alternative performance
measures can be found in the ‘measuring
financial performance – glossary’ section
of the Annual Report and Accounts
commencing on page 278.
The Committee reviewed the process for the production of the
reports under the remit of the Group Chief Financial Officer and
the level of involvement of cross-functional subject matter experts,
including monitoring the procedures in place to ensure that all
contributors attested to the completeness, accuracy
and appropriateness of the disclosures provided.
The Committee:
— reviewed with both management and the external auditor, the
critical accounting estimates and judgements, and significant
accounting policies and disclosures for the Group’s interim and
annual financial statements during the year;
— received regular updates from management on the progress
made on the integration workstreams, including key accounting
treatments and policies following the acquisition of Virgin Money
Holdings (UK) plc in October 2018;
— received regular updates and progress reports from
management on the Group’s plans and progress in working
towards the successful completion of the FSMA Part VII
transfer;
— received regular updates from the Group Accounting Policy
Team and external auditor on key changes and developments
in financial reporting requirements;
— reviewed the Group’s judgements, policies and proposed
disclosures relating to the adoption of both IFRS 9 and IFRS 15,
including the transitional disclosures required by IFRS 7;
— required a review of the policy underpinning Alternative
Performance Measure (APM) adjustments, and received regular
updates on how management has sought to provide greater
detail and transparency in their determination and presentation
of APMs. These demonstrated how the Group’s financial
performance on a statutory basis reconciled to the underlying
view presented by management. The Committee agreed with
management’s conclusions on the items to be adjusted in
presenting an underlying position including legacy conduct
costs, integration costs, acquisition-related impacts and the
results of the software rationalisation programme; and
— received regular updates and monitored the Group’s readiness
for the adoption of IFRS 16 (‘Leases’) with effect from 1 October
2019 which included updates from management on the progress
being made on the relevant judgements made in relation to
the modelling of outputs throughout parallel run, and detailed
analysis of the adoption accounting and capital impacts and
related disclosure requirements.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 089
KEY ISSUES/AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Payment
Protection
Insurance
(PPI)
Impairment
losses on loans
and advances
Effective
Interest Rate
(EIR)
The level of provisions required for both
redress and administrative costs in relation
to past conduct related matters require
assumptions to be made that are based
upon a combination of historical data and
management judgement.
These judgements are inherently complex
as they involve making estimates based
on multiple factors that incorporate
expectations of future customer behaviour,
the impact of regulatory rule making and
the application of precedent from the
Financial Ombudsman Service.
Further information on and disclosures
relating to provisions for conduct matters
are set out in note 3.16.
The Group’s loans and advances are
subject to impairment losses which, as
from the adoption of IFRS 9 on 1 October
2018, are measured on an expected credit
loss (ECL) basis as opposed to the previous
incurred loss basis as required by IAS 39.
The process of calculating the collectively
assessed element of the ECL balance for
both the 12-month ECL allowance (Stage 1)
and the lifetime ECL allowance (Stages 2
and 3) requires the use of significant
estimates and judgements over issues
such as the estimation of the probability
of default (PD), macroeconomic indicators,
scenarios and weightings in arriving at a
probability weighted forward-looking ECL
allowance, and the use of post-model
adjustments (PMAs).
Further information on and disclosures
relating to the Group’s ECL impairment
allowance are set out in the credit risk
section of the Risk report starting on
page 144 and in note 3.1.
The Group offers a range of mortgage and
credit card products, interest income on
which is recognised using the EIR method.
This provides a level yield over the
anticipated behavioural life of the product.
In addition, and in accordance with IFRS 9,
certain costs with are directly attributable
and integral to the generation of a financial
instrument are deferred and released to
the income statement over the expected
life of the relevant product.
The Committee:
— reviewed and challenged the assumptions made by management
when determining the level of provisions required for PPI and
other conduct related matters, in particular the judgements and
assumptions made in relation to the impact of the increased
activity by claims management companies experienced as a
result of the August 2019 industry deadline; and
— reviewed in detail proposals in relation to PPI and other conduct
scenarios (including potential redress and administrative costs)
presented by management which reflected a series of
alternative potential outcomes before concluding on the £30m
provision increase recorded in March 2019 and the £385m
increase recorded in September 2019.
Based upon the most recent information, the Committee
concluded that management assumptions were supportable
and that the conduct provisions recorded at 30 September 2019
were appropriate.
The Committee:
— reviewed regular reports from management in relation to the
level of ECL impairment provisioning, with the key focus being
on the assumptions used within the collectively assessed
element of the provision;
— reviewed and challenged the inputs and resulting output of the
base models, with a particular focus on probabilities of default
and the estimate of future recoveries;
— reviewed and challenged the level of PMAs included within the
ECL impairment allowance and the rationale for their inclusion;
— assessed outputs against peer and wider industry benchmarks;
and
— agreed that the judgements and assumptions used were
necessary and appropriate at 30 September 2019.
The Committee:
— received regular updates from management on the operation
of new EIR models and the impact these made to the
Group’s results;
— reviewed and challenged the inputs, methodologies and
assumptions applied to these models, in particular those
around customer prepayment profiles and behaviours; and
— are satisfied that the inputs, methodologies and assumptions
used by management in operating EIR accounting for the
Group are appropriate and supportable.
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AUDIT COMMITTEE
REPORT
KEY ISSUES/AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Deferred
tax assets
The largest elements of the Group’s
deferred tax asset are historic losses
and capital allowances.
In assessing the recoverability of the
deferred tax asset on the balance sheet,
management has exercised judgement
over the forecast future profitability of the
Group and the number of years over which
to take account of future profits, i.e. the
period over which profits can be reliably
estimated.
Further information on and disclosures
relating to the Group’s deferred tax asset
position as at 30 September 2019 are
set out in note 3.11.
The actuarial valuation of the Group’s
defined benefit scheme liabilities involves
making several financial and demographic
assumptions, including: discount rate;
future inflation rates; and future
mortality rates.
Further information on and disclosures
relating to the Group’s retirement benefit
obligations at 30 September 2019 are
set out in note 3.12.
Retirement
benefit
obligations
The Committee:
— reviewed the recoverability of deferred tax assets throughout
the year;
— considered the judgements made by management over the
forecast future profitability of the Group and the time horizon
over which the use of tax losses was foreseeable in light of
the continuing and progressively tightening restrictions on
their use; and
— agreed that the recognition of a deferred tax asset balance
of £322m at 30 September 2019 was appropriate.
The Committee reviewed the discount and inflation rate
assumptions proposed by management at 30 September 2019
against a benchmark range provided by the external adviser
and concurred with these key assumptions.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 091
Other significant issues
Internal Audit
Going concern
The Committee reviewed and challenged the going concern
assessment undertaken by management including assessments
of the Group’s capital, liquidity and funding position, and confirmed
to the Board that it was appropriate for the Group’s financial
statements to be prepared on a going concern basis.
Long-term viability
The Committee reviewed and challenged the viability assessment
(including the three-year time horizon selected) undertaken by
management in the 2019 Annual Report and Accounts.
The Committee considered the process to support the viability
statement in conjunction with an assessment of principal risks
and strategy/business model disclosures, taking into account
the assessment by the Risk Committee of stress testing results
and risk appetite. The Committee recommended the draft
Viability Statement (as set out on pages 134 to 135) to the Board
for approval.
Assessment of fair, balanced and understandable reporting
The Committee considered, at the request of the Board, the
comprehensive review process which supports the Board and
Committee in reaching its conclusion whether the 2019 Annual
Report and Accounts was fair, balanced and understandable and
whether it provided the necessary information for shareholders
to assess the Group’s performance, business model and strategy.
The process which enabled the Committee to reach this
conclusion included:
— the production of the 2019 Annual Report and Accounts which
was managed by the Group Chief Financial Officer, with overall
governance and coordination provided by a cross-functional
team of senior management led by the Group Head of Finance;
The following matters were considered by the Committee during
the year in respect of its responsibility to monitor the role and
effectiveness of the Internal Audit function (including the role
of the Group Director Internal Audit):
— approval of the audit plan, including any material changes, and
monitoring of progress towards its delivery on a quarterly basis;
— quarterly reports from Internal Audit on activities undertaken and
a six-monthly assessment of the overall control environment;
— major findings of significant internal audits, and the responses
to these from management;
— regular interactions with the Group Director Internal Audit,
including private sessions with the Committee and Committee
Chair and specific audit planning workshops;
— an annual assessment of the independence and performance of
the Group Director Internal Audit who continued to report directly
to the Chair of the Committee, with a secondary reporting line
to the Chief Executive Officer for administrative purposes;
— adequacy of Internal Audit resources, including the financial
budget and capability to draw on external specialists when
appropriate;
— a review of benchmarking information relating to the size
and capability of the Internal Audit function and the results
of Internal Audit Quality Assurance Assessments; and
— revisions to the Internal Audit Charter (available at
www.virginmoneyukplc.com), which sets out the role and
responsibilities of the function, were approved.
The Committee concluded that the Internal Audit function was
sufficiently resourced and skilled to operate as a standalone entity.
— cross-functional support to drafting the 2019 Annual Report
External auditor
and Accounts, which included input from Finance, Risk, Legal
and Governance, Investor Relations, HR and the wider business;
— a robust review process of inputs into the 2019 Annual Report
and Accounts by all contributors to ensure disclosures were
balanced, accurate and verified, and further comprehensive
reviews were conducted by senior management;
— a review by the Group Company Secretary of all Board and
Committee minutes to ensure all significant matters discussed
at meetings were appropriately disclosed in the 2019 Annual
Report and Accounts as required;
— a formal review by the Committee of the draft 2019 Annual
Report and Accounts in advance of final sign-off; and
— a final review by the Board of Directors.
After careful review and consideration of all relevant information,
including principal risks, the Committee was satisfied that, taken
as a whole, the 2019 Annual Report and Accounts is fair, balanced
and understandable and has affirmed that view to the Board.
This process was also undertaken in respect of all the Group’s
financial reporting during the year to ensure that, taken as a
whole, based on the information supplied to it and challenged
by the Committee, the financial reports were fair, balanced
and understandable, and advised the Board to that effect.
The Committee oversees the effectiveness of the external
auditor (Ernst & Young LLP (‘EY’)) and during the year it approved
the annual external audit plan, reviewed the external auditor
engagement letter and agreed the auditor’s remuneration
(the Committee was authorised by shareholders at the 2019 AGM
to agree the remuneration of the external auditor). Steven Robb
fulfils the role of Senior Statutory Auditor for the third year and EY
will continue to practice the rotation of the Senior Statutory Auditor
responsible for the Group audit at least every five years; all other
audit partners and audit senior management will be required to
rotate at least every seven years. During the year, the Committee:
— reviewed the findings of the external audit including key
judgements and the level of challenge provided by the
external auditor;
— reviewed the external auditor’s representation letter;
— reviewed management’s responses to control findings,
non-compliance and any other findings identified by
external audit; and
— considered the wider external audit market generally,
noting relevant industry specific information and events.
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AUDIT COMMITTEE
REPORT
Risk management and internal control systems
Detailed information in respect of the internal controls and risk
management systems for the Group’s financial reporting process
are provided within the Risk report on pages 138 to 192. Specific
matters that the Committee considered during the year included:
— reviewing the output of Internal Audit reports (including
thematic and focused reviews of prudential, credit, conduct
and strategic change risks) to confirm the effectiveness of
the Group’s internal control and risk management systems;
— consideration of the Group’s Financial Reporting Control
Effectiveness Statement for Finance and Treasury together
with an overview of key financial reporting controls; and
— considered the findings of the external auditor in connection
with the Group’s control environment.
The Committee concluded that it was content that financial
reporting internal controls were sufficiently robust and were
operating effectively.
Regulatory compliance
The Committee provided oversight of the Group’s compliance
with all necessary regulatory reporting which included reviewing
the integrity of the Pillar 3 Disclosures and recommending approval
by the Board, and providing oversight of significant management
judgement in the regulatory returns to the Group’s regulators
(the Prudential Regulation Authority, Financial Conduct Authority,
Bank of England and European Banking Authority).
Whistleblowing
The Chair of the Committee is the Whistleblower Champion
in accordance with the Senior Managers and Certification
Regime with responsibility for the integrity, independence
and effectiveness of the Group’s policies and procedures
on whistleblowing and the Committee has oversight of the
whistleblower policy standard and framework. The Committee
considered periodic whistleblower framework reports covering
the Group’s whistleblowing arrangements, including monitoring
the trends in reported and substantiated whistleblowing cases,
and obtained assurance on the completion of training by
colleagues to promote and raise awareness across the organisation
of the Group’s whistleblowing arrangements. The Committee
also obtained oversight of updates to the Whistleblowing
Policy Standard.
The Committee considered the effectiveness of the audit
process and the external auditor performance as part of an annual
performance review which takes into account management’s
assessment of audit effectiveness. The assessment focused
on the areas of judgement; mindset and culture; skills, character
and knowledge; with an overarching assessment of quality control.
The Committee concluded that it was satisfied with the external
auditor’s performance and recommended to the Board a proposal
for the re-appointment of the auditor at the Company’s AGM.
External auditor independence and remuneration
Both the Board and the external auditor have safeguards in
place to protect the independence and objectivity of the external
auditor which are detailed in the External Auditor Independence
Policy Standard (Policy Standard). This policy is reviewed at least
annually and was refreshed during 2019. The Policy Standard
details the nature of the services that the external auditor may
not undertake and specifies that non-audit services may not
be pre-approved and are subject to prior approval from the
Committee or a delegate. In certain cases, the external auditor
may be selected over another service provider due to their detailed
knowledge and understanding of the Group’s operations. Any
allowable non-audit service with a value above £100,000 requires
approval from the Chair of the Committee. The Policy Standard also
specifies that the overall fee for non-audit services be continually
monitored and should not exceed 70% of the average audit fee
over the prior three-year period. The total amount paid to the
external auditor in 2019 was £3,801k (2018: £2,518k). The
Committee challenged the external auditor on whether this fee
level was sufficient to facilitate an effective audit, and received
satisfaction on this point. Non-audit services of £725k (2018:
£820k) performed by the auditor during the year included providing
accounting opinions and comfort letters in respect of the issues
of Global Medium Term Note debt instruments; profit attestations;
and a Client Assets Sourcebook audit. Payments by the Group for
both audit and non-audit services provided in 2019 and 2018 are
further detailed in note 2.4 to the financial statements. The Policy
Standard also regulates the appointment of former audit colleagues
to senior finance positions in the Group.
Statutory Audit Services Compliance
The Committee confirms that the Group has complied during
the period of financial review and to the date of this report
with The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014, which relates
to the frequency and governance of tenders for the appointment
of the external auditor and the setting of a policy on the provision
of non-audit services.
EY has been the external auditor for Clydesdale Bank PLC and
other Group entities since January 2005. EY was appointed as the
Company’s external auditor on 14 January 2016 following an audit
tender, shortly before the Company became the holding company
of the Group. The Committee undertook a competitive tender of
the audit of the Group in early 2015 and the Group has no current
retendering plans. In applying the CMA’s requirements, the next
mandatory tender would be in respect of the 2026 financial year.
Notwithstanding this, EY will have fulfilled the maximum 20 year
duration allowed for external audit appointments under the
Statutory Auditors and Third Country Auditors Regulations 2016
in respect of the financial year ending 30 September 2024.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 093
RISK COMMITTEE
REPORT
“The Committee continued to
assist the Board in ensuring that
the Group maintains an effective
risk management framework
and it provided oversight of
the assessment of key current
and emerging risks.”
Chair
Clive Adamson
Members
David Bennett
Paul Coby
Geeta Gopalan
Fiona MacLeod
Tim Wade
The Committee comprises six independent Non-Executive
Directors who have a variety of industry backgrounds,
including banking and financial services. Membership of
the Committee has been designed so that there is a deep
understanding of risk management, banking, and financial
sector expertise it needs to fulfil its responsibilities.
In addition to the Committee members, the Board Chairman,
Chief Executive Officer, Group Chief Financial Officer, Group
Chief Operating Officer, Group Chief Risk Officer, Group
General Counsel, Group Director Internal Audit, and Head
of Regulatory and Compliance Risk are invited to attend
Committee meetings.
Private sessions were held with the Group Chief Risk Officer
during the year to provide additional opportunity for open
dialogue and feedback without the Executive Directors
being present.
The Committee recognises the common interest in issues
relevant to both the Committee and the Audit Committee,
including the assurance activities which span all three
lines of defence. Joint meetings of the Committees took
place during the year where matters including the FY2020
Risk Management Assurance Plan and the FY2020 Internal
Audit Plan were discussed. To support the coordination
of information between the committees, the Chairs of
the Committee and the Audit Committee are members
of both committees.
The Committee had six scheduled meetings and four
additional meetings during the year. Details of meeting
attendance are set out on page 66.
Key objective
The Committee assists the Board to set the Group’s risk
appetite and to ensure that the Group maintains an effective
risk management framework. The Committee also supports
the Board by assessing key current and emerging risks
and their mitigation, and by leading the development
and embedding of a culture that supports risk awareness
and the fair treatment of customers.
Responsibilities
During the year, the Committee reviewed its Charter which
sets out its responsibilities. The Charter can be accessed
on the Company’s website (www.virginmoneyukplc.com).
Committee performance evaluation
During the year, the Committee met its key objectives and
carried out its responsibilities effectively, as confirmed by
the annual Committee performance evaluation, the results
of which were discussed by the Committee and reported
to the Board.
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RISK COMMITTEE
REPORT
Dear shareholder,
Looking ahead
Many of the areas that the Committee focused on in 2019 will
continue to be areas of focus in 2020, most notably the integration
of Virgin Money Holdings (UK) plc and the associated rebranding
and resultant customer value proposition changes for our
customers across the combined Group. The Committee will
also play a key oversight role to support the Board as the Group
prepares to participate in the Bank of England’s concurrent
stress testing.
The environment in which the Group operates is likely to continue
to be subject to considerable change, with uncertainties likely
to include the macroeconomic growth outlook and the impact
of the UK’s withdrawal from the EU. The Committee will continue
to closely monitor developments and the associated impacts
on the Group’s risk profile.
Clive Adamson
Chair, Risk Committee
I am pleased to report on how the Committee has discharged
its responsibilities throughout the financial year ended
30 September 2019.
The Committee has continued to support the Board to maintain
a robust and effective risk management framework, and to
promote the appropriate risk culture across the Group.
Geeta Gopalan will become Chair of the Risk Committee with
effect from 30 November 2019, subject to regulatory approval,
and I would like to wish her every success for the future.
Risk policies and frameworks
The Committee oversaw the development of a combined
Risk Appetite Statement after the acquisition of Virgin Money
Holdings (UK) plc to support the Group’s strategic plans, and played
a key role in the development of a refreshed Risk Management
Framework (RMF) for implementation across the enlarged Group
following the FSMA Part VII transfer. The Committee also oversaw
the establishment of a revised three lines of defence model, and
continued to review stress and scenario analysis to give assurance
on the Group’s ability to mitigate potential risks.
The Committee has overseen developments in cyber resilience
and operational resilience, and an enhanced approach to managing
technology risk which was reflected in the revised RMF.
Virgin Money Holdings (UK) plc integration
The integration of Virgin Money Holdings (UK) plc was a key
area of focus, and the Committee reviewed and challenged
specific programme updates and opinions on the progress of
the programme, and key risks, from all three lines of defence.
The Committee played a key role in ensuring that the requisite
level of separate entity governance was maintained across the
Group ahead of the FSMA Part VII transfer by ensuring that
the Committee focused on Group-wide risk matters continuing
to fall within the remit of the Virgin Money PLC Board Risk
Committee. The Committee also reviewed and supported
transitional risk assessments in respect of the key organisational
changes undertaken during integration.
Principal and top and emerging risks
The following report sets out the principal risks, and areas of
top and emerging risks the Committee evaluated over the year.
More details on the wider risk profile and the RMF that the
Committee oversees can be found in the Risk Overview within
the Strategic Report on pages 26 to 27 and in the Risk Report
on pages 138 to 192.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 095
Activities during the year
The significant matters addressed by the Committee during the financial year ended 30 September 2019 and in evaluating
the 2019 Annual Report and Accounts are described in the following pages.
KEY ISSUES/AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Enhancing the
RAS and
stress testing
Reviewing and approving the Group’s
risk appetite
The Committee:
— reviewed and approved a Group RAS to ensure that the Group has
the appropriate risk tolerances in place;
— regularly reviewed the RAS and recommended any updates to the
Board for approval taking into consideration the strategic objectives
and target business model of the Group as well as the environment
in which it operates;
— reviewed regular reports of performance against each RAS measure,
and assessed and confirmed the adequacy of management actions
in relation to actual or potential breaches of red and amber RAS
thresholds; and
— reviewed deep dive analysis on a variety of risk matters including:
Conduct Risk, Regulatory and Compliance Risk, Financial Crime Risk
and Funding.
Reviewing the ICAAP and ILAAP and
recommending approval to the Board
The Committee reviewed and monitored the capital, funding,
and liquidity profile through the ICAAP and ILAAP processes.
Embedding the
risk framework
and governance
Providing oversight and reviewing
the application of the Group’s risk
management, compliance and
control systems
Supporting
an effective
risk culture
Ensuring that all colleagues
operate in line with the Group’s
risk-focused culture
The Committee:
— reviewed and approved proposals to refresh and update the
RMF in relation to the evolving nature of the Group’s activities,
which included recommending that the Board approve an RMF
for implementation across the enlarged Group following the FSMA
Part VII transfer;
— oversaw the establishment of a revised three lines of defence model;
— reviewed and approved a suite of updated Policy Statements
and Policy Standards for implementation following the FSMA
Part VII transfer;
— approved the Group’s range of updated Principal Risk Policy
Statements which were supported by deep dive reviews into
the application and effectiveness of the policy led by the Policy
Statement owners; and
— discussed and noted an annual review of the Group’s anti-money
laundering systems and controls.
The Committee:
— continually assessed risk culture, including considering risk events
and undertaking root cause analysis; and
— made recommendations to the Remuneration Committee regarding
the development of remuneration incentives, and considered any
risk adjustments to be taken into account by the Remuneration
Committee when making remuneration decisions.
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RISK COMMITTEE
REPORT
KEY ISSUES/AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Risk
management
Overseeing the risk profile and risk
management of the Group within the
Board approved RAS
The Committee:
— reviewed and challenged regular reports from the Group Chief Risk
Officer that considered matters of concern on the material sources
of top and emerging risk to the Group;
— reviewed and supported transitional risk assessments in respect of
key organisational changes, including a transitional risk assessment
in respect of the Group risk structure;
— approved the annual Risk Management Assurance Plan and received
regular updates on the adequacy and effectiveness of the
application of the risk and control framework;
— reviewed and challenged programme updates and opinions on the
progress of the integration programme, and key risks, from the three
lines of defence;
— reviewed and approved the Group’s control environment; and
— carried out an assessment of the Viability Statement in the 2019
Annual Report and Accounts and advised the Board and Audit
Committee to that effect.
As part of the RMF, during the year the Committee maintained oversight of the following identified principal risks and associated
top and emerging risks.
RISK CATEGORIES
Credit risk
Financial risk
The risk of loss of principal or interest
stemming from a borrower’s failure to
meet its contracted obligations to the
Group in accordance with the terms
agreed. Credit risk is evident at both
a portfolio and transactional level.
This covers several categories of risk
which, if improperly managed, will
have an adverse effect on the financial
performance of the Group. They
include funding risk, liquidity risk,
market risk, pension risk, capital risk,
non-traded equity risk and model risk.
KEY MATTERS CONSIDERED
The Committee regularly reviewed the performance of the loan
portfolio including concentrations, alongside changes in the economic
environment, to ensure that concentration risks were minimised.
The Committee:
— closely monitored the Group’s funding and capital positions giving
due consideration to any additional risks arising from increased
market uncertainty;
— discussed and noted regular reports from the Group Treasurer
which provided updates on the Group’s exposure to financial risk;
— considered the Group’s recovery plan in the event of a significant
deterioration in financial stability; and
— monitored the Group’s implementation of the requirements of
Structural Reform, and supported the Board Chairman’s attestation
of compliance with the Group’s ring-fencing obligations.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 097
RISK CATEGORIES
Regulatory and
compliance risk
This is the risk of failing to understand
and comply with relevant laws and
regulatory requirements; failing to
identify, monitor and respond to
changes in the regulatory environment;
non-compliance or not keeping
regulators informed of relevant
issues; not responding effectively
to information requests, regulatory
review findings or not meeting
regulatory deadlines or obstructing
the regulator. It is also the risk of
failure to comply with the wider set
of rules, regulations, codes of practice
and laws relevant to the Group.
KEY MATTERS CONSIDERED
The Committee:
— obtained regular briefings from management on regulatory
developments and upstream risk, including in relation to PSD2, the
General Data Protection Regulation and Authorised Push Payments.
The Committee considered and monitored the implications of these
developments on the Group’s strategic objectives and operations,
systems and controls; and
— reviewed deep dive analysis on the Regulatory and Compliance Risk
Policy Statement, and approved the statement.
Emerging risk – Regulatory change – The requirement to respond to
and deliver mandatory change remains integral to the achievement of
the Group’s strategic objectives. The Committee are alert to the fact
that the Group continues to face a significant regulatory change agenda
including a number of changes relating to PSD2 and High Cost of Credit.
Conduct risk
The risk of undertaking business in
a way that is contrary to the interests
of our customers, resulting in the
delivery of inappropriate customer
outcomes or experiences, customer
detriment, regulatory censure, redress
costs and/or reputational damage.
Operational
risk
The risk of loss resulting from
inadequate or failed internal processes
or from external events. Impacts
from operational risks arise from the
day-to-day activities of the Group,
which may result in direct or indirect
losses and could adversely impact
the Group’s financial performance
and position.
The Committee:
— regularly reviewed an enhanced conduct risk dashboard which
provided greater insight into the risks throughout the customer
journey across all major product areas;
— reviewed deep dive analysis on the Conduct Risk Policy Statement,
and approved the statement;
— regularly reviewed and challenged conduct risk updates. Regulatory
change, particularly in relation to payments, remained a key area
of focus; and
— monitored progress to remediate key legacy conduct issues
throughout the year, including PPI and other remediation programmes.
The Committee:
— regularly reviewed and challenged operational risk updates,
with operational resilience and continuity a key focus area; and
— reviewed and approved the operational risk scenarios to be included
in the annual programme, the outputs of which are used to support
the operational risk capital calculation for inclusion in the ICAAP.
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RISK COMMITTEE
REPORT
RISK CATEGORIES
Financial
crime risk
Technology
risk
This is the risk that the Group’s
products and services will be used
to facilitate financial crime against the
Group, its customers or third parties.
It encompasses the risk of failing
to understand and meet relevant
laws, regulations and supervisory
requirements relating to money
laundering, terrorism financing,
bribery and corruption, and sanctions
and embargoes risk. It also includes
risks associated with external or
internal acts intended to defraud,
misappropriate, and circumvent policy,
funds, information, regulations
and property.
This is the risk of loss resulting
from inadequate or failed information
technology processes through
governance, strategy, design,
build or run components internally
or externally provisioned. It includes
IT resilience, information security,
data privacy and payment risk.
KEY MATTERS CONSIDERED
The Committee:
— maintained oversight of the effectiveness of the Financial Crime
Framework for monitoring, management and mitigation of financial
crime; and
— reviewed deep dive analysis on the Financial Crime Risk Policy
Statement, and approved the Statement, Anti-Money Laundering
and Counter Terrorist Financing Policy Standard and Anti-Bribery
and Corruption Policy.
The Committee:
— reviewed and challenged regular status updates from the Group
Chief Operating Officer regarding Change and IT Risk Management;
— alongside the other members of the Board, visited the teams
managing the Group’s cybersecurity programme to gain a deeper
understanding of the operations and challenges in this area;
— reviewed and challenged an update from the Risk function regarding
cyber risk; and
— monitored the Risk function’s capabilities in cyber risk with a
view to ensuring that the function remains an appropriate second
line of defence.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 099
RISK CATEGORIES
Strategic and
enterprise risk
The risk of significant loss of earnings
or damage arising from decisions
or actions that impact the long-term
interests of the Group’s stakeholders
or from an inability to adapt to external
developments.
People risk
The risk of not having sufficiently
skilled and motivated colleagues
who are clear on their responsibilities
and accountabilities and who behave
in an ethical way. This could lead
to inappropriate decision making
that is detrimental to customers,
other colleagues or our shareholders
and could ultimately lead
to regulatory sanction.
KEY MATTERS CONSIDERED
The Committee:
— received regular updates on strategic and business risks from
the Group Chief Risk Officer;
— regularly reviewed and challenged programme updates and opinions
on the progress of the Integration Programme, and key risks,
from the three lines of defence; and
— oversaw the Group’s response to the evolving regulatory
expectations regarding climate change risk.
Emerging risk – Geo-political and macroeconomic environment –
The Group is exposed to a variety of downstream risks resulting
from the geo-political environment, which have significant business
relevance. These are chiefly macroeconomic growth outlook, credit
appetite and performance, competitive pressures and margin.
Emerging risk – Competition – The financial services industry is a
highly competitive environment. The emergence of new entrants and
regulatory initiatives, such as Open Banking, and in particular, Strong
Customer Authentication may lead to material changes in the future
provision of financial services. New entrants to the banking market,
including bespoke challenger banks but particularly non-bank
payments institutions, challenge the competitiveness of the Group.
Emerging risk – Climate change – Physical risks arising from climate
change can potentially result in large financial losses, impairing asset
values and the creditworthiness of borrowers. Transition risks arising
from the process of adjustment towards a low-carbon economy could
lead to changes in policy, technology and sentiment, prompting a
reassessment of the value of a large range of assets and create credit
exposures for banks and other lenders as costs and opportunities
become apparent.
The Committee provided oversight of key people risks, which included
reviewing and supporting transitional risk assessments in respect of
key organisational changes.
Further details on the Group’s approach to risk appetite, risk culture, the RMF, and significant and emerging risks can be found in the
Risk report beginning on page 138.
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DIRECTORS’ REMUNERATION
REPORT
“The Committee is focused
on implementing a robust
framework that promotes
the sustainable long-term
performance of the Group
and clearly demonstrating that
shareholder experience and
business performance are
considered when determining
Executive Director remuneration.”
Chair
Adrian Grace
Members
David Bennett
Fiona MacLeod
Jim Pettigrew
Directors’ remuneration report contents
Chair’s statement
At a glance
Directors’ remuneration policy
Annual report on remuneration
page 101
page 104
page 106
page 117
The Committee comprises four independent Non‑Executive
Directors. Fiona MacLeod was appointed as a member
of the Committee with effect from 5 November 2018.
The Committee held five scheduled meetings and five
additional meetings during the financial year. Details of
meeting attendance are set out on page 66.
Other attendees at Committee meetings during the year
included (by invitation from time to time): the Chief Executive
Officer; the Chief Financial Officer; the Group Human
Resources Director; and the Head of Reward and Pensions,
except when issues relating to their own remuneration
were being discussed. PricewaterhouseCoopers LLP (PwC),
the Committee’s independent remuneration adviser, also
attended meetings where invited. The Company Secretary
attended meetings to record minutes and advise on
governance matters.
The Group manages the link between risk and remuneration
carefully with the Remuneration Committee and the Board
Risk Committee working closely together. The Remuneration
Committee receives appropriate risk reports during the
year covering corporate and individual conduct performance
and, in advance of any variable pay award or release,
considers appropriate adjustments in relation to ex‑post
and ex‑ante risks.
Key objectives
To implement a remuneration framework that supports
the delivery of the Group’s strategic goals and its Purpose to
make people happier about money by motivating colleagues
to contribute towards the sustainable long‑term success
of the business.
Responsibilities
During the year, the Committee updated its Charter which
sets out the role and responsibilities of the Committee
and which can be found on the Company’s website:
www.virginmoneyukplc.com/about‑us/corporate‑governance/
Committee performance evaluation
During the year, the Committee met its key objectives
and carried out its responsibilities effectively as confirmed
by the annual Committee performance evaluation, the results
of which were discussed by the Committee and reported
to the Board.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 101
Dear shareholder,
STATEMENT BY THE CHAIR OF
THE REMUNERATION COMMITTEE
On behalf of the Board and as Chair of the Remuneration
Committee, I am pleased to present the Directors’ remuneration
report for the year ended 30 September 2019 which, in accordance
with reporting regulations, is split into two parts:
— the Annual report on remuneration which summarises how the
remuneration policy was implemented in 2019 and how it will
apply in 2020, and which will be subject to an advisory vote; and
— the forward‑looking Directors’ remuneration policy which,
subject to a binding vote at the AGM, will apply for the three
years commencing 1 October 2019.
The Group continues to be subject to difficult macroeconomic
conditions together with the ongoing resolution of a number
of legacy issues. However, the Board remains confident in the
longer‑term strategy as outlined at the Capital Markets Day.
As such, the Committee needs to maintain the balance and
motivational impact of remuneration arrangements that reflect the
climate in which the Group is operating, that continue to incentivise
management appropriately and that are cognisant of the returns
for investors and the delivery of long‑term benefits for customers.
Listening to our shareholders
Although last year’s Directors’ remuneration report received support
from a majority of shareholders, with 65.79% of votes cast in favour,
the Committee acknowledges the c34% of votes that opposed how
the remuneration policy was implemented in 2018. The Committee
recognises that shareholders have an essential role to play in
guiding responsible remuneration practices and, during the year,
has engaged with the Group’s largest shareholders in the UK and
in Australia (between them representing around 60% of the Group’s
voting rights) to better understand the underlying concerns that
may have contributed to the voting outcome.
The feedback received through this consultation has provided
assurance that our largest shareholders support our approach
to remuneration. However, while we have majority support for
our approach, some shareholders would like to see greater
transparency in setting out the processes for determining award
outcomes for Executive Directors and explaining where the
Committee has applied judgement and discretion. The feedback
has been central to the design of this report and the new policy.
This year, the Committee has sought to ensure Executive Director
outcomes are aligned with shareholder experience and with
expectations of the regulator. It is also key to remain effective in
the retention of the leadership team tasked with managing legacy
challenges and delivering integration and the long‑term Group
strategy. The Committee is satisfied that it has exercised an
appropriate level of restraint and delivered fair outcomes through
the decisions to reduce variable pay outcomes and not award
salary increases to Executive Directors.
2019 review
Fixed pay: The Committee continued to monitor the levels of
executive fixed pay during the year, including Executive Director
pension contribution levels, against the normal market comparators
and from an overall fairness perspective. Executive Director pay
in the sector has remained largely static and, while the Group has
grown in size and complexity since the takeover of Virgin Money
Holdings (UK) PLC, the Remuneration Committee is satisfied that
the prior year increases in variable pay opportunity together with
the existing level of total fixed pay provide the right balance
of reward and incentivisation. Therefore, no salary increases
are proposed for 2020.
Annual bonus: During 2019, the Group has continued to deliver
against its strategic goals despite the backdrop of a challenging
operating environment and ongoing uncertainty on the short‑term
UK economic outlook. The efficiency of the Group’s performance
is underlined by the improvement in its underlying cost:income
ratio to 57.5%. Notable progress has been achieved in net promoter
scores over the period and, despite the organisational change
currently being undertaken, colleague engagement scores have
remained strong at 76%.
While noting the improvements registered in these areas,
the financial targets for underlying PBT and underlying costs
were not met. In addition, the RoTE outcome for bonus purposes
was reduced from 10.8% to 10.03% to account for the impact
of PPI. Therefore, overall business performance delivered a
scorecard outcome of 37% (out of 80% maximum opportunity).
The Committee recognises the significant contribution the
Executive Directors have made during 2019, including the
completion of FSMA Part VII and the development of the revised
strategy. However, taking into account recent feedback from
shareholders, particularly in relation to share price performance,
the personal elements of bonus have been reduced to zero
(out of 20% maximum opportunity). As a result, the final bonus
award outcomes are £445,000 for the Chief Executive Officer and
£220,000 for the Chief Financial Officer, respectively representing
a 28% and 29% year‑on‑year reduction.
Impact of adjustments summary
(outcome as percentage of maximum award)
David Duffy
CONSIDERATION
Business scorecard
Personal scorecard
Risk adjustment
Total
Ian Smith
CONSIDERATION
Business scorecard
Personal scorecard
Risk adjustment
Total
UNADJUSTED
OUTCOME
37%
14%
–
51%
ADJUSTMENT
MADE
–
(14%)
–
(14%)
UNADJUSTED
OUTCOME
37%
19%
–
56%
ADJUSTMENT
MADE
–
(19%)
–
(19%)
FINAL
ADJUSTED
OUTCOME
37%
0%
–
37%
FINAL
ADJUSTED
OUTCOME
37%
0%
–
37%
2019 long‑term awards: The Remuneration Committee intends
to grant 2019 Long Term Incentive Plan (LTIP) awards to Executive
Directors in December. The metrics, targets and weightings for
this award have been formulated to align with the Group’s strategy
as outlined at the Capital Markets Day. The achievement of
on‑target performance against stretching objectives over the
three‑year business cycle will continue to deliver a 60%
performance outcome.
Taking account of investor feedback, the number of performance
metrics has been reduced and performance measures reflect a
movement towards statutory measurements. Some of our larger
shareholders have expressed a desire to move to a Total
Shareholder Return metric that is commonly used in Australia.
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STATEMENT BY THE CHAIR OF
THE REMUNERATION COMMITTEE
This metric is not commonly used in the UK financial services
sector as it is not a risk‑adjusted metric, as required by
UK regulators.
The Committee has determined not to adjust the quantum of the
LTIP awards granted to Executive Directors for 2019 given the
importance of retaining and incentivising the incumbents who are
key to delivering the Group’s long‑term strategy. The LTIP grants
for 2019 represent a significant incentive for Executive Directors
to achieve the outcomes noted at the Capital Markets Day. The
Committee will continue to monitor the macroeconomic conditions
and business performance in line with shareholder expectation
and will review any outcomes of these grants at the time of vesting
so as to ensure alignment.
The Executive Director remuneration framework ensures that the
balance of total remuneration is biased towards delivery in shares
rather than cash. More than 80% of variable remuneration awarded
for 2019 in the form of bonus and LTIP awards for the year will
be delivered in shares, with over 60% subject to performance
conditions and deferral over a seven‑year period and a further
12‑month post‑vest hold period.
Performance outcome for 2015 and 2016 long-term awards
During the year, the Committee determined the performance
outcomes for the 2015 demerger award and the 2016 LTIP award
against targets set at grant. The 2015 demerger award was subject
to a single performance condition linked to the Group’s profit
expectation following the demerger from NAB and was therefore
solely based on cumulative underlying profit before tax over a
three‑year period. The terms of the awards were such that 100%
of the award vested if the sole target was met and 0% vested if
the target was not attained. Following the end of the performance
period the cumulative underlying profit before tax target had been
met. The Remuneration Committee determined that the award
should therefore vest in full.
The 2016 LTIP award was subject to financial and non‑financial
performance conditions set at the time of grant. The Committee
determined the final performance outcome of the FY2016 LTIP
as 62% of the maximum opportunity. As part of its assessment
of the performance conditions, the Committee ensured that the
outcomes did not benefit from any uplift from the acquisition of
Virgin Money Holdings (UK) PLC in October 2018, two‑thirds of
the way through the performance period. The Committee also
adjusted the RoTE outcome for LTIP purposes from 10.8% to 9.13%
to account for the impact of PPI.
Impact of Virgin Money Holdings (UK) PLC
acquisition on unvested LTIP awards
LTIP awards for 2018 were granted to Executive Directors shortly
after the acquisition of Virgin Money Holdings (UK) PLC was
completed and before the Remuneration Committee was in a
position to fully determine an appropriate set of quantitative
metrics to apply to this award. The Committee determined the
performance metrics following the Capital Markets Day and after
consulting with investors. The final outcomes are set out on page
125 of this report with measures aligned to the strategy. The
performance measures applicable to LTIP awards for 2017 have
been reassessed during the year to take account of the acquisition.
Where appropriate, recalibration has been applied to financial
measures. The revised measures, and an explanation of the
rationale behind any changes, are set out on page 125.
Looking ahead
The current remuneration policy will have operated for three years
at the time of the 2020 AGM, and the Committee is therefore
seeking approval for a new remuneration policy.
The Committee has undertaken an extensive review and
considered the merits of alternative approaches to executive
remuneration. Given the continued restrictions imposed by the
banking regulations, the support for our current remuneration
policy reflected both through the overwhelmingly positive vote at
the 2017 AGM (99%) and the more recent feedback received from
our engagement with shareholders, the prospective remuneration
policy will remain closely aligned with the existing one. A number
of minor amendments have been made either to refine the
operation and delivery of variable pay or to align with new and
emerging requirements under the Corporate Governance Code
and regulatory remuneration reporting. A summary of each change,
and the supporting rationale, is provided on page 105.
Recognising regulatory obstacles to setting specific measures
against total shareholder return, the Committee will need to
remain cognisant of the overall shareholder experience and
macroeconomic environment when implementing the Group’s
remuneration framework and will continue to review and adjust
outcomes to align with shareholder feedback and overall business
performance as demonstrated in the approach taken to the 2019
financial year.
Remuneration considerations across the Group
The remuneration of colleagues across the Group is an important
consideration for the Remuneration Committee. In addition to
determining the all‑colleague bonus plan outcome against target,
the Committee approved an all‑colleague annual pay review spend
of 2%, from which Executive Directors are excluded. Recognising
the important role that employee share ownership has in
engagement towards a shared Purpose, all colleagues across the
Group received a £500 free share award in March 2019. The Group
Share Incentive Plan was extended to Virgin Money Holdings (UK)
PLC colleagues in April.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 103
Corporate governance changes
In preparing this year’s Directors’ remuneration report, the
Committee has considered the requirements for firms with
accounting periods commencing after 1 January 2019 to disclose
the ratio of CEO pay to the average colleague, to report the
year‑on‑year change in remuneration for all Executive Directors
(rather than just the CEO) and to explain how the Committee
develops its remuneration policy including requirements to hold
shares after employment ends. While the majority of these
reporting requirements will only apply to the Group from 1 October
2019, the Committee felt it would be important to embrace these
changes as early as possible in order to meet the spirit of the new
approach and increase transparency into the implementation of the
Group’s remuneration framework.
The Committee considered the Financial Reporting Council (FRC)
guidance to develop a formal post‑employment shareholding policy
as part of the review of the existing remuneration policy. In line
with banking requirements, at least 60% of Executive Directors’
annual variable remuneration is deferred in shares over seven
years and subject to a further 12‑month post‑vest hold period.
In practice, this means that Executive Directors will typically have
conditional share awards to a value in excess of their shareholding
requirement that are subject to deferral over this time frame.
Taking this into account, and having discussed this with industry
bodies, it is felt that the Group’s existing remuneration structure,
together with the regulatory regime applicable to UK retail banks,
ensures that Executive Directors are already subject to adequate
post‑employment shareholding requirements.
The disclosure of the CEO pay ratio and the year‑on‑year changes
in Executive Director remuneration is included on page 128. The pay
ratio of 97:1 is affected this year by the inclusion of the demerger
award and 2016 LTIP award, both of which are disclosed in this
year’s single figure total. The Remuneration Committee is satisfied
that the normalised annual ratio of 60:1 that includes only one
long‑term award within the year is well within industry norms and
reflects the full responsibility of the Chief Executive Officer role.
The Committee, and the Board as a whole, are conscious of the
growing need to take account of the consideration of the wider
workforce. The Board’s approach to fostering this dialogue is set
out in the Governance and Nomination Committee Report.
I would like to take this opportunity to thank investors for their
significant engagement during the course of the year which gives
me assurance that the policy being proposed is in the interests of
the Group and its shareholders. I am pleased to recommend it to
you, along with the 2019 Annual report on remuneration and this
statement, ahead of the 2020 AGM.
Adrian Grace
Chair, Remuneration Committee
This report has been prepared in accordance with Schedule 8 to
The Large and Medium‑sized Companies and Groups (Accounts
and Reports) Regulations 2008 as amended in 2013, the provisions
of the UK Corporate Governance Code (2016) and the Listing Rules.
On behalf of the Board
.
Adrian Grace
Chair, Remuneration Committee
27 November 2019
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104
At a glance
Total remuneration for Executive Directors
The charts below summarise Executive Directors’ single figure
total remuneration for 2018 and 2019. Full details are provided
on page 121. To highlight, total remuneration for 2019 includes a
demerger award and the first post‑IPO LTIP award. Payments from
these awards did not feature in the comparable number for 2018
and, going forward, the implementation of the policy will see only
one LTIP award included in the single figure total. To provide a
better year‑on‑year comparison, normalised 2019 outcomes are
also illustrated.
Alignment of Executive Director remuneration
with long-term shareholder interests
A fundamental principle in the design of the Group’s remuneration
framework is that Executive Directors’ interests are aligned with
shareholders. Delivering remuneration in a balance of cash and
shares, deferring variable pay over an extended time frame and
implementing shareholding requirements serves to ensure that
Executive Directors are incentivised to grow the business over
the long term.
The charts below demonstrate how Executive Director
remuneration aligns with shareholder interests through the
balance of:
— fixed and variable remuneration;
— remuneration delivered in cash versus shares;
— variable pay deferred versus delivered immediately; and
— share awards that are subject to ongoing performance
conditions.
Single figure total remuneration
David Duffy Chief Executive Officer
2019
Actual outcome
Normalised outcome
£1,253k
£1,253k
£445k
£365k
£1,310k
£3,374k
£445k
£365k
£2,064k
2018
Actual outcome
£1,212k
£620k
£1,832k
Ian Smith Chief Financial Officer
2019
Actual outcome
Normalised outcome
£618k
£618k
£220k
£221k
£168k
£393k
£1,400k
£168k
£1,007k
2018
Actual outcome
£603k
£310k
£913k
Fixed 2019 bonus 2016 LTIP Demerger award
Total remuneration
Variable remuneration
Fixed
30%
Cash
43%
Variable
70%
Shares
57%
The total remuneration and variable remuneration illustrations
are based on the application of the policy in 2020.
Shares
80%
Share awards subject to ongoing performance conditions
Cash
20%
25%
Short term 1 year)
40%
75%
Long term 3 years+)
60%
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 105
Summary of the proposed new Directors’ remuneration policy
ELEMENT
Salary
Pension
Benefits
Bonus
LTIP
POLICY
DETAILS
Competitive salaries paid based on role
responsibilities and individual experience.
Unchanged from previous policy.
20% of salary for existing Executive Directors.
Contributions for new appointments to be
aligned with the prevailing all‑colleague rate
at the time of appointment.
Standard benefits are provided to Executive
Directors. Current Chief Executive Officer’s
standard benefits and pension capped
at £250,000.
Total variable remuneration in respect of a
financial year is limited by the 2:1 ratio of variable
pay to fixed pay. A discount may be applied to
deferred awards for the purposes of calculating
the 2:1 regulatory maximum.
Amendment made to align newly‑appointed
Directors with the pension contribution rate
for the majority of colleagues.
Unchanged from previous policy.
Unchanged from previous policy.
Unchanged from previous policy.
Shareholding requirement
Chief Executive Officer: 200% of salary.
Unchanged from previous policy.
Post-employment
shareholding
Chief Financial Officer: 150% of salary.
Under the Directors’ remuneration policy,
at least 60% of variable pay is delivered in
shares over a seven‑year time frame with no
acceleration on departure. Shares are also
subjected to post‑vest holding periods in line
with regulatory requirements.
Clarification made to recognise Corporate
Governance Code requirement to develop
policy on post‑employment shareholding.
Leaver provisions
Unvested share awards to lapse on cessation of
employment except in the case of good leavers.
Amendment made to leaver provisions to apply
ongoing service conditions up to the vest date
for share awards.
Change of Control
Unvested share awards would vest on Change
of Control, although ongoing regulatory deferral
will apply.
Clarification of treatment of unvested share
awards on Change of Control including ongoing
regulatory deferral.
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Directors’ remuneration policy
This section sets out the forward‑looking Directors’ remuneration policy which will be put forward to shareholders at the January 2020
AGM. Subject to shareholder approval, the policy is intended to apply for three years from 1 October 2019. The Committee will consider
the remuneration policy annually to ensure that it remains aligned with business needs and is appropriately positioned relative to the
market. However, there is no intention to revise the policy more frequently than every three years.
Directors’ remuneration policy and principles
The remuneration principles support the Group’s culture and its long‑term business strategy. Executive Director remuneration is linked
to individual performance, business results, shareholder experience, fair customer outcomes and prudent risk management. Remuneration
arrangements are fully compliant with, and will be operated in line with, all remuneration regulatory requirements.
The comparator peer group is defined as other UK‑based banks and wider financial services firms of a comparable size, divisional heads
in larger UK banks and other FTSE companies reflecting our market capitalisation.
The remuneration policy is intended to:
— provide competitive, transparent and fair rewards and benefits;
— reward achievement of short and long‑term individual performance and business strategy;
— align the interests of Executive Directors and shareholders;
— deliver outcomes over short and long‑term horizons with appropriate performance and risk adjustments;
— support the risk management framework which is set by reference to the risk appetite of the Group; and
— ensure the Group is able to attract, recognise, motivate and retain Executive Directors as the Group grows.
Developing the remuneration policy
In formulating the new remuneration policy, the Remuneration Committee undertook an extensive review of the existing policy including
alternative approaches to executive remuneration. The existing remuneration policy, as approved by 99% of shareholders at the 2017 AGM,
remains aligned with the Group’s remuneration principles.
The small number of minor amendments to the policy are primarily driven by emerging requirements under the Corporate Governance Code
and regulatory remuneration reporting, which the Committee continues to monitor.
The process for determining the proposed remuneration policy has involved engagement with the Group’s largest shareholders.
Details on how the policy will be applied in 2020 are included on pages 119 to 120 of the report.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 107
The policy in relation to each element of Executive Directors’ remuneration is set out in the following tables.
Elements of policy – fixed remuneration
Base salary
Purpose and link to strategy
Recruit, reward, retain and recognise role responsibilities.
Operation
Base salaries are paid in 12 equal monthly instalments during the year and are reviewed annually
with any changes normally effective from 1 October following the end of the financial year.
When determining and reviewing base salaries, the Committee considers:
— Group and individual performance;
— the skills, experience and responsibilities of the Executive Director and their market value;
— the scope and size of the role;
— base salary increases for colleagues throughout the Group; and
— position relative to the external market.
Maximum potential
Salary increases will normally be aligned in percentage terms with increases awarded to other
colleagues but may be higher in certain circumstances such as:
— where there has been an increase in role responsibilities; and
— where an Executive Director is relatively new in the role and the Committee determines to provide
increases that are greater than those applied across the Group to bring the individual’s salary
into line with the market and reflect experience gained.
Pension
Purpose and link to strategy
Recruit, reward, retain and contribute towards Executive Directors’ funding for retirement.
Operation
Maximum potential
Executive Directors are entitled to participate in the Group defined contribution pension scheme
or may receive a cash allowance in lieu of an employer pension contribution.
The maximum pension contribution for Executive Directors is set at 20% of an Executive Director’s base
salary. Newly‑appointed Executive Directors’ contributions will be aligned with the pension benefits
available to the majority of colleagues.(1)
(1) Currently, the Group contributes up to a maximum of 13% of salary to colleagues’ pensions, dependent on the level of personal contribution made.
Benefits
Purpose and link to strategy
To provide competitive benefits consistent with the role performed.
Operation
The Group provides a range of benefits which can include private medical insurance, health
assessments, life assurance and car allowance/car. The Committee retains the discretion to provide
additional benefits as may be reasonably required. These may include relocation benefits such as
(but not limited to) accommodation, family relocation support and taxable travel.
The Executive Directors are entitled to 30 days’ holiday in addition to applicable bank/public holidays.
Maximum potential
A cap of £250,000 applies to the current Chief Executive Officer’s standard benefits, which includes
pension contributions/any cash allowance in lieu of pension contributions, private medical insurance,
health assessments, life assurance and car allowance/car.
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Elements of policy – variable remuneration
Bonus
Purpose and link to strategy
Operation
Maximum potential
Performance conditions
The annual bonus is designed to reward Group and personal performance in line with
strategic objectives.
Annual bonuses are discretionary and are based on Group and individual performance measures within
the year. The measures, their weighting and targets are set annually with awards determined by the
Committee at the end of the financial year.
The annual bonus may be delivered in shares and/or cash which, in combination with the LTIP award
and any relevant awards under the all‑employee Share Incentive Plan (SIP), will be structured in line
with the regulatory requirements on the deferral of variable pay under the PRA Remuneration Code.
The equity‑based element of the award will be made under the Deferred Equity Plan (DEP). Regulatory
holding periods may be applied as necessary upon the vesting of upfront awards and at the end of the
required deferral period for deferred awards.
Dividends or dividend equivalents may accrue on deferred annual bonus awards and are paid on
vesting, subject to the extent permitted under the relevant financial services remuneration regulations.
If dividend equivalents are not permissible, the number of shares awarded may be determined using
a share price discounted by reference to the anticipated yield over the deferral period.
In determining the outcome, the Remuneration Committee will seek the advice of the Risk Committee
to ensure all relevant risk factors are identified. The Committee may exercise discretion to ensure that
the bonus outcomes are a fair and accurate reflection of the business and individual performance
(but any award may not exceed the maximum opportunity).
The Committee can, at its discretion, apply malus and/or clawback to all or part of any bonus award.
Taken together with the LTIP and any relevant awards under the all‑employee SIP, the total variable
remuneration opportunity in respect of a financial year is limited by the 2:1 ratio of variable pay to fixed
pay (excluding recruitment awards, see page 111), subject to the LTIP opportunity being at least half
of the total variable pay opportunity.
To the extent permitted by remuneration regulations, a discount may be applied to deferred bonus
awards for the purposes of calculating the 2:1 regulatory maximum.
Performance measures consist of financial and non‑financial measures, including personal objectives.
Specific measures, targets and weightings will be set by the Remuneration Committee annually with
targets disclosed on a retrospective basis. Typically:
— 80% of the annual bonus opportunity is based on performance of the Group against key financial
and non‑financial measures; and
— 20% is based on personal performance.
DIRECTORS’ REMUNERATION REPORTDirectors’ remuneration policy continuedVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 109
Long Term Incentive Plan (LTIP)
Purpose and link to strategy
Delivery of the Group’s strategy and growth in shareholder value.
Operation
Maximum potential
Awards are normally granted under the LTIP following the end of the financial year. The Committee,
in its absolute discretion, will determine the level of the awards made under LTIP after taking into
account business and individual performance.
Awards are subject to performance conditions aligned with the Group’s long‑term strategic goals.
Performance conditions are normally tested over a period of three financial years. Upon the vesting
of shares at the end of the required deferral period, a regulatory holding period may be applied as
necessary.
Dividends or dividend equivalents may accrue on LTIP awards and, to the extent that the award vests,
are paid on vesting, subject to the extent permitted under the relevant financial services remuneration
regulations. If dividend equivalents are not permissible, the number of shares awarded may be
determined using a share price discounted by reference to the anticipated yield over the deferral period.
In determining the outcome, the Remuneration Committee will seek the advice of the Risk Committee
to ensure all relevant risk factors are identified and may exercise discretion to ensure that LTIP
outcomes are a fair and accurate reflection of overall business performance of the Group during
the performance period (but any award may not exceed the maximum opportunity).
The Committee can, at its discretion, apply malus and/or clawback to all or part of any LTIP award.
Taken together with the annual bonus opportunity and any relevant awards under the all‑employee SIP,
the total variable remuneration in respect of a financial year is limited by the 2:1 ratio of variable pay
to fixed pay (excluding recruitment awards, see page 111), subject to the LTIP opportunity being at least
half of the total variable pay opportunity.
To the extent permitted by remuneration regulations, a discount may be applied to LTIP awards for the
purposes of calculating the 2:1 regulatory maximum.
Performance conditions
Performance conditions are set by the Remuneration Committee each year and are normally tested
over a period of three financial years.
Measures will normally consist of an appropriate balance of financial and non‑financial targets aligned
with the long‑term strategy of the Group:
— pioneering growth;
— super straightforward efficiency;
— disciplined and sustainable; and
— delighting our customer and colleagues.
The weighting of metrics will be determined before each award with no more than 25% of the maximum
vesting for threshold performance. The Committee has discretion, in exceptional circumstances,
to amend targets, measures or weightings if a corporate event takes place (for example a major
transaction, including a change of control, or capital raising) that in the opinion of the Committee causes
the targets, measures or weightings to be no longer appropriate or such adjustment to be reasonable.
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Other Group share plans
Share Incentive Plan (SIP)
Purpose and link to strategy
Executive Directors are invited to participate in the Group SIP. The SIP encourages share ownership,
aligns participants’ interests with those of shareholders and allows them to benefit from the long‑term
success of the Group.
Operation
The SIP provides for the purchase of shares from gross pay on a monthly basis. The SIP is also the plan
under which awards of free or matching shares may be made.
Maximum potential
Participation levels are within HMRC limits as amended from time to time.
If operated in the future, Executive Directors will also be eligible to participate in other all‑employee share plans operated by the Group.
Shareholding requirement
Purpose and link to strategy
To align Executive Directors’ interests with those of shareholders.
Operation
Executive Directors are expected to build up a specified holding of Group shares equivalent
to a percentage of salary.
EXECUTIVE DIRECTOR
Chief Executive Officer
Chief Financial Officer
SHAREHOLDING REQUIREMENT (% OF SALARY)
200%
150%
When assessing an Executive Director’s shareholding against the requirement, unvested awards that
are not subject to ongoing performance conditions will be included based on the anticipated net
number of shares that would be released to the Executive Director at the end of the deferral period.
Executive Directors are required to retain 60% of the net shares received from share awards after
the payment of income tax and National Insurance until the shareholding requirement is met.
Post‑employment: Under the Group’s Executive Director remuneration policy, a significant proportion
of variable pay is delivered in shares over a seven‑year time frame with no acceleration on departure.
Upon the vesting of shares at the end of the deferral period, a regulatory holding period is applied
as required.
Bonus and LTIP flexibility
The Committee operates within its policy at all times. Bonus and LTIP awards are administered according to the rules of each respective
plan and in line with the Listing Rules while retaining flexibility in a number of areas. This includes how to deal with a change of control,
restructuring or any other corporate event of the Group; how and whether an award or its performance conditions may be adjusted in
certain circumstances (e.g. change of accounting policy); and the choice of (and adjustment of) performance measures, weightings and
targets for each incentive plan from year‑to‑year in accordance with the remuneration policy. Any use of the above discretions would,
where relevant, be explained in the Annual report on remuneration.
Performance measures
The Committee will set targets annually based on the Group’s strategy. Performance measures are selected to ensure an appropriate
balance between short and long‑term strategic goals and to align Executive Director and shareholder interests. In determining the
appropriate set of measures and targets for annual bonus and LTIP awards, the Committee has discretion to vary the weighting attributed
to performance measures, or to substitute the metrics, over the life of this Directors’ remuneration policy taking into account the strategic
plan and consensus forecasts.
The Committee may apply discretion, in exceptional circumstances (for example, if there is a major corporate event), to amend targets
and measures for in‑flight awards if these are no longer appropriate to ensure alignment with strategy and any risks within the business.
The Committee retains discretion to adjust outcomes to ensure these are consistent with corporate performance.
DIRECTORS’ REMUNERATION REPORTDirectors’ remuneration policy continuedVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 111
Risk adjustments, malus and clawback
Bonus and LTIP awards may be reduced before they are released (malus) or may be subject to clawback where the Committee determines
that an adjustment should apply. Clawback may be applied up to seven years from the award date, or ten years where an investigation
has commenced.
Circumstances in which malus and/or clawback may be applied include, but are not limited to, where:
— there is material misstatement of the Group’s financial results;
— there is reasonable evidence of individual misbehaviour or material error;
— the Group suffers a material downturn in financial performance;
— the Group suffers a material failure of risk management;
— a determination by the Committee that the circumstances on which it has based any discretion in respect to good leaver treatment
were misrepresented at the time or have subsequently changed so that it would have exercised its discretion differently;
— individual conduct has, in the reasonable opinion of the Committee, caused serious harm to the reputation of and/or significant
financial loss to the Group or the relevant business unit;
— an error is made in the calculation of the extent of vesting of an award that resulted in an overpayment to the individual; and
— any other matter which, in the reasonable opinion of the Committee, is required to be taken into account to comply with prevailing
legal and/or regulatory requirements, which, for the avoidance of doubt, includes any regulations or guidance published by a relevant
regulator from time to time.
Legacy arrangements
The Remuneration Committee reserves the right to honour any remuneration payments or awards and any payments or awards for loss
of office, notwithstanding that they are not in line with this policy where the terms of the payments or award were agreed before the policy
came into effect. Such payments or awards will be set out in the Annual remuneration report for the relevant year.
Approach to recruitment remuneration
When considering Executive Director appointments, the Committee will consider the skills and experience of the candidates in relation
to external data and remuneration required to attract the individual. The Committee will seek advice from its independent advisers when
considering the level of remuneration to be offered.
The Remuneration Committee will align the remuneration for any new appointment with the Directors’ remuneration policy. The maximum
variable pay opportunity for each performance period would be within the regulatory requirements.
Where it is necessary to compensate an individual for awards forfeited or forgone from an existing employer including long‑term awards,
deferred awards, in year and prior year annual bonuses and other contractual entitlements, the Committee will seek to match up to the
expected value of the awards. Awards granted will vest over a similar time frame with similar conditions. In accordance with regulatory
requirements, the Committee will also take into consideration relevant factors including, but not limited to:
— the form of the award;
— any performance conditions attached to those awards;
— the relative stretch of any performance conditions compared to those awards being forfeited;
— the vesting profile of the awards and the likelihood of vesting; and
— relevant regulatory guidance in place in relation to buy‑out awards.
Where a new Executive Director has to relocate to take up the appointment, either locally in the UK or from overseas, practical and/or
financial support may be given in relation to relocation and mobility. This may include reimbursement of legal and accounting advice and
tax equalisation payments. Where an Executive Director is appointed from within the Group or following corporate activity or reorganisation
(e.g. merger with another company), the normal policy would be to honour any legacy arrangements in line with the original terms
and conditions.
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Illustration of the proposed remuneration policy
The chart below illustrates the potential remuneration of the Executive Directors under the new policy in the following four scenarios based
on Executive Directors’ remuneration for the 2020 financial year:
— minimum remuneration based on fixed elements of package only including salary, pension and cash benefits (i.e. fixed pay);
— target outcome assumes the actual bonus award is 50% of the maximum opportunity with the LTIP vesting at 60%;
— maximum outcome which assumes the actual bonus award is 100% of the maximum opportunity and the LTIP vesting at 100%; and
— maximum outcome (as above) with a 50% share price increase applied to the LTIP.
Potential remuneration of the Executive Directors
David Duffy
Minimum
Target
Maximum
Maximum plus share price growth
100%
£1,237k
42%
29%
24%
21%
37%
£2,922k
28%
23%
43%
£4,246k
53%
£5,149k
£0
£1,000
£2,000
£3,000
£4,000
£5,000
£6,000
Ian Smith
Minimum
Target
Maximum
Maximum plus share price growth
100%
£615k
42%
29%
24%
21%
37%
£1,452k
28%
23%
43%
£2,109k
53%
£2,558k
£0
£500
£1,000
£1,500
£2,000
£2,500
£3,000
Fixed Pay Bonus LTIP
The potential outcomes illustrated in the chart include, where relevant, the implementation of the European Banking Authority’s (EBA)
discount factor for variable pay deferred over more than five years. Salary figures are as at 1 October 2019. Full details on the 2020 bonus
and LTIP opportunities for the Chief Executive Officer and Chief Financial Officer can be found on page 119.
The maximum plus share price growth outcome has been calculated by increasing the cash value of the maximum LTIP award by 50%.
DIRECTORS’ REMUNERATION REPORTDirectors’ remuneration policy continuedVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 113
Service contracts and provisions
Election
All Executive Directors are subject to annual
re‑election.
PROVISION
DETAILS
Notice periods within
Executive Directors’
service contracts
12‑months’ notice from Company.
12‑months’ notice from Executive Directors.
Executive Directors may be required to work
during the notice period, unless determined
otherwise.
Confidentiality
Six‑month post‑termination restrictive covenants.
Outside appointments
Executive Directors may accept outside
appointments in other listed companies with
Executive Directors retaining any fees received.
Executive Directors are subject to a
confidentiality undertaking without limitation
in time, as well as to six‑month post‑termination
restrictive covenants covering non‑competition;
non‑solicitation of and non‑dealing with clients;
non‑interference with suppliers or contractors
and non‑solicitation of colleagues.
The Chair is required to approve appointments
in advance. Agreement from the Board must
be sought before Executive Directors accept
any additional non‑executive roles outside of
the Group. Procedures are in place to ensure
that regulatory limits on the number of
directorships held are complied with. Details
of the directorships held can be found in
the biographies section of the Corporate
governance report.
The notice periods and dates of service contracts for Executive Directors are shown below.
EXECUTIVE DIRECTORS
David Duffy
Ian Smith
Debbie Crosbie*
NOTICE PERIOD
12 months
12 months
12 months
* Debbie Crosbie stood down from the Board on 19 November 2018.
DATE OF SERVICE CONTRACT
25 November 2015
3 December 2015
24 November 2015
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Policy on payments for loss of office
PROVISION
DETAILS
Compensation for
loss of office
Payment in lieu of notice of no more than
12‑months’ salary.
Treatment of annual bonus
on termination
With the exception of good leavers, where
participants leave before 1 December following
the end of the performance year they will not
be eligible for an award.
Payable monthly and subject to an obligation
on the Executive Director to mitigate their loss
such that payments will either reduce or cease
completely if the Executive Director obtains
alternative employment. In the event of
redundancy, the Executive Director shall be
entitled to receive statutory redundancy pay,
together with outplacement and legal support.
The Committee has discretion to reduce
the entitlement of a good leaver in line with
performance and the reason for leaving.
Treatment of unvested
deferred bonus on termination
With the exception of good leavers, unvested
awards lapse where participants leave before
the relevant vest date.
Awards to good leavers will be retained. Vesting
or release dates will remain in line with those set
at the time of award.
Treatment of unvested LTIP
awards on termination
With the exception of good leavers, unvested
awards lapse where participants leave before
the relevant vest date.
Awards to good leavers will be prorated, unless
the Committee decides otherwise. The award will
vest, unless the Committee decides otherwise,
on the normal vesting date to the extent that any
performance condition has been met.
At the Committee’s discretion, an Executive Director will be treated as a good leaver in cases where their employment ends due to death,
injury, ill‑health, disability, redundancy, retirement, or the Company being transferred out of the Group and any other reason (except for
dishonesty, fraud, misconduct or dismissal). The Committee reserves the right to make additional payments where such payments are
made in good faith and are required to discharge legal obligations or are due to the breach of such obligations.
Change of control
In the event of a takeover or other major corporate event (but not an internal reorganisation of the Group) all outstanding DEP and LTIP
awards granted under the Group’s share plans would vest, to the extent that the Committee determines that any performance conditions
have been met, with proration applied unless determined otherwise by the Committee. Awards would, however, remain subject to any
regulatory deferral requirements.
Colleague engagement
The Remuneration Committee is provided with regular updates on overall pay and conditions for colleagues across the Group as a whole,
including negotiated pay increases for the broader colleague population. Each year, the Committee reviews and approves the colleague
bonus pool and in doing so takes account of the potential outcomes for Executive Directors, as well as year‑on‑year relative movement
and other emerging metrics such as the CEO pay ratio which is reported for the first time on page 128.
DIRECTORS’ REMUNERATION REPORTDirectors’ remuneration policy continuedVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 115
Approach to all colleague remuneration
The approach to all‑colleague remuneration is intended to:
— provide competitive, transparent and fair rewards, benefits and conditions;
— reward delivery of the business strategy;
— support the Group’s Purpose, values and behaviours and encourage collaboration;
— deliver outcomes with appropriate risk adjustments; and
— attract, retain and motivate colleagues to deliver ambitious, customer‑focused outcomes.
The Group’s performance philosophy that success will be achieved through alignment with strategic goals and working together is
underpinned by a team‑based incentives plan. To support this approach to performance management, variable pay awards are based on
the principle that colleagues are aligned with the performance of the business. When the Group performs well, all colleagues will share
in this success and therefore everyone is rewarded for the contribution they make to the Group’s success.
Elements of all-colleague remuneration
ELEMENT
Base salary
Pension
Benefits
Bonus
LTIP
Share Incentive Plan
OPERATION
The approach ensures a fair level of base salary taking into account the scope of the role, affordability,
economic factors, external market data and business performance.
All new colleagues are automatically enrolled in a Group defined contribution pension scheme. In line
with pensions legislation, the minimum colleague contribution is 2% of pensionable salary. The Group
operates a contribution matching scheme whereby the Group matches colleague contributions up to
agreed levels. The Group will also pay a cash allowance in lieu of pension contributions to individuals
who would otherwise exceed annual and/or lifetime allowance thresholds.
The Group provides a range of benefits based on colleagues’ roles, which include flexible benefits
allowances, private medical insurance, health assessments, life assurance and car allowance/car.
Colleagues receive between 25 and 30 days’ holiday annually depending on their role with an option
to purchase additional leave.
All colleagues within the Group are eligible for an annual bonus award with target opportunities
depending on role.
Awards will be funded from a bonus pool normally reflecting the same financial and non‑financial
measures that apply to Executive Directors. When determining the outcome of the performance
measures, the Remuneration Committee will seek the advice of the Risk Committee to ensure all
relevant risk factors are identified and the bonus pool and/or individual awards are adjusted accordingly.
Members of the Executive Leadership Team and other senior managers are eligible to participate
in the LTIP with awards made solely at the discretion of the Committee.
All colleagues are invited to participate in the Group’s tax‑approved share plan. The plan encourages
share ownership, aligns colleagues’ interests with those of shareholders and allows them to benefit
from the long‑term success of the Group.
The SIP provides for the purchase of shares, within HMRC participation limits, on a monthly basis
from gross pay and is also the vehicle used to allow for awards of free or matching shares.
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Chairman and Non-Executive Directors’ remuneration policy
The table below sets out the Non‑Executive Directors’ remuneration policy which applies to the Chairman and Non‑Executive Directors.
Non‑Executive Directors are engaged through letters of appointment which are for an initial period of three years, subject to three‑months’
notice by the Non‑Executive Directors or the Group. The Chairman has a six‑month notice period. All Non‑Executive Directors are subject
to annual re‑election by shareholders at each AGM and are subject to early termination without compensation if they are not reappointed
at a meeting of shareholders.
Non-Executive Directors’ packages
Purpose and link to strategy
To ensure the Group is able to engage and retain highly‑skilled and experienced individuals.
Operation
Fees paid to the Chairman are determined by the Remuneration Committee, while the fees paid to the
Non‑Executive Directors are set by the Board annually. The fees reflect a base fee with additional fees
payable for being members of, or chairing, Board committees and a separate fee is payable to the
Senior Independent Director and Deputy Chairman.
The fees are set at a rate that reflects the value to the Group and expected time commitment given
the added regulatory complexity within the financial services sector. In exceptional circumstances,
incremental fees may be paid for additional duties and time commitment, to reflect increased workload.
From time to time, new Board committees may be established and/or responsibilities distributed
between committees, at which point fees for committee membership and chair may be reviewed.
The Chairman and Non‑Executive Directors are reimbursed for expenses incurred in performing their
duties and any tax arising on such reimbursed expenses is borne by the Group. For individuals based
outside of the UK this will include travel to and from the UK. Non‑Executive Directors and the Chairman
do not participate in any variable remuneration or benefits arrangements.
Maximum potential
The maximum aggregate value of fees payable to the Chairman and the Non‑Executive Directors
is capped at £2.5m under the Company’s Articles of Association.
Performance conditions
There are no performance conditions attached to the fees payable to the Chairman
or Non‑Executive Directors.
The dates of current Non‑Executive Directors’ letters of appointment are shown below:
Non-Executive Directors
Clive Adamson
David Bennett
Paul Coby
Geeta Gopalan
Adrian Grace
Fiona MacLeod
Jim Pettigrew
Darren Pope
Teresa Robson‑Capps
Amy Stirling
Tim Wade
19 May 2016
23 November 2015
19 May 2016
24 July 2018
11 November 2015
8 September 2016
11 November 2015
26 July 2018
11 November 2015
30 July 2018
8 September 2016
Considerations of shareholder views
The Committee will always seek to engage with investors and understand their views whenever significant changes are proposed
or specific feedback has been provided. In addition, the Committee will ensure its disclosure meets standards of best practice.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 117
Annual report on remuneration
Remuneration Committee membership
Adrian Grace, Chair
David Bennett
Fiona MacLeod (appointed 5 November 2018)
Jim Pettigrew
Activity during the year
Matters considered and actions taken by the Committee
The significant matters addressed by the Committee during the financial year ended 30 September 2019 are described below:
ROLE OF THE COMMITTEE
KEY ISSUE/AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Fixed and variable pay issues
2018 Executive Director
and senior management
remuneration outcomes
Executive Director and
all‑colleague pay review
2018 long‑term and 2019
short‑term incentive
arrangements
Approved variable remuneration awards for Executive Directors,
other senior management, material risk takers (MRT) and
all‑colleague awards under the Group Team Bonus for the 2018
financial year.
Considered and approved fixed pay increases for individual
Executive Directors and senior management. Approved the budget
and principles for the all‑colleague pay review.
Considered and approved the long‑term and short‑term
performance measures, taking into consideration investor views.
Considered and noted Executive Director and senior management
personal objectives for 2019.
Non‑Executive Directors’ fees
Considered external market insight.
2015 demerger award
Approved the outcome of the 2015 demerger award.
Free share award
Approval of £500 free share award to all colleagues.
MRT termination and
commencement awards
Performance measures
Approved remuneration arrangements.
Considered the impact of the acquisition of Virgin Money Holdings
(UK) PLC and refreshed strategy on performance measures for
variable pay awards.
Remuneration policy
Implementation of the
remuneration policy in 2019
Considered and approved the final implementation of the policy
for 2019.
2020 policy review
Considered and approved the new Directors’ remuneration policy
to be submitted for a binding vote at the 2020 AGM having fully
taken account of investor and investor body feedback, following
proactive engagement and appropriate market updates from
remuneration advisers.
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Annual report on remuneration continued
ROLE OF THE COMMITTEE
KEY ISSUE/AREA OF FOCUS
COMMITTEE REVIEW AND CONCLUSION
Governance, risk and
other matters
Annual remuneration
disclosures
Approved the 2018 Directors’ remuneration report.
MRTs
Reviewed and approved changes and confirmed MRT population
throughout the year.
Regulatory developments
Considered all regulatory requirements, including changes to the
Companies Act and the UK Corporate Governance Code, which
have been implemented within 2019.
Risk assessment
Scheme rules and terms
of the DEP and LTIP
Remuneration Committee
planned activities and Charter
Gender pay
Harmonisation
Considered appropriate risk reporting, including corporate risks
and conduct risks and approved any corporate or individual risk
adjustments to variable pay.
Approved minor amendments to the existing scheme rules.
Considered and reviewed the 2019 planned activities and ways
of working to be observed in the year. Made minor additions
to the Committee Charter to increase Committee effectiveness.
Considered the Company’s disclosure and positive activities
that support the improvement of gender pay.
Implemented the Group team bonus across Virgin Money Holdings
(UK) PLC employees.
Pension amendments
Approval of changes to the delivery of pension benefit for
colleagues impacted by tax limits to increase flexibility.
Following the end of the 2019 financial year, Committee meetings have taken place during which variable remuneration awards, including
2019 annual bonus and LTIP awards, for Executive Directors, other senior management, MRT and all‑colleague awards under the Group
team bonus for the 2019 financial year were approved following the consideration of a risk assessment report prepared by the Board
Risk Committee. The Committee also determined the performance outcome for the 2016 LTIP award following completion of the three‑year
performance period on 30 September 2019.
Advisers to the Committee
Following a selection process carried out by the Remuneration Committee prior to the IPO of the Group, the Committee engaged the
services of PwC as independent remuneration adviser. During the financial year, PwC advised the Committee on all aspects of the
Directors’ remuneration policy for members of the Executive Leadership Team. PwC also provide professional services in the ordinary
course of business including assurance, advisory, tax and legal advice. The Committee is notified of other remuneration work that is
undertaken by PwC. In addition, there are processes in place to ensure no conflict of interest exists in the provisions of these services.
PwC is a member of the Remuneration Consultants Group, whose voluntary code of conduct is designed to ensure objective and
independent advice is given to remuneration committees. Fees of £164,000 excluding VAT (2018: £198,000) were paid based on the
time spent on advice provided to the Remuneration Committee in respect of Directors’ remuneration for the financial year.
Statement of voting at general meeting
The Group’s remuneration policy, which was effective during 2019, was detailed within the Directors’ remuneration report for 2016
and was approved at the AGM on 31 January 2017.
The implementation of the remuneration policy and the remuneration awarded to Executive Directors in respect of 2018 were detailed in
last year’s Directors’ remuneration report and voted on at the AGM on 30 January 2019. The shareholder votes submitted at the meeting,
either directly, by mail or by proxy, were as follows:
Directors’ remuneration policy (2017 AGM)
Directors’ remuneration report (2019 AGM)
VOTES FOR
VOTES AGAINST
VOTES WITHHELD
NUMBER OF
SHARES
594,488,715
707,216,605
% OF VOTES
99.23
65.79
NUMBER OF
SHARES
4,592,820
367,726,021
% OF VOTES
0.77
34.21
NUMBER OF
SHARES
1,524,064
7,441,115
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 119
Implementation of the policy in 2020
The following sets out how the Directors’ remuneration policy will be applied in 2020.
Fixed pay
Base salary
David Duffy (Chief Executive Officer): £1,020,000.
Ian Smith (Chief Financial Officer): £510,000.
Pension
Up to 20% of salary.
Other benefits
In line with policy.
Annual bonus
Opportunity
Deferral terms
Bonus opportunity is 118% of salary for the Chief Executive Officer and 117% of salary for the Chief
Financial Officer.
No dividend equivalent will be payable although, for any deferred award, the number of shares granted
may be determined using a share price discounted by reference to the anticipated yield.
For the 2020 performance year, annual bonus opportunity will be awarded in a combination of cash
and shares. Deferral, as required, will be consistent with regulatory requirements taking into account
total variable pay awarded for 2020 including LTIP with at least 50% of any bonus award delivered in
shares. Any share releases are subject to a post‑vest holding period in line with regulatory requirements
and market practice.
Performance measures
and targets
In line with policy, the Remuneration Committee has determined that for 2020:
— 80% of the annual bonus opportunity is based on performance of the Group against key financial
and non‑financial measures; and
— 20% is based on personal performance.
The Board considers that the targets that apply to these measures are commercially sensitive at this
time but will provide information on the targets alongside the level of payout relative to the
performance achieved in next year’s implementation report.
The Remuneration Committee has determined that 50% maximum opportunity is justified for target
performance and 25% is justified for threshold performance.
All awards are subject to malus and clawback.
LTIP awards in respect of 2020 will be granted over shares to the value of up to 177% of salary
for the Chief Executive Officer and 176% of salary for the Chief Financial Officer.
No dividend equivalents will be payable, however, the number of shares granted may be based
on a share price discounted by reference to the expected dividend yield over the vesting period.
The performance period will be the three years commencing 1 October 2020. An assessment
of individual and business performance in the financial year preceding the date of the grant will
be taken into account before awards are made. The expectation is that awards will be granted
in December 2020.
To the extent that the performance conditions are met, awards will vest in equal tranches from the
third anniversary of the date of grant to the seventh such anniversary. Any share releases are subject
to a post‑vest holding period in line with regulatory requirements and market practice.
Long Term Incentive Plan
Opportunity
Vesting terms
Performance measures
and targets
The Remuneration Committee will determine performance measures aligned with the delivery of
the Group’s strategic objectives and the continued creation of shareholder value. These measures
will be published in the 2020 Directors’ remuneration report ahead of any awards being made.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 120
Annual report on remuneration continued
Illustration of delivery timeframe for 2020 remuneration
2020 performance year
2021
2022
2023
2024
2025
2026
2027
2028
Salary
Pension
Cash
Cash in lieu
Annual bonus*
Performance
period
Cash
shares
Holding period
Performance period
LTIP
Preliminary
performance
period
Shares
Holding period
Shares
Holding period
Shares
Holding period
Shares
Holding period
Shares
Holding period
* Annual bonus awards are delivered in a combination of cash and shares and are subject to deferral, in line with regulatory requirements, taking into
account total variable pay awarded for the year including LTIP. Any share releases are subject to a post‑vest holding period in line with regulatory
requirements and market practice.
Non-Executive Directors’ annual fees
The following fees are payable to Non‑Executive Directors for the year ending 30 September 2020 in line with the rates that were approved
by the Board in October 2018 and that are reviewed annually. The Non‑Executive Directors are reimbursed for expenses they incur in
performing their duties. Any tax arising on such reimbursed expenses is borne by the Group.
Chairman(1)
Non‑Executive Director
Deputy Chairman
Senior Independent Director
Chair Audit Committee
Chair Risk Committee
Chair Remuneration Committee
Member Audit Committee
Member Risk Committee
Member Remuneration Committee
Chair Governance and Nomination Committee
Member Governance and Nomination Committee
2020
£375,000
£75,000
£60,000
£30,000
£35,000
£35,000
£35,000
£15,000
£15,000
£15,000
£35,000
£15,000
2019
£375,000
£75,000
£60,000
£30,000
£35,000
£35,000
£35,000
£15,000
£15,000
£15,000
£35,000
£15,000
(1) Paid as a combined fee for the role as Chairman and Chair of the Governance and Nomination Committee.
Fees for Virgin Money PLC committee roles included in last year’s report will not apply from 1 October 2019 and are therefore not included
in this year’s report.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 121
Outcomes for 2019
Year-on-year change in single figure total remuneration
The variable remuneration reported in the single figure table has significantly increased year‑on‑year for both the Chief Executive Officer
and the Chief Financial Officer. This increase is primarily driven by two key factors:
— 30 September 2019 marked the end of the performance period of the first post‑IPO LTIP award, granted in 2016. The performance
outcome for this award was 62%, and the income arising for each Executive Director has been disclosed in line with reporting
requirements; and
— the final outcome for the exceptional 2015 demerger award has been included. This award was granted following the demerger from
NAB and provided a link to the IPO (in February 2016). The award was subject to a performance condition set over a three‑year period
and vested in February 2019.
A normalised approach for variable remuneration reporting in future years will include:
— annual bonus awarded for the relevant year; and
— one LTIP award where the performance period has ended in the relevant financial year.
By way of comparison:
— total 2019 remuneration excluding the LTIP and demerger award is £1,699k for the Chief Executive Officer (2018: £1,833k) and £839k
for the Chief Financial Officer (2018: £914k)
— total 2019 remuneration excluding the exceptional demerger award is £2,064k for the Chief Executive Officer and £1,007k for the Chief
Financial Officer.
Executive Directors – single total figure of remuneration (audited)
The table below sets out the single total figure of remuneration and breakdown for each Executive Director in respect of the financial year
to 30 September 2019.
DAVID DUFFY
IAN SMITH
DEBBIE CROSBIE
£000S
Salary
Benefits and allowances(1)
Pension and pension allowance
Total fixed remuneration
Annual bonus
2016 LTIP(2)
Other awards(3)
2015 demerger award(4)
Total variable remuneration
Total remuneration excluding one‑off
demerger award
Total remuneration
2019
1,020
50
183
1,253
445
365
1
1,310
2,121
2,064
3,374
2018
1,000
32
180
1,212
620
–
1
–
621
1,833
1,833
2019
510
10
98
618
220
168
1
393
782
1,007
1,400
2018
500
9
94
603
310
–
1
–
311
914
914
2019
158
124
29
311
–
–
–
–
–
311
311
2018
450
8
81
539
–
–
1
–
1
540
540
(1) Executive Directors receive private medical cover, health assessment and life assurance. During 2019, the Chief Executive Officer received an annual
car allowance of £30,000 and other taxable benefits including home to work travel totalling £19,784. The Chief Financial Officer received an annual car
allowance of £6,840 and other taxable benefits to the value of £2,817. The former Chief Operating Officer received a car allowance of £2,280, a payment
in lieu of notice of £118,750 and other taxable benefits to the value of £2,737.
(2) The average share price between 1 July 2019 and 30 September 2019 of 156.68p has been used to indicate the value. The shares were awarded in 2016
based on a share price of 266.03p. Share price movement has reduced the valuation of the awards by £254,847 for the Chief Executive Officer and
£117,229 for the Chief Financial Officer compared with the corresponding values at the time of grant.
(3) The Chief Executive Officer and the Chief Financial Officer both received an award of £500 of free shares in March 2019.
(4) The award vested in two tranches on 15 February 2019 and 12 August 2019. The share price on each respective vest date was 186.80p and 147.72p.
The shares were awarded based on a share price of 195.17p. Share price movement has reduced the valuation of the awards by £190,129 for the Chief
Executive Officer and £57,040 for the Chief Financial Officer compared with the corresponding values at the time of grant.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 122
Annual report on remuneration continued
Payments to past Directors (audited)
Debbie Crosbie left Group service on 31 January 2019, having stood down from the Board on 19 November 2018. No payments were made
to any other former Executive Directors during the year.
Executive Director’s payments for loss of office (audited)
No payments were made during this or the previous year.
Total pension entitlements (audited)
David Duffy, Ian Smith and Debbie Crosbie each opted out of the Group’s defined contribution pension plans and received cash allowances
in lieu of pension contributions.
Debbie Crosbie participated in the Group’s defined benefit scheme until 31 July 2017, when the plan was closed to future accrual.
Details of the pension accrued in the Group’s defined benefit pension scheme by Debbie Crosbie in respect of qualifying services are
shown below. The value of the pension is calculated using the HMRC method.
Values relating to Defined
Benefit Scheme
Debbie Crosbie
Annual bonus
ACCRUED
PENSION AT
YEAR END
£000
42
NORMAL
RETIREMENT
DATE
30 March 2035
ADDITIONAL VALUE
OF PENSION
ON EARLY
RETIREMENT
£000
–
PENSION VALUE
IN THE YEAR
FROM THE
DB SCHEME
£000
–
PENSION VALUE
IN THE YEAR
FROM CASH
ALLOWANCE
£000
29
TOTAL
£000
29
For 2019, the maximum annual bonus opportunities were 118% of salary for the Chief Executive Officer and 117% of salary for the Chief
Financial Officer. The annual bonus awards to be made in respect of the 2019 financial year were agreed by the Committee following an
assessment of the Group (80% of total opportunity) and individual performance (20% of total opportunity) against the objectives set at the
beginning of the year. Details of the targets used to determine annual bonus in respect of the 2019 financial year and the extent to which
they were satisfied are shown in the table below.
CATEGORY
Sustainable returns
MEASURE
Underlying PBT
WEIGHTING
16%
THRESHOLD
£512m
TARGET
£569m
MAXIMUM
£625m
PERFORMANCE ACHIEVEMENT VERSUS TARGETS
NPS retail
8%
29.0%
32.0%
Actual: £539m
Efficiency
Total underlying costs
20%
£950m
£940m
Actual: £948m
35.0%
Actual: 37%
£930m
Underlying CIR
8%
58.50%
57.50%
55.50%
Capital optimisation
Underlying RoTE(1)
16%
10.0%
Actual: 10.03%
Customer focused culture
Colleague engagement
12%
68.0%
Business scorecard outcome for 2019
80%
Actual: 57.5%
10.4%
76.0%
Actual: 76.0%
10.8%
78.0%
OUTCOME AS %
MAXIMUM
OPPORTUNITY
6%
8%
7%
4%
6%
6%
37%
(1) The actual underlying RoTE of 10.8% was reduced for the purposes of calculating the business scorecard outcome to take account of the impact of PPI.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 123
Personal awards (20% weighting) David Duffy
2019 final outcome: 14% out of a maximum 20%.
Chief Executive Officer performance highlights:
— leadership of the two bank franchises in parallel for 12 months, followed by the early completion of the FSMA Part VII in October 2019;
— delivery of the revised strategy and medium‑term targets through Capital Markets Day, articulated to the market and shareholders
in June 2019;
— strong FY2019 colleague engagement scores against the backdrop of substantial change;
— customer satisfaction has continued to strengthen, reflecting improved customer journeys, with Net Promoter Scores exceeding
stretch targets with a pro forma increase for the combined Group; and
— integration synergies reconfirmed with initial cost synergies increased.
Personal awards (20% weighting) Ian Smith
2019 final outcome: 19% out of a maximum 20%.
Chief Financial Officer highlights:
— achievement of IRB accreditation from the PRA for both Mortgage and SME/Corporate portfolios;
— strong support provided in the development of the refreshed strategy and its successful delivery on Capital Markets Day;
— combined Group Internal Capital Adequacy Assessment Process (ICAAP), Pillar 2A and 2B assessment and Internal Liquidity Assessment
Process (ILAAP) completed; and
— leading the financial efficiency agenda and the Group’s focus on reducing underlying operating expenses which have reduced in line
with FY2019 targets and have underpinned a reduction in underlying cost:income ratio.
The performance against business and personal objectives for the year delivered a scorecard outcome of 51% of maximum opportunity
for the Chief Executive Officer and 56% of maximum opportunity for the Chief Financial Officer. In determining final 2019 outcomes,
the Committee decided, despite the strong performance of the Executive Directors this year, to reduce the personal elements to zero
to further align the Executive Directors with recent shareholder experience. The final outcome for both Executive Directors is 37% of
maximum, which equates to £445,000 for the Chief Executive Officer and £220,000 for the Chief Financial Officer.
Impact of adjustments summary (outcome as percentage of maximum award)
David Duffy
CONSIDERATION
Business scorecard
Personal scorecard
Risk adjustment
Total
Ian Smith
CONSIDERATION
Business scorecard
Personal scorecard
Risk adjustment
Total
UNADJUSTED
OUTCOME
37%
14%
–
51%
ADJUSTMENT
MADE
–
(14%)
–
(14%)
UNADJUSTED
OUTCOME
37%
19%
–
56%
ADJUSTMENT
MADE
–
(19%)
–
(19%)
FINAL
ADJUSTED
OUTCOME
37%
0%
–
37%
FINAL
ADJUSTED
OUTCOME
37%
0%
–
37%
2019 deferral of variable pay
In line with remuneration regulation, deferral is met through the LTIP in the first instance with annual bonus only deferred to the extent
required to meet the regulatory minimum. As a result, annual bonus awards for 2019 are not subject to deferral although 50% is delivered
in shares and subject to a 12‑month post‑vest holding period. The Chief Executive Officer and the Chief Financial Officer will receive
2019 LTIP awards in December 2019 as set out on page 126.
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Annual report on remuneration continued
Long-term awards
(i) Long-term awards included in 2019 single figure table
Demerger award (audited)
The 2015 demerger award was subject to one performance condition based on cumulative underlying profit before tax over a three‑year
period. This target was agreed by the Board in August 2015 based on the approved three‑year strategic plan including underlying profit
before tax for 2016, 2017 and 2018. The three‑year cumulative plan target for the demerger award was £770m. The terms of the award
were such that 100% of the award vested if the sole target was met and 0% vested if the target was not attained. At the end of the
performance period the cumulative underlying profit before tax over the three‑year period was £843m meaning the target had been met.
The Remuneration Committee determined that the award should therefore vest in full.
2016 LTIP award (audited)
Awards were granted over shares to the value of 100% of salary in March 2017 with performance conditions tested over the three financial
years to 30 September 2019. As detailed in the table below, performance against the targets results in a 62% outcome. Share awards
granted under this award will be released in March and September 2020.
The Committee reviewed the appropriateness of the performance conditions taking account of the acquisition of Virgin Money Holdings
(UK) PLC in October 2018, part way through the relevant performance period. The Committee determined not to amend the performance
measures or targets. However, in determining the performance outcome, the Committee reviewed the impact of the transaction on the
performance targets to ensure a fair final outcome without uplifts driven solely by the acquisition.
2016 award
PERFORMANCE ACHIEVEMENT VERSUS TARGETS
CATEGORY
Sustainable customer
growth
MEASURE
Clydesdale and
Yorkshire Bank NPS
WEIGHTING
10%
THRESHOLD
22.5%
TARGET
25%
Threshold not met
MAXIMUM
27.5%
OUTCOME AS %
MAXIMUM
0.0%
Digital adoption
10%
45.0%
50.0%
55.0%
6.0%
Efficiency
CIR
25%
60.0%
CET1 ratio
10%
Capital optimisation
Underlying RoTE(1)
30%
8.0%
IRB accreditation
of mortgage book
Prudent risk management
and governance
Bad and doubtful
debts/average loans
5%
5%
Actual: 50%
Actual: 58%
57.5%
12%
9.0%
Actual: 9.13%
Achieved
25bps
55%
13.3%
10.0%
Actual: 13%
10.0%
19.6%
Actual: Achieved
Actual: 20bps
5.0%
5.0%
3.0%
61.9%
Cumulative operational
risk losses
5%
£25m
£20m
£15m
Actual: £20m
2016 LTIP performance outcome
100%
(1) The actual underlying RoTE of 10.8% was reduced for the purposes of calculating the performance outcome to take account of the impact of PPI.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE
125
(ii) Prior year LTIP awards subject to ongoing performance conditions
2017 LTIP award (granted November 2017)
Following the acquisition of Virgin Money Holdings (UK) PLC in October 2018, the 2017 LTIP measures have been reviewed. At the Capital
Markets Day in June 2019, performance targets were presented based on a detailed strategic plan and with clear outcomes for each year.
This provided the benchmark for Group performance that has been used for the reassessment of the FY2020 targets that underpin the
2017 LTIP awards. The strategy presented at the Capital Markets Day prioritised deposit growth ahead of customer lending growth. The
customer lending growth measure has therefore been removed from the 2017 LTIP with the weighting distributed across the remaining
measures (excluding digital adoption) in proportion to their original weightings.
Underlying performance measures
Sustainable customer growth
Efficiency
Risk and compliance
Customer‑focused culture
WEIGHTING
THRESHOLD
Retail NPS
Digital adoption
Cost:income ratio(1)
Return on tangible equity(1)(2)(3)
IRB accreditation(4)
Bad and doubtful debt/average loans(4)
Cumulative operational risk losses(5)
Complaints per 1,000
Colleague engagement
Senior leadership diversity
10.0%
7.5%
22.5%
22.5%
10.0%
7.5%
7.5%
7.5%
2.5%
2.5%
21
50%
58.0%
10.0%
<£30m
3.7
72%
38%
TARGET
24
52.5%
55.0%
11.0%
Achieved
<30%
<£25m
3.5
77%
40%
MAXIMUM
27
55.0%
52.0%
12.0%
<£20m
3.3
82%
42%
(1) CIR and RoTE are targeted on an underlying basis.
(2) RoTE is subject to an underpin that CET1 is greater than 12%.
(3) Three‑year average.
(4) IRB accreditation (based on the full roll‑out) and bad and doubtful debt/average loans are all or nothing measures with 100% vesting if achieved
for these elements.
(5) Cumulative figure for 2018, 2019 and 2020.
The award was granted on 24 November 2017 and will vest based on the performance over the 2018 to 2020 financial years.
Subject to performance outcomes, the award will be released over three to seven years from the date of grant, with the net shares
received (post‑taxation) subject to further regulatory holding periods as required.
2018 LTIP award (granted December 2018)
Performance measures for the 2018 LTIP had not been determined at the time the 2018 Directors’ remuneration report was published as
the Committee continued to assess the implications of the Virgin Money Holdings (UK) PLC acquisition on the Group’s long‑term strategic
targets. Performance measures for the 2018 LTIP are therefore included for the first time in this year’s report.
Underlying performance measures
Pioneering growth
Super straightforward efficiency
Disciplined and sustainable
Delighting our customers
and colleagues
Relationship deposit growth
Cost:income ratio
Operating cost outcome
Return on tangible equity
Risk scorecard(1)
Colleague engagement
Senior colleague diversity
CMA ranking
Digital adoption
WEIGHTING
THRESHOLD
TARGET
MAXIMUM
8.33%
10.0%
10.0%
30.0%
20.0%
2.5%
2.5%
8.33%
8.33%
5%
52%
£840m
9.5%
70%
40%
Top 8
54%
50%
£825m
10.5%
72%
42%
Top 5
56%
10%
49.5%
£815m
10.75%
74%
44%
Top 3
58%
(1) Performance will be assessed by the Committee based on several qualitative and quantitative inputs such as feedback from the Chair of the Board Risk
Committee and achievement of the long‑term objectives of the organisation. Specific focus will be on customer complaints, operational risk losses and
cost of risk.
The award was granted on 20 December 2018 and will vest based on the performance over the 2019 to 2021 financial years.
Subject to performance outcomes, the award will be released over three to seven years from the date of grant, with the net shares
received (post‑taxation) subject to further regulatory holding periods as required.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 126
Annual report on remuneration continued
(iii) 2019 LTIP award (to be granted December 2019)
2019 LTIP
The following awards will be made to Executive Directors in December 2019.
2019 LTIP award
David Duffy
Ian Smith
PERCENTAGE
OF SALARY(1)
177%
176%
FACE VALUE
OF AWARD
£1,805,400
£897,600
TYPE OF
INTEREST
AWARDED
Conditional rights to
Virgin Money UK PLC
shares
END OF
PERFORMANCE
PERIOD
PERCENTAGE
RECEIVABLE FOR
THRESHOLD
PERFORMANCE
PERCENTAGE
RECEIVABLE FOR
TARGET
PERFORMANCE
30 Sep 2022
25%
60%
(1) The awards are based on a percentage of salary as at 30 September 2019. For the purposes of determining the 2:1 cap, a discount is applied in line with
regulatory requirements.
Subject to performance outcomes over the period 1 October 2019 to 30 September 2022 (2020 to 2022 financial years), the awards will
vest from December 2022 to December 2026. At each vest date, the net number of shares received (post‑taxation) will be subject to a
retention period in line with regulatory requirements.
In formulating the measures in the table below, the Committee has engaged with the Group’s largest shareholders (representing around
60% of the Group’s voting rights) and has ensured the measures support the delivery of the strategy as outlined at the Capital Markets Day
and the Key Performance Indicators set out on pages 14 and 15.
Performance measures
Pioneering growth
Super straightforward efficiency
Disciplined and sustainable
Delighting our customers
and colleagues
Relationship deposit growth
Cost:income ratio(1)
Operating cost outcome(1)
Restructuring costs
Return on tangible equity(2)
Risk scorecard(3)
Colleague engagement
Senior colleague gender diversity
CMA ranking
WEIGHTING
10.0%
10.0%
10.0%
5.0%
25.0%
20.0%
5.0%
5.0%
10.0%
THRESHOLD
5%
47%
£790m
£378m
11.0%
73%
41%
Top 5
TARGET
45%
£780m
£360m
12.0%
76%
43%
Top 3
MAXIMUM
10%
44.5%
£770m
£342m
12.25%
77%
45%
Top 2
(1) Cost:income ratio and operating costs are on an underlying basis.
(2) RoTE is on a statutory basis.
(3) Performance will be assessed by the Committee based on several qualitative and quantitative inputs such as feedback from the Chair of the Board Risk
Committee and achievement of the long‑term objectives of the organisation. Specific focus will be on customer complaints, operational risk losses and
cost of risk.
(iv) Legacy awards
NAB LTIP awards
Detailed below are the rights under the NAB LTIP held by the Chief Operating Officer at the beginning of the financial year. Neither the
Chief Executive Officer, nor the Chief Financial Officer received any NAB LTIP awards.
Debbie Crosbie’s NAB LTIP awards
FY2013 LTIP
FY2014 LTIP
VESTING DATE
20 Dec 17
21 Dec 18
RELEASE DATE
20 Jun 18
21 Jun 19
PERFORMANCE PERIOD
(IF APPLICABLE)
11 Nov 13 to 11 Nov 17
10 Nov 14 to 10 Nov 18
NAB
PERFORMANCE
RIGHTS
10,161
13,380
Awards made under the 2013 and 2014 NAB LTIP were subject to performance conditions based on NAB’s relative total shareholder return
(TSR) performance with half measured against the S&P/ASX Top 50 Index peer group and half against a selection of financial companies
in the ASX Top 200 peer group.
The performance conditions were not met and the 2013 and 2014 awards therefore lapsed in full.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 127
Non-Executive Directors’ fees (audited)
The table below sets out the single total figure of remuneration and breakdown for each Non‑Executive Director for the year ending
30 September 2019. The fees reported in the table in respect of 2019 include amounts paid in respect of Virgin Money plc Board
Committee roles. Taken together, these payments give rise to a year‑on‑year increase in the total fees. The Virgin Money plc Board
Committee fees will not apply in 2020.
FEES
BENEFITS
TOTAL
Clive Adamson
David Bennett
David Browne(1)
Paul Coby
Geeta Gopolan
Adrian Grace
Fiona MacLeod
Darren Pope
Jim Pettigrew
Teresa Robson‑Capps
Amy Stirling(2)
Tim Wade
Total
2019
£000
155
255
–
110
135
120
140
135
410
110
–
155
1,725
2018
£000
110
195
75
80
–
100
85
–
365
80
–
110
1,200
2019
£000
–
–
–
–
–
–
–
–
–
–
–
–
–
2018
£000
–
–
–
–
–
–
–
–
–
–
–
–
–
2019
£000
155
255
–
110
135
120
140
135
410
110
–
155
1,725
2018
£000
110
195
75
80
–
100
85
–
365
80
–
110
1,200
(1) David Browne retired from the Board on 30 June 2018.
(2) Amy Stirling does not receive any fees.
Non-Executive Directors’ payments for loss of office (audited)
No payments were made during the current or previous year.
Total shareholder return (TSR) performance
The graph below shows the value of £100 invested in the Group’s shares since listing, compared with the total returns of the FTSE 250
Index. The graph shows the TSR generated by both the movement in share value and the reinvestment over the same period of dividend
income. The Committee considers the FTSE 250 as representative of the current market capitalisation of the Group.
Virgin Money UK PLC TSR v FTSE 250
Virgin Money UK PLC
FTSE 250
180
160
140
120
100
80
60
40
20
0
8 Feb 2016
30 Sep 2016
30 Sep 2017
30 Sep 2018
30 Sep 2019
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 128
Annual report on remuneration continued
Chief Executive Officer historic remuneration
The table below sets out the total remuneration delivered to the Chief Executive Officer since IPO:
Chief Executive Officer
Total single figure (£000)
Annual short‑term incentive payment level achieved
(% of maximum opportunity)
Demerger award
Long‑term incentive vesting level achieved
(% of maximum opportunity)(1)
(1) No LTIP awards vested during 2016, 2017 or 2018.
Pay ratio
Pay ratio
2019
EXCLUDING
DEMERGER
AWARD
£2,064
2019
EXCLUDING
LTIP AND
DEMERGER
AWARDS
£1,699
2016
2,048
2017
2,056
2018
1,833
2019
£3,374
80%
82%
62%
–
–
–
37%
100%
62%
2019
EXCLUDING
DEMERGER
AWARD
60:1
2019
EXCLUDING
LTIP AND
DEMERGER
AWARDS
49:1
MEDIAN
97:1
The ratio of 97:1 is affected this year by the inclusion of the demerger award and 2016 LTIP award, both of which are disclosed in this year’s
single figure total. The Remuneration Committee is satisfied that the normalised annual ratio that would only include one long‑term award
within the year is well within industry norms and reflects the full responsibility of the Chief Executive Officer role.
Relative importance of spend on pay
The table below sets out the relative importance of spend on pay in the 2019 financial year:
Overall spend
Dividend(1)
Overall spend on pay including Executive Directors(2)
DISBURSEMENTS
FROM PROFIT IN
2019 FINANCIAL
YEAR £M
–
421
DISBURSEMENTS
FROM PROFIT IN
2018 FINANCIAL
YEAR £M
44
223
(1) No dividend was declared in respect of the year ended 30 September 2019 (2018: 3.1p).
(2) 2018 and 2019 figures as per note 2.4 of the consolidated financial statements. The year‑on‑year increase is driven by the increased size of the business,
and number of colleagues employed in 2019.
Change in Executive Director remuneration compared with colleagues
The table below shows the percentage change in remuneration for the Chief Executive Officer and Chief Financial Officer between 2018
and 2019 compared with the percentage change in the average remuneration of colleagues.
Remuneration compared with colleagues
CEO
CFO
Colleagues(1)(2)
SALARY
2018 TO 2019
2%
2%
4%
BENEFITS(3)
2018 TO 2019
56%
11%
31%
BONUS
2018 TO 2019
(28%)
(29%)
10%
(1) Reflects the change in average annual FTE salary of colleagues employed by the Group at both 30 September 2018 and 30 September 2019.
(2) Reflects the change in average bonus awards for colleagues employed by the Group at both 30 September 2018 and 30 September 2019.
(3) Taxable benefits and other allowances excluding employer pension contributions.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 129
Statement of Directors’ shareholding and share interests (audited)
David Duffy
Ordinary shares
Breakdown of unvested shares:
Deferred Equity Plan Awards
Long Term Incentive Plan Awards
Ian Smith
Ordinary shares
Breakdown of unvested shares:
Deferred Equity Plan Awards
Long Term Incentive Plan Awards
OWNED OUTRIGHT
713,784
303,447
NUMBER OF SHARES
UNVESTED
(NOT SUBJECT TO
PERFORMANCE
CONDITIONS)
UNVESTED
(SUBJECT TO
PERFORMANCE
CONDITIONS)
TOTAL
80,459
233,056
1,461,705
36,973
107,205
714,854
2,489,004
1,162,479
Breakdown of Executive Director share interests under each of the Group’s share plans
Further details in respect of the unvested shares included in the Directors’ interest table above are provided in the following tables.
The details are in relation to the current Executive Directors and no other Directors have rights to shares.
DEP and LTIP awards
David Duffy
2017 DEP
START
OF YEAR
AWARDED
DURING
THE YEAR
VESTED
DURING
THE YEAR
LAPSED
DURING
THE YEAR
UNVESTED
AT YEAR
END
DATE OF
GRANT
GRANT
PRICE
80,459
–
–
–
80,459 24 Nov 17
313.2
2018 DEP
2015 demerger award
2016 LTIP
–
768,560
375,897
163,415
–
–
163,415
768,560
–
–
–
142,841
– 20 Dec 18
– 11 Feb 16
233,056 09 Mar 17
189.7
195.17
266.03
2017 LTIP
2018 LTIP
Ian Smith
2017 DEP
319,284
–
– 1,142,421
36,973
–
–
–
–
–
319,284 24 Nov 17
313.2
– 1,142,421 20 Dec 18
189.7
2018 DEP
2015 demerger award
2016 LTIP
–
230,568
172,912
81,707
–
–
81,707
230,568
–
–
–
65,707
– 20 Dec 18
– 11 Feb 16
107,205 09 Mar 17
189.7
195.17
266.03
–
36,973 24 Nov 17
313.2
246 Vests from December 2020
to June 2022
MARKET
VALUE AT
DATE OF
GRANT
£000
NOTES
536 Vests from December 2020
to June 2022
310
1,500
1,000
Vests March and
September 2020
1,000 Vests from December 2020
to June 2025
Vests from December 2021
to December 2026
2,167
155
450
460
Vests March and
September 2020
460 Vests from December 2020
to June 2025
Vests from December 2021
to December 2026
1,077
2017 LTIP
2018 LTIP
Debbie Crosbie
2017 DEP
2015 demerger award
2016 LTIP
2017 LTIP
146,871
–
–
567,983
36,206
230,568
169,153
143,678
–
–
–
–
–
–
–
–
–
–
–
–
146,871 24 Nov 17
313.2
567,983 20 Dec 18
189.7
36,206
230,568
169,153
143,678
– 24 Nov 17
– 11 Feb 16
– 09 Mar 17
– 24 Nov 17
313.2
195.17
266.03
313.2
241
450
450
450
Award lapsed
Award lapsed
Award lapsed
Award lapsed
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 130
Annual report on remuneration continued
DEP
Conditional share awards were granted under the DEP in December 2018 in respect of FY2018. The face value of the portion of the Chief
Executive and Chief Financial Officer’s annual bonus awards that were delivered via DEP awards was £310,000, and £155,000 respectively.
These values were converted into the number of shares shown in the table on page 129 using the middle market share price on the day
immediately preceding grant, being 189.7p. The awards vested immediately, with resultant shares (post‑taxation) subject to a 12‑month
holding period. Awards remain subject to clawback provisions. Details of this award are included in the table alongside the awards made
in respect of 2017.
LTIP
Conditional share awards were made to Executive Directors under the LTIP in December 2018 in respect of FY2018. Awards were granted
based on 177% of salary for the Chief Executive Officer (£1,770,000) and 176% of salary for the Chief Financial Officer (£880,000).
These values were converted into the number of shares shown in the table on page 129 using the middle market share price on the day
immediately preceding grant which was discounted to reflect the absence of dividend equivalents during the period from grant to vest
in accordance with the Directors’ remuneration policy. The face value at the date of grant included in the table reflects the middle market
share price multiplied by the number of shares awarded. Performance conditions apply (as set out on page 125) with no more than 25%
of the maximum vesting for threshold performance. Awards are subject to malus and clawback provisions. Resultant shares (post‑taxation)
are subject to a regulatory hold period. Details of these awards are included in the table alongside the LTIP awards made in respect of 2016
and 2017.
SIP
An award of 246 shares was made on March 2019 to each of the Executive Directors through the SIP. The Chief Financial Officer currently
participates in the monthly purchase of shares through the SIP.
SAYE
No offers under the SAYE plan have been made (2018: none).
Shareholding requirement
Executive Directors are required to build up a holding of the Group’s shares. This is set at 200% of base salary for CEO and 150% of base
salary for the CFO. Detailed below are the beneficial holdings of ordinary shares as at 30 September 2019 for each Executive Director,
together with an indicative net value of unvested share awards that are not subject to ongoing performance conditions.
Director
David Duffy
Ian Smith
BASE SALARY
£1,020,000
£510,000
REQUIREMENT
AS % OF
BASE SALARY
200%
150%
WHOLLY-
OWNED
SHARES(1,2)
713,784
303,447
NET NUMBER OF
SHARE AWARDS
NOT SUBJECT TO
PERFORMANCE
CONDITIONS(3)
166,163
74,972
VALUE(4)
£1,011,059
£434,803
SHAREHOLDING
REQUIREMENT
MET?
No
No
(1) Ordinary shares beneficially‑owned and holdings of connected persons. This includes shares held via the Group SIP – David Duffy (661), Ian Smith
(2,476 including 924 shares purchased through the partnership scheme during the year ending 30 September 2019).
(2) Includes CHESS Depositary Interests (CDIs) which represent interests in ordinary shares beneficially‑owned by David Duffy (4,080). Ian Smith transmuted
4,502 Chess Depositary Interests into Group ordinary shares on 25 March 2019.
(3) Includes projected net number of shares due under unvested awards over Group shares which are not subject to ongoing performance conditions. Assumes
a deduction from unvested rights to reflect the tax and National Insurance due on the release of shares at a rate of 47% for the Chief Executive Officer and
48% for the Chief Financial Officer.
(4) Values are based on 30 September 2019 closing price of 114.9p.
DIRECTORS’ REMUNERATION REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 131
Directors’ shareholding
The beneficial interests of the Executive and Non‑Executive Directors and their connected persons who held office at 30 September 2019
in the shares of the Group and as at 30 September 2018 are shown below:
ORDINARY SHARES
BENEFICIALLY-
OWNED AT
30 SEPTEMBER
2018 (OR DATE
OF APPOINTMENT
IF LATER)
213,438
Directors
David Duffy
TRANSACTIONS
DURING YEAR
20 December 2018
NUMBER
OF SHARES
86,340
18 February 2019
206,880
8 March 2019
12 August 2019
246
206,880
Ian Smith
138,158
20 December 2018
42,349
18 February 2019
60,885
8 March 2019
12 August 2019
Various
246
60,885
924
NOTES
Net number of shares from vesting
of upfront DEP award
Net number of shares from vesting
of tranche 1 of 2015 demerger award
All‑colleague free share award
Net number of shares from vesting
of tranche 2 of 2015 demerger award
Net number of shares from vesting
of upfront DEP award
Net number of shares from vesting
of tranche 1 of 2015 demerger award
All‑colleague free share award
Net number of shares from vesting
of tranche 2 of 2015 demerger award
Acquisition of shares through SIP
Debbie Crosbie(1)
Clive Adamson
David Bennett
Paul Coby
Geeta Gopalan
Adrian Grace
Fiona MacLeod
Jim Pettigrew
Darren Pope
Teresa Robson‑Capps
Amy Stirling
Tim Wade
140,771
–
16,386
–
–
16,220
7,000
50,000
–
–
–
20,000
22 November 2018
50,000
Acquisition of shares
10 December 2018
30,000
Acquisition of shares
ORDINARY SHARES
BENEFICIALLY-
OWNED AT
30 SEPTEMBER
2019 (OR DATE
OF CESSATION
IF EARLIER)
713,784
303,447
140,771
–
16,386
–
–
16,220
7,000
100,000
–
–
–
50,000
(1) Debbie Crosbie stepped down from the Board on 19 November 2018.
Since the year ended 30 September 2019, the Group Chief Financial Officer purchased 129 partnership shares on 1 October 2019 and
112 partnership shares on 1 November 2019. At the date of the report, he held a total of 303,688 shares in the Group. None of the
Non‑Executive Directors holds any awards under the Group share plans (2018: none). There have been no other changes to the above
interests between 30 September 2019 and the date of this report.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 132
DIRECTORS’
REPORT
Corporate governance report
Directors’ indemnities and insurance
The Corporate governance report, found on pages 66 to 79,
together with this report of which it forms part, fulfils the
requirements of the Corporate Governance Statement for the
purpose of the FCA’s Disclosure and Transparency Rules (DTR).
Directors
The names and biographical details of the current Directors
of the Company are shown on pages 56 to 61.
Particulars of Directors’ emoluments and interests in shares
in the Company are given on pages 104 to 131 of the Directors’
remuneration report. During the year, no Director had a material
interest in any significant contract to which any Group Company
was a party.
Annual general meeting (AGM)
The Company’s 2020 AGM will be held at 9.00am (GMT)
on Wednesday 29 January 2020 at the offices of
Clifford Chance LLP, 10 Upper Bank Street, London, E14 5JJ,
United Kingdom. Details of the meeting venue and the resolutions
to be proposed, together with explanatory notes, are set out in
a separate Notice of AGM which is published on the Company’s
website (www.virginmoneyukplc.com).
Appointment and retirement of Directors
The appointment, retirement and/or replacement of Directors is
governed by the Articles of Association of the Company (Articles),
the Code and the Companies Act 2006 (Act). The Articles may
be amended only by a special resolution of the shareholders
in a general meeting.
In the interests of good governance, all Directors will retire and
those wishing to serve again will submit themselves for re-election
at the 2020 AGM.
Board composition changes
The Directors have each entered into individual deeds of access,
insurance and indemnity with the Group which indemnify the
Directors to the maximum extent permitted by law. Each such
provision constitutes a ‘third-party indemnity provision’ and a
‘qualifying indemnity provision’ for the purposes of the Companies
Act 2006. These provisions are in force for the benefit of the
Directors at the date of this report, and during the financial year
to which this report relates. Such deeds are available for inspection
at the Company’s registered office.
The Group has an insurance policy in place for the benefit of all
trustees, colleagues, Directors, officers, members and partners
of the Company while acting in the capacity of a trustee or
administrator of employee benefit or pension plans. This policy
indemnifies the Directors of Yorkshire and Clydesdale Bank Pension
Trustee Limited and YCB DC Trustee Limited (each a ‘Trustee
Company’), the trustees and administrators of the two occupational
pension schemes operated by the Group, against liability incurred
by them in connection with the management and administration of
the pension schemes. This insurance policy constitutes a ‘pension
scheme indemnity provision’ and a ‘qualifying indemnity provision’
for the purposes of the Companies Act 2006. These provisions
are in force for the benefit of the Directors of Trustee Companies
at the date of this report, and during the financial year to which
this report relates. Such policy is available for inspection at the
Company’s registered office.
In addition, the Group had appropriate Directors’ and Officers’
Liability Insurance cover in place throughout the financial year.
Changes to the composition of the Board since 1 October 2018 up to the date of this report, are shown in the table below. Clive Adamson
will step down as an Independent Non-Executive Director on 29 November 2019.
NAME
Geeta Gopalan
Darren Pope
Amy Stirling
Debbie Crosbie
ROLE
Independent Non-Executive Director
Independent Non-Executive Director
Non-Executive Director
Executive Director and Group Chief
Operating Officer
DATE OF APPOINTMENT
15 October 2018
15 October 2018
15 October 2018
DATE OF RESIGNATION
19 November 2018
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 133
Profits and appropriations (to be updated when info available)
Political donations
The Group loss before tax for the financial year ended
30 September 2019 amounted to £232m (2018: loss of £164m).
The loss attributable to the ordinary shareholders for the year
ended 30 September 2019 amounted to £268m (2018: loss of
£181m). As at 30 September 2019, the distributable reserves of
the Company were £1,015m (2018: £1,005m). The Directors do not
recommend the payment of a dividend in respect of the financial
year ended 30 September 2019 (2018: £0.031).
Share capital, control and Directors’ powers
Shares in the Company are listed on both the London Stock
Exchange (LSE) and the Australian Securities Exchange (ASX)
(in the form of CHESS Depositary Interests (CDIs)). The Company
is required to comply with the disclosure requirements of the LSE
and also of the ASX insofar as they relate to the Company’s foreign
exempt listing in Australia.
Details of the movements in allotted share capital during the
year, together with the rights and obligations attaching to the
Company’s shares, are shown in note 4.1 to the consolidated
financial statements.
There are no restrictions on voting rights of securities in the
Company. The Notice of AGM specifies deadlines for determining
attendance and voting entitlements at the AGM.
The Group operates an Employee Benefit Trust (EBT), which holds
ordinary shares on trust for the benefit of employees and former
employees of the Group, and their dependants, which is used in
conjunction with the Group’s employee share schemes. While
ordinary shares are held in the EBT, the voting rights in respect
of these ordinary shares are exercised by the trustees of the EBT.
Where participants in an employee share incentive plan operated
by the Company are the beneficial owners of shares but not the
registered owners, the voting rights are normally exercised at the
discretion of participants.
With the exception of restrictions on the transfer of ordinary
shares under the Company’s Share Incentive Plan (SIP) there are
no restrictions which exist on the transfer or holding of securities
in the Company under its Articles and there are no shares
carrying special rights with regards to the control of the Company.
Subject to the Articles and provisions of relevant statutes,
the Board may exercise all powers of the Company.
The Company may only amend its Articles of Association if its
shareholders pass a special resolution to this effect.
Acquisition of own shares
The Group did not give any money for political purposes nor did
it make any political donations to political parties or other political
organisations, or to any independent election candidates, or incur
any political expenditure during the year. At the AGM in 2019,
shareholders gave authority under Part 14 of the Companies Act
to make political donations and incur political expenditure up to a
maximum aggregate amount of £100,000. This authorisation was
sought for prudence as it is the Group’s policy not to make any
political donations to political parties or incur political expenditure
within the ordinary meaning of those words. Given the wide
definition of donations and expenditure within the Companies Act,
activities which form part of the regular operations of the Group
such as communicating with government at local, national and
European level and funding events to which politicians are invited,
may be covered.
Financial risk management objectives and policies
Information about internal controls and financial risk management
systems in relation to financial reporting and Board review can
be found on page 92 of the Corporate governance report.
Information about financial risk management objectives and
policies in relation to the use of financial instruments can be
found in the Risk report on pages 138 to 192.
Post-balance sheet events
FSMA Part VII transfer of trade and assets from
Virgin Money PLC to Clydesdale Bank PLC
On 26 September 2019, at a hearing in the Court of Session
in Edinburgh, the Court approved a banking business transfer
scheme under FSMA Part VII. The scheme effective date was,
21 October 2019, and in accordance with the court approval,
on this date the business of Virgin Money PLC was transferred
to Clydesdale Bank PLC for a cash consideration of £10m.
The transfer of the trade and assets is a business transfer under
common control and has no impact on the consolidated Group
financial results. The total assets and total liabilities transferred
were £49bn and £47bn respectively.
Change in company name
CYBG PLC changed it’s name to Virgin Money UK PLC on
30 October 2019. The registered office address of the Company
has changed from 20 Merrion Way, Leeds, LS2 8NZ to Jubilee
House, Gosforth, Newcastle upon Tyne, NE3 4PL.
For further details of events after the balance sheet, refer to
note 5.6 of the financial statements.
At the AGM of the Company held on 30 January 2019 a resolution
was passed that the Directors were authorised to purchase
up to a maximum of 142,734,419 ordinary shares representing
approximately 10% of the issued ordinary share capital. A renewal
of authority will be sought at the 2020 AGM. Further information
is set out in the Notice of AGM.
Information included in the Strategic report
The following information that would otherwise be required to be
disclosed in this report and which is incorporated into this report
by reference can be found on the following pages of the
Strategic report.
SUBJECT
Future developments
Colleague engagement
Emissions reporting
PAGE REFERENCE
13
17
38
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 134
Equality of employment opportunities
It is the policy of the Group to promote equality of employment
opportunities by giving full and fair consideration to applications
from people with disabilities. If existing colleagues become
disabled, every effort is made to retain them within the workforce
wherever reasonable and practicable. The Group also endeavours
to provide equal opportunities in the training, promotion and
general career development of disabled persons.
Substantial shareholdings
Information provided to the Company pursuant to the FCA’s
DTR is published on Regulatory Information Services and
on the Company’s website.
As at 30 September 2019 the following information has been
received, in accordance with DTR 5, from holders of notifiable
interests in the Company’s issued share capital. The information
provided below was correct at the date of notification; however,
the date received may not have been within the current financial
year. It should be noted that these holdings are likely to have
changed since the Company was notified. However, notification
of any change is not required until the next notifiable threshold
is crossed. No further notifications were received in the period
from 30 September 2019 to the date of this report.
Virgin Group Holdings Limited
Perpetual Limited and Subsidiaries
Investors Mutual Limited
Schroders PLC
AMP Life Limited, AMP Capital Investors Limited, Ipac Asset Management Limited,
AMP Capital Investors (NZ) Limited
TOTAL NUMBER
OF SHARES
188,083,550
60,787,499
53,659,761
44,572,459
% OF
VOTING RIGHTS
13.11
4.24
3.74
3.11
DIRECT/INDIRECT
INTEREST
Direct
Direct
Direct
Indirect
43,220,044
3.01
Direct/Indirect
Going concern
Viability
The Group’s Directors have made an assessment of the Group’s
ability to continue as a going concern and are satisfied that
the Group has the resources to continue in business for the
foreseeable future.
Provision C2.2 of the Code requires the Directors to explain in
the Annual Report and Accounts how they have assessed the
prospects of the company, over what period they have done so
and why consider that period to be appropriate.
The Group’s use of the going concern basis for preparation of
the accounts is discussed in note 1.4 of the Group’s consolidated
financial statements.
Viability statement
Assessment of principal risks
As described in the Risk report on page 138, the Board is
responsible for determining the nature and extent of the principal
risks it is willing to take in order to achieve its strategic objectives.
In line with the 2016 UK Corporate Governance Code (the Code)(1)
requirements, the Directors have performed a robust assessment
of the principal risks facing the Group including those that would
threaten its business model and future performance, solvency
or liquidity.
The principal risks the Group actively monitors and manages
are described on pages 26 to 27 of the Strategic Report.
Risk management and internal controls
As described in the Corporate Governance report on page 79
and the Risk report on page 138, the Board actively monitors the
Group’s risk management and internal control systems. A review
of the effectiveness of those systems has been performed
incorporating all material controls, including financial, operational
and compliance controls.
The Directors have determined that a three year period to
30 September 2022 is an appropriate period over which to perform
the assessment. This is the period over which the forecast have
a greater level of certainty. The Board monitors a longer term
strategic and financial plan which extends beyond the three year
period. This longer-term strategic and financial plan provides less
certainty of outcome but provides a robust planning tool against
which strategic decisions can be made.
The Directors have considered the current state of the balance
sheet, principal and emerging risks which could impact the
performance of the Group, and the Group’s strategic and financial
plan. The strategic and financial plan makes certain assumptions
about the performance of the Group and the economic, market
and regulatory environments in which it operates. To support the
planning process, downside scenario analysis has been performed
to consider how the Group’s performance would be affected by
changing economic and market conditions throughout the planning
period. A number of different stress scenarios were also conducted
over the strategic and financial plan to assess the sensitivity of the
base plan financials. These indicated that the stresses did not
materially impact the financial outcomes.
(1) The Group will apply the revised 2018 version of the Code with effect from 1 October 2019, with Provision C2.2 of the 2016 Code incorporated
into Provision 31 of the 2018 Code.
DIRECTORS’ REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE 135
In making this assessment the Directors have considered a
wide range of information (including the Directors’ robust view
and challenge of the outcomes of the latest ICAAP and the ILAAP)
which assess the Group’s future projections of capital adequacy,
liquidity and funding. The Board has also considered the results
of stress testing which is performed as an integral part of both
the ICAAP and ILAAP.
Information relevant to this assessment can be found in the
following sections of the Annual Report and Accounts:
— a financial summary, including a review of the latest income
statement and balance sheet is provided in the Financial results
section pages 34 to 46;
— the Group’s capital position is included in the Balance sheet
and prudential regulation risks section of the Risk report pages
163 to 170;
— the Group’s liquidity position is described in the Balance sheet
and prudential regulation risks section of the Risk report pages
171 to 182;
— the Group’s principal risks and policies and processes for
managing those risks are described in the Risk report and
summarised on pages 26 to 27;
— the Group’s business model and strategy are described
in the Strategic report pages 10 to 13; and
— the Group’s approach to stress testing and reverse stress
testing is described in the Risk report on pages 141 to 142.
Based upon this assessment, the Directors have concluded that
there is a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due over
the three years to 30 September 2022.
Disclosure of information under Listing Rule (LR) 9.8.4R
Additional information required to be disclosed by LR9.8.4R, where
applicable to the Group, can be found in the following sections of
this report:
SUBJECT
Publication of unaudited
financial information
Allotment of equity securities
Significant contracts
PAGE REFERENCE
The disclosures within the
Risk report (pages 138 to 192)
are unaudited unless
otherwise stated.
255
275
Research and development activities
The Group does not undertake formal research and development
activities although it does invest in products and services in each
of its business lines in the ordinary course of business. Further
details can be found in note 3.10 of the Group’s consolidated
financial statements.
Change of control
The Group is not party to any significant agreements that are
subject to change of control provisions in the event of a takeover
bid, other than the following:
— Virgin Money Holdings (UK) plc is a shareholder in Virgin Money
Unit Trust Managers Limited which has entered into a joint
venture with Aberdeen Asset Management plc. Where either
shareholder (Virgin Money Holdings (UK) plc or Aberdeen Asset
Management plc) in the joint venture has a change of control
event, the joint venture will terminate unless such change of
control has prior approval of the other shareholder; and
— a Trade Mark Licence Agreement with Virgin Enterprises Limited
(Virgin) under which Virgin has granted a licence to Virgin
Money UK PLC to use the ‘Virgin’ and ‘Virgin Money’ trademarks.
Virgin has the right to terminate the agreement within 30 days
of a change of control of Virgin Money UK PLC unless it is a
Permitted Change of Control. A Permitted Change of Control
is one arising from (a) an IPO on a recognised stock exchange
or (b) any other sale of shares of Virgin Money UK PLC which
has been pre-approved by Virgin in writing. Virgin can withhold
consent only in the event that the third-party purchaser is a
direct competitor of Virgin or another Virgin licensee in the UK,
or it is involved in any activity or possesses a reputation or
financial standing which would be likely to materially damage
the value or reputation of the Virgin brand.
There is a very small number of senior colleagues who are entitled
to an enhanced redundancy payment if redundancy arises within
the initial period of employment and is a result of a change
of control.
STRATEGIC REPORTFINANCIAL RESULTSRISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGOVERNANCEVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE
136
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and
the Group and Company financial statements in accordance with
applicable law and regulations. Company law requires the Directors
to prepare financial statements for each financial year. The Group
financial statements are prepared in accordance with IFRSs as
adopted by the EU and applicable law and have elected to prepare
the parent company financial statements on the same basis.
Under company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company and of the
profit or loss of the Group and Company for that year. In preparing
these financial statements the Directors are required to:
— select suitable accounting policies in accordance with
International Accounting Standard (IAS) 8: Accounting Policies,
Changes in Accounting Estimates and Errors and then apply
them consistently;
— present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
— provide additional disclosures when compliance with the
specific requirements of IFRSs is insufficient to enable users
to understand the impact of particular transactions, other
events and conditions on the financial performance; and
— state that the Group and Company have complied with IFRSs,
subject to any material departures disclosed and explained
in the financial statements.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Group and 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 Group and Company and hence
for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic report, Directors’ report,
Directors’ remuneration report and Corporate governance
statement that comply with that law and those regulations.
Responsibility statement of the Directors
in respect of the Annual Report and Accounts
The Directors confirm that to the best of their knowledge:
— the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of
the Company and the Group and the undertakings included in
the consolidation taken as a whole; and
— the Strategic report includes a fair review of the development
and performance of the business and the position of the
Company and the Group, together with a description of the
principal risks and uncertainties that they face.
The Directors consider the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s
and Group’s position and performance, business model
and strategy.
Independent auditor and audit information
In accordance with section 485 of the Companies Act 2006,
a resolution to reappoint Ernst & Young LLP, and to authorise the
Audit Committee to agree their remuneration, will be proposed
at the next AGM.
The Directors who were members of the Board at the time of
approving the Report of the Directors are listed on page 57.
Having made enquiries of fellow Directors and of the Group’s
auditor, each of these Directors confirms that:
— to the best of each Director’s knowledge and belief, there is no
information relevant to the preparation of their report of which
the Group’s auditor is unaware; and
— each Director has taken all the steps a Director might
reasonably be expected to have taken to be aware of relevant
audit information and to establish that the Group’s auditor
is aware of that information
On behalf of the Board
Lorna McMillan
Group Company Secretary
27 November 2019
Virgin Money UK PLC. Registered No. 09595911
DIRECTORS’ REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019GOVERNANCE RISK
REPORT
137
Risk report
Risk classes
137
143
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 138
RISK
REPORT
Effective risk management is
critical to realising the Group’s
strategy of pioneering growth,
with delighted customers and
colleagues, while operating with
super straightforward efficiency,
discipline and sustainability. The
safety and soundness of the Group
is aligned to Our Purpose and is a
fundamental requirement to enable
our customers and stakeholders
to be ‘happier about money’.
Risk culture
Personal accountability is at the heart of the Group’s risk culture.
This is enabled through the risk management accountability model
and a formal delegation framework through which colleagues are
able to make risk-based decisions. Culture is shaped by many
aspects including Purpose, Values and Behaviours that set a
‘Tone from the Top’, the Group’s and Regulatory Codes of Conduct,
operating principles, policy statements and standards, the risk
management operating model and an approved articulation of
risk appetite that aligns to, and supports, strategic objectives.
The Group strives to instil a culture that enables colleagues to
meet the requirements of all relevant rules, regulations, laws,
codes and policies and build constructive regulatory relationships.
All colleagues are recruited with the core skills, abilities and
attitude required to competently carry out their role. They are
provided with sufficient training and development to ensure they
maintain the required levels of competence underpinned by the
Group’s Purpose, Values and Behaviours.
Management promote an environment of effective challenge
in which decision-making processes stimulate a range of views.
Transparency and open dialogue are encouraged, to enable
colleagues to raise concerns when they feel uncomfortable about
actions, practices or behaviours.
The Group is customer-centric and values open and honest
feedback from its customers. This feedback allows colleagues to
rectify problems, learn from them and consistently create products
and services that meet customer needs in alignment with purpose.
The Board and senior management are responsible for taking
leadership of risk culture through their actions and words, and
proactively overseeing and addressing any identified areas of
weakness or concern. Internal Audit (IA) provides an independent
view of risk culture to the Board Audit Committee through a risk
and control-related management awareness assessment assigned
to the majority of audits. Following the launch of Our Purpose in
2019, IA is piloting independent deep dives in specific areas of
the business, to complement existing reporting, and measure
alignment between actual and intended culture.
Risk strategy
The Group has a clearly defined risk strategy to manage and
mitigate risk in the course of its daily business. The strategy:
— ensures all principal and emerging risks are identified
and assessed;
— ensures risk appetite is clearly articulated and influences
the Group’s strategic plan;
— promotes a clearly defined risk culture which emphasises risk
management across all areas of the Group while maintaining
independent oversight;
— undertakes ongoing analysis of the environment in which the
Group operates to proactively address potential risk issues as
they arise; and
— supports commercial decisions and people with appropriate
risk processes, systems and controls.
Risk appetite
Risk appetite is defined as the level and types of risk the Group
is willing to assume within the boundaries of its risk capacity, to
achieve its strategic objectives. The Risk Appetite Statement (RAS)
articulates the Group’s risk appetite to stakeholders and provides
a view on the risk-taking activities the Board is comfortable with,
guiding decision-makers in their strategic and business decisions.
The Risk Appetite Framework (RAF) sets out the mandatory
governance requirements for the creation, management and
oversight of the RAS.
The RAS conveys the balance required between risk taking and the
commercial and reputational implications of doing so, promoting
good customer outcomes and protecting the Group from excessive
exposure. The RAS includes qualitative and quantitative limits
which inform strategies, targets, policies, procedures and other
controls that collectively ensure the Group remains within the
Board’s approved appetite.
The Group’s RAS is prepared by the Group Chief Risk Officer with
consideration of the strategic objectives and business model,
as well as the environment in which the Group operates. Reporting
to Executive Committees and the Board includes details of
performance against relevant RAS settings, breaches and trends.
Risk governance and oversight
The Group has a structured risk governance framework to support
the Board of Directors’ aim of achieving long-term and sustainable
growth through the Group’s Purpose of ‘making you happier about
money’. This includes a number of committees with a specific risk
management focus, although all committees consider risk matters
in accordance with the Group’s Risk Management Framework
(RMF). The Group’s risk governance structure strengthens risk
evaluation and management, while also positioning the Group to
manage the changing regulatory environment in an efficient and
effective manner. Oversight of the risk governance structure is
facilitated by the Board.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 139
Governance Committee framework
VMUK PLC Board
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VMUK PLC
Audit
Committee
VMUK PLC
Risk
Committee
VMUK PLC
Remuneration
Committee
VMUK PLC
Governance
& Nomination
Committee
VMUK PLC
IRB & Credit
IFRS9
Committee
Clydesdale Bank PLC Board
Virgin Money PLC Board
CB PLC IRB &
Credit IFRS 9
Committee
CB PLC
Audit
Committee
CB PLC
Risk
Committee
CB PLC
Remuneration
Committee
CB PLC
Governance
& Nomination
Committee
VM PLC
Risk
Committee
VM PLC
Audit
Committee
VM PLC
Remuneration
Committee
VM PLC
Nomination
Committee
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Chief
Executive
Officer
Executive
Risk
Committee*
Disclosure
Committee
Purpose
Council
Leadership
Team
Board
Executive Committee
Board Sub-Committee
Executive Sub-Committee
Reward Risk
Adjustment
Committee
Credit Risk
Committee
Model
Governance
Committee
Efficiency
& Investment
Committee
Asset &
Liability
Committee
* The Executive Risk Committee has a reporting and escalation line into the relevant Board Risk Committee.
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140
RISK
REPORT
During the year, the Group considers the effectiveness of the Executive Committee governance framework in order to ensure it remains
fit for purpose. The following Executive Committees have been established under the authority of the CEO:
COMMITTEES
RISK FOCUS
Executive Leadership Team
The Executive Leadership Team supports the CEO to lead the Group to be a strong, customer-focused
bank for its communities, by focusing on four strategic priorities: pioneering growth; delighting
customers and colleagues; being straightforward and efficient; and being disciplined and acting
in a sustainable manner.
Executive Risk Committee
The Executive Risk Committee supports the CEO in respect of risk and control accountabilities and
serves to provide leadership focus on key risk issues, including:
— endorsing the RAS for approval by the Board;
— overseeing and challenging the enterprise-wide risk performance and control environment of the
Group and business units, including the effective use of policy, frameworks and tools;
— monitoring the status of regulatory relationships, the reputation of the Group in relation to its
regulators and the changing state of the regulatory landscape, including the impacts for and
readiness of the Group for future changes;
— monitoring the strength of risk capability and capacity, including risk training and education plans
to ensure an effective risk and control framework; and
— reviewing and endorsing risk policies, frameworks and tools for use across the Group.
Disclosure Committee
The Disclosure Committee is responsible for ensuring the Group complies with its continuous disclosure
obligations for exchanges on which it has equity and debt securities listed.
The Executive Risk Committee is supported by the following committees:
Credit Risk Committee
The Credit Risk Committee (CRC) is responsible for ensuring that the credit risk management
framework and associated policies remain effective. The Committee has oversight of the quality,
composition and concentrations of the credit risk portfolio and recommends strategies to adjust the
portfolio to react to changes in market conditions.
Model Governance Committee
The Model Governance Committee (MGC) supports the ERC and subsequently the Board in fulfilling
its governance responsibilities for material models and rating systems. The Committee oversees the
integration and ongoing use of models across the Group, specifically considering the fitness for
purpose, usability and scalability of models.
Reward Risk Adjustment
Committee
The Reward Risk Adjustment Committee is responsible for considering and providing feedback to the
Board Risk Committee and the Remuneration Committee in relation to risk events which may affect
awards of variable pay and therefore ensuring that the Group complies with its regulatory requirements
in respect of establishing and maintaining a robust risk adjustment process.
The Executive Leadership Team is supported by the following committees:
Purpose Council(1)
The Purpose Council oversees and manages the factors that are critical to being a purpose-led
organisation. The Council maintains focus on agreed objectives, outcomes and benefits, and focuses
on removing obstacles in the way of being a purpose-led organisation.
Efficiency and Investment
Committee
The Efficiency and Investment Committee is responsible for overseeing the management of sustainable
costs across the Group while supporting its growth ambitions, aligned to risk appetite.
Asset and Liability Committee
The Asset and Liability Committee (ALCO) is responsible for monitoring the performance of the Group
against the Board approved capital and funding plans. The Committee focuses on the Group’s financial
risks including capital, funding, liquidity and interest rate risk to ensure that the Group’s activity
complies with regulatory and corporate governance requirements and also delivers Group policy
objectives. The impact of pension risk on capital is also assessed by ALCO.
(1) The Customer Committee was dissolved on 12 June 2019 and the first meeting of the Purpose Council was held on 28 February 2019.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 141
Three lines of defence
Effective operation of a three lines of defence model is integral
to the Group’s approach to risk management and is based on the
overriding principle that risk capability must be embedded within
the first line of defence teams to be effective. This principle
embodies the following concepts:
— risk management responsibilities are clearly understood
and adhered to by all colleagues when carrying out their
day-to-day activities;
— decisions are made with proactive consideration of the
potential risk and impact on customers;
— business areas must self-identify and report management
issues, which are captured centrally, showing good levels
of risk awareness, management remediation, and promoting
a strong risk culture; and
— regular control assessments are undertaken to confirm the
effectiveness of the control environment, based on control
monitoring and testing, in relation to both the current and
emerging risk profile.
Control is exercised through a clearly defined delegation of
authority, with communication and escalation channels throughout
the Group.
Risk management framework
The Group identifies and manages risk in line with the RMF,
which is the totality of systems, structures, policies, processes
and people that identify, measure, evaluate, control, mitigate,
monitor and report all internal and external sources of material risk.
The RMF aligns to Our Purpose by establishing an overarching
framework for the identification, measurement, management and
reporting of risk in a clear and transparent way.
Risk policies and procedures
The policy framework is a key component of the Group’s RMF,
providing structure and governance for the consistent and
effective management of policies. In developing the policy
framework, the Group sets the tone that demonstrates the risk
culture expected across the organisation. This aligns with the
behavioural expectations for all colleagues which form a core
part of our performance management approach. Policy statements
and supporting policy standards define the minimum control
requirements which must be observed across the Group to
manage material sources of risk within risk appetite.
Risk management and internal controls
The Board actively monitors the Group’s risk management and
internal control systems. A review of the effectiveness of those
systems has been performed incorporating all material controls,
including financial, operational and compliance controls.
3rd Line of Defence – Internal Audit
Provides independent assurance to the Board and senior
management on the operation of the organisation’s risk
management, governance and internal control frameworks.
2nd Line of Defence – Risk Management
Risk stewards monitor and facilitate the implementation
of effective risk management practices across the Group,
challenging risk owners and reporting findings independently
to the Board. Risk stewards design, set and deploy risk
appetite frameworks, statements and policies, challenge
operational processes and procedures and advise on
compliance with policy.
1st Line of Defence – Business Owners
Risk owners have ownership, responsibility and
accountability for directly assessing, controlling and
mitigating risks. They are responsible for identifying,
measuring, monitoring, controlling and reporting risks.
They must act within Board-approved risk appetite and
policy. They design and implement processes and controls
to enable them to do that, and all risks and issues should
be escalated to the Leadership Team.
3LOD
Internal
Audit
2LOD
Risk Management
1LOD
Business Owners
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142
RISK
REPORT
Stress testing
Principal and emerging risk categories
In line with the UK Corporate Governance Code (the Code)
requirements, the Board has performed a robust assessment
of the Group’s principal and emerging risks, including those that
could result in events or circumstances that might threaten the
Group’s business model, future performance, solvency or liquidity
and reputation. In deciding on the classification of principal risks,
the Board considered the potential impact and probability of the
related events and circumstances and the timescale over which
they may occur.
The Group’s principal and emerging risks are disclosed on pages 26
to 29 of the Strategic report.
Stress testing is an important and widely recognised risk
management tool, used to assess the vulnerability of financial
institutions and identify risks under adverse economic scenarios.
The Group uses stress testing in strategic, capital and liquidity
planning, and to inform risk appetite, risk mitigation and
contingency planning.
The Group undertakes stress testing following the Basel Committee
principles which utilise, where appropriate, scenarios provided
by the Bank of England (BoE).
The Board and senior management are actively involved in the
stress testing process, reviewing, challenging and approving
all aspects of stress testing, from the consideration of scenarios to
be tested, to the outcomes and mitigating actions. The involvement
of the Board and senior management is considered essential for
the effective operation of stress testing and the manner in which
the results inform strategic planning and risk appetite. Reverse
stress testing is also undertaken to assess the types of risks that
would pose fundamental threats to the viability of the Group’s
business model.
Recognising its enlarged size following the integration of Virgin
Money Holdings (UK) plc, the Group will take part in the BoE’s
concurrent stress test from 2020.
Risk Management Framework
3. Risk management
4. Appetite decision
5. Monitor risks/manage events
Risk Management Core Components
Risk Management Cycle
Risk Infrastructure
Risk Culture
Risk culture and governance
Roles and responsibilities: three lines of defence
Strategic planning including risk appetite setting
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Policy framework
Frameworks, risk systems, policies and standards
to manage principal risks:
— Credit risk
— Strategic and enterprise risk
— Conduct risk
— Regulatory and compliance risk
— Operational risk
— Technology risk
— People risk
— Financial crime risk
— Financial risk
Underpinned by operational resilience risk
Control Effectiveness Statement
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VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT
143
RISK
CLASSES
Credit risk
Financial risk
Regulatory, compliance and conduct risk
Operational risk
Technology risk
Financial crime risk
Strategic and enterprise risk
People risk
144
163
183
185
187
189
190
191
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 144
CREDIT
RISK
Strongly performing credit portfolios,
well positioned for growth
Close monitoring, robust policies and a well-controlled
framework support the credit operations of the Group.
Credit risk is the risk that a borrower or counterparty fails to pay
the interest or capital due on a loan or other financial instrument.
Credit risk manifests itself in the financial instruments and/or
products that the Group offers, and those in which the Group
invests (including, among others, loans, guarantees, credit-related
commitments, letters of credit, acceptances, inter-bank transactions,
foreign exchange transactions, swaps and bonds). Credit risk can
be found both on-balance sheet and off-balance sheet.
Risk appetite
The Group controls its levels of credit risk by placing limits on
the amount of risk it is willing to take in order to achieve its
strategic objectives. This involves a defined set of qualitative and
quantitative limits in relation to its credit risk concentrations to one
borrower, or group of borrowers, and to geographical, product and
industry segments. The management of credit risk within the Group
is achieved through ongoing approval and monitoring of individual
transactions, regular asset quality reviews and the independent
oversight of credit decisions and portfolios.
Credit strategies and policies
Credit risks associated with lending are managed through the
application of detailed lending policies and standards which outline
the approach to lending, underwriting criteria, credit mandates,
concentration limits and product terms. Credit risk is managed and
monitored using the credit models that underpin the IRB approval
for the mortgage and business portfolios and the standardised
approach for the personal portfolios. The Group maintains a
dynamic approach to credit management and will take necessary
steps if individual issues are identified or if credit performance
deteriorates, or is expected to deteriorate, due to borrower,
economic or sector-specific weaknesses.
Roles and responsibilities for the management, monitoring and
mitigation of credit risk within the Group are clearly defined in line
with the Group’s RMF.
Significant credit risk strategies and policies are approved, and
reviewed annually, by the Credit Risk Committee. For complex
credit products and services, the Head of Business Risk, Head of
Retail Risk and Credit Risk Committee provide a policy framework
which identifies and quantifies risks and establishes the means
of mitigating such risks. These policies and frameworks are
delegated to, and disseminated under the guidance and control
of the Board and senior management, with appropriate oversight
through governance committees.
Exposures
Credit risk exposures are categorised as mortgages, personal
and business. In terms of loans and advances, credit risk arises
both from amounts loaned and commitments to extend credit
to customers. To ensure appropriate credit limits exist, especially
for business lending, a single large exposure policy is in place and
forms part of the risk appetite measures that are monitored and
reported on a monthly basis. The overall composition and quality
of credit portfolio exposures are monitored and periodically
reported to the Board and, where required, to the relevant
supervisory authorities.
Exposures are also managed in accordance with the large
exposure reporting requirements of the Capital Requirements
Regulation (CRR).
Unless otherwise noted, the amount that best represents the
maximum credit exposure at the reporting date is the carrying
value of the financial asset.
Measurement
The Group uses a combination of strategies and statistical models
that utilise internal and external data to measure the exposure
to credit risk within the portfolios.
Portfolios are assessed using segmentation for measurement,
reporting and monitoring purposes.
For the year ended 30 September 2019, the Group applied
the IRB methodology to mortgage and business exposures
for regulatory capital. All other exposures are measured under
the standardised approach.
Note 3.2 of the consolidated financial statements provides details
of the Group’s approach to the impairment of financial assets and
the calculation of the Group impairment charge.
In the year to 30 September 2019, the following changes have
had a material impact on the Group’s credit risk methodology
and calculation, and how this is presented within this report:
1. The adoption of IFRS 9 ‘Financial Instruments’ with effect
from 1 October 2018; and
2. The acquisition of Virgin Money Holdings (UK) PLC
on 15 October 2018.
The Group has elected not to restate comparative figures on an
IFRS 9 basis as permitted by the standard. Where a comparative
has been presented in the credit risk section of the Risk report,
the basis of preparation is either:
— as at 30 September 2018: representing the audited position
under IAS 39 as originally disclosed in the 2018 Annual Report
and Accounts; or
— as at 1 October 2018: representing the position as at
30 September 2018 (excluding Virgin Money Holdings (UK) PLC)
as amended for the adoption of IFRS 9.
While the overall policies and methodologies developed by the
Group in preparing for its adoption of IFRS 9 on 1 October 2018
have many similarities to those used by Virgin Money Holdings (UK)
PLC, there are differences in the detail relating to the inputs and
processes supporting the ECL calculations. The complexity of the
underlying data, model-related methodology and inputs means
that a single methodology in providing a combined Group ECL view,
while under development, is not possible at this time, with each
subsidiary retaining its own distinct set of IFRS 9 compliant models.
The Group’s statutory impairment charge for the year is £252m,
which includes the effect of the acquired assets that are required
to be assessed under the staging criteria introduced by IFRS 9,
irrespective of the fact that the fair value of the acquired assets
incorporated an adjustment for credit risk. The underlying
impairment charge of £148m excludes the acquisition accounting
impairment impact to aid meaningful period on period comparison.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 145
Key credit metrics
IMPAIRMENT PROVISIONS HELD ON CREDIT EXPOSURES
Business lending
Mortgage and Personal lending
UNDERLYING IMPAIRMENT CHARGE ON CREDIT EXPOSURES
Business lending
Mortgage and Personal lending
ASSET QUALITY MEASURES:
Underlying impairment charge(2) to average customer loans (cost of risk)
90+ days past due (DPD) plus impaired assets to customer loans
Stage 3 assets to customer loans
Total provision to customer loans
Specific provision to impaired assets
Stage 3 provision to Stage 3 loans
30 SEP 2019
(AUDITED)
£M
AS AT
1 OCT 2018(1)
(UNAUDITED)
£M
30 SEP 2018(1)
(AUDITED)
£M
147
215
362
150
74
224
136
59
195
FOR THE YEAR ENDED
30 SEP 2019
(AUDITED)
£M
1 OCT 2018(1)
(UNAUDITED)
£M
30 SEP 2018(1)
(AUDITED)
£M
25
123
148
0.21%
N/a
1.09%
0.50%
N/a
14.32%
N/a
N/a
N/a
N/a(3)
N/a
1.77%
0.68%
N/a
14.55%
15
26
41
0.12%
0.91%
N/a
0.61%
35.50%
N/a
(1) These exclude the impact of the acquisition of Virgin Money Holdings (UK) PLC with September 2018 figures presented on an IAS 39 basis.
(2) Inclusive of gains/losses on assets held at fair value and elements of fraud loss but excludes the acquisition accounting impact on impairment losses
shown on page 280.
(3) An underlying impairment charge was not calculated as at 1 October 2018 and therefore this metric cannot be calculated for that date.
A number of the Group’s key credit metrics are no longer applicable as a result of the change to an IFRS 9 basis of calculating expected
credit losses (ECLs) and have been replaced with metrics appropriate to the revised basis as shown in the table above.
The increase in underlying impairment charge from £41m to £148m primarily reflects a higher charge on our personal exposures which
includes the charge relative to the acquired credit cards portfolio. The charge relative to business and mortgage exposures has also
increased. The cost of risk, at 21bps, is reflective of a return to normalisation, however it remains below our expectation of a long-term
loss rate of 30bps.
Asset quality measures remain resilient, reflective of the focus on responsible credit decisions and controlled risk appetite. The level of
Stage 3 assets remains modest against a growing book. This reflects the credit quality of the portfolios, supported by the low interest
rate environment. The ratio of total provisions to customer loans at 0.50% is reflective of a well-collateralised portfolio, supported by
the increase in the size of the mortgage portfolio which proportionately requires a lower provision coverage and is a key driver of the
overall reduction.
Reconciliation of the impairment loss provision from IAS 39 to IFRS 9
The movement in the Group’s opening impairment provision as a result of adopting an ECL impairment methodology as required by IFRS 9
from 1 October 2018 is illustrated below:
Closing IAS 39 impairment provision as at 30 September 2018
Less: removal of IAS 39 collective provision
Add: introduction of a 12-month ECL calculation (Stage 1)
Add: introduction of a lifetime ECL calculation (Stage 2 and 3)
Add: undrawn balances
Add: multiple economic scenarios
Opening IFRS 9 impairment loss provision as at 1 October 2018
£M
195
(152)
53
121
5
2
224
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146
Removal of IAS 39 collective provision
The IAS 39 concept of a collective impairment provision to cover losses that have been incurred but not yet identified on loans subject
to an individual assessment is no longer an acceptable basis for impairment provisioning under IFRS 9.
Introduction of a 12-month ECL calculation
IFRS 9 requires a 12-month ECL calculation on all assets which have not undergone a significant increase in credit risk since origination.
These are classed as Stage 1 under IFRS 9, with the calculation on loans and advances allocating the ECL at an individual account level.
The 12-month ECL calculation is based on the possibility of default occurring within 12 months of the reporting date.
Introduction of a lifetime ECL calculation
IFRS 9 requires a lifetime ECL calculation where a financial asset has been assessed as experiencing a significant increase in credit risk
based on the Group’s staging criteria. These can be classed as either Stage 2 or Stage 3 under IFRS 9, with the calculation on loans and
advances allocating the ECL at an individual account level. Not all of these accounts would have been included in the IAS 39 collective
provision, with the quantum of the ECL calculation also higher due to the requirement for lifetime losses to be included. The lifetime ECL
calculation is based on the possibility of credit losses occurring over the lifetime of the asset.
Undrawn balances
IFRS 9 requires that impairment allowances be held on an expected loss basis rather than the incurred loss basis under IAS 39. This change
has brought into scope pipeline exposures where an irrevocable commitment has been made to a customer, but no drawdown had occurred
at the IFRS 9 adoption date, and for which no impairment allowance was held previously.
Multiple economic scenarios
This represents the difference, at adoption of IFRS 9, between calculated provisions under the Group’s base scenario and the final
aggregate position over the three scenarios (base, mild upside and severe downside).
Maximum exposure to credit risk (audited)
The table below shows the maximum exposure to credit risk including derivatives. The maximum exposure is shown gross, before the effect
of mitigation through the use of master netting and collateral agreements. The table also shows the maximum amount of commitments
from the Group’s banking operations.
Cash and balances with central banks (note 3.4)
Financial instruments at fair value through other comprehensive income (note 3.7)
Due from other banks
Financial assets available for sale
Other financial assets at fair value (note 3.5)
Derivative financial assets (note 3.6)
Loans and advances to customers (note 3.1)
Contingent liabilities (note 5.1)
Other credit commitments (note 5.1)
Maximum credit risk exposure
2019
£M
10,296
4,328
1,018
–
267
366
73,095
89,370
113
15,158
104,641
2018(1)
£M
6,573
–
693
1,562
362
262
32,748
42,200
119
7,016
49,335
(1) The comparative year has been restated in line with the current year presentation. £34m of derivative collateral in relation to clearing houses has been
reclassified between other liabilities and due to other banks and £143m has been reclassified between other assets and due from other banks.
All Treasury-related financial assets are classed as Stage 1 financial assets under IFRS 9.
£8.4bn of cash is held with the BoE (2018: £4.8bn, excluding Virgin Money Holdings (UK) PLC). Due from other banks is all with senior
investment grade counterparties. Financial instruments at fair value through other comprehensive income and the credit rating of
counterparties are discussed in note 3.7.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT
147
Mitigation
The management and mitigation of credit risk within the Group is achieved through both approval and monitoring of individual transactions
and asset quality, analysis of the performance of the various credit risk portfolios, and the independent oversight of credit portfolios across
the Group. Portfolio monitoring techniques cover such areas as product, industry or geographic concentrations and delinquency trends.
There is regular analysis of the borrower’s ability to meet their interest and capital repayment obligations with early support and mitigation
steps taken where required. Credit risk mitigation is also supported, in part, by obtaining collateral, and corporate and personal guarantees
where appropriate.
Other mitigating measures are described below.
Specialist expertise
Credit quality is managed and monitored by skilled teams including, where required, specialists who provide dedicated support for
customers experiencing financial difficulty.
Credit decisions utilise credit scoring techniques and manual underwriting, as appropriate. These tasks are performed by skilled and
competent specialists acting within agreed delegated authority levels set in accordance with their experience and capabilities.
Credit policy and adherence to policy standards
Specialist teams oversee credit portfolio performance as well as adherence to credit risk policies and standards. Activities include targeted
risk-based reviews, providing an assessment of the effectiveness of internal controls and risk management practices. Bespoke assignments
are also undertaken in response to emerging risks and regulatory requirements. Independent assurance reviews are also regularly
undertaken by Internal Audit.
Portfolio oversight
Portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are
managed in terms of credit risk exposures, are regularly reviewed. This entails the production and analysis of regular portfolio monitoring
reports for review by senior management.
Controls over rating systems
The Group has an Independent Model Validation Unit that sets common minimum standards. The standards are designed to ensure risk
models and associated rating systems are developed consistently and are of sufficient quality to support business decisions and meet
regulatory requirements. The Group performs an annual self-assessment exercise of its ratings systems to ensure ongoing CRR compliance
supported by all three lines of defence.
Stress testing
Stress test scenarios are regularly prepared with the outcomes reviewed and relevant actions taken. Outputs will typically include
impairment charges, RWA, and write-offs. Management will consider how each stress scenario may impact on different components of the
credit portfolio. The primary method applied uses migration matrices, modelling the impact of PD rating migrations and changes in portfolio
default rates to changes in macroeconomic factors to obtain a stressed position for the credit portfolios. Loss given default (LGD) is
stressed based on a range of factors, including property price movements.
The Group also utilises other instruments and techniques across its wider balance sheet. These are summarised below:
Derivatives
The Group maintains control limits on net open derivative positions. At any one time, the amount subject to credit risk is limited to
the current fair value of instruments that are favourable to the Group (i.e. assets where their fair value is positive), which, in relation
to derivatives, may only be a small fraction of the contract, or notional values used to express the volume of instruments outstanding.
This credit risk is managed as part of the customer’s overall exposure together with potential exposures from market movements.
Master netting agreements
The Group further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with whom
it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets
and liabilities, as transactions are usually settled on a gross basis. However, credit risk associated with the favourable contracts is reduced
by a master netting arrangement to the extent that, if any counterparty failed to meet its obligations in accordance with the agreed terms,
all amounts with the counterparty are terminated and settled on a net basis. Derivative financial instrument contracts are typically subject
to the International Swaps and Derivatives Association (ISDA) master netting agreements, as well as Credit Support Annexes (CSA), where
relevant, around collateral arrangements attached to those ISDA agreements. Derivative exchange or clearing counterparty agreements
exist where contracts are settled via an exchange or clearing house.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 148
Credit assessment and mitigation
Credit risk is managed in accordance with lending policies, the Group’s risk appetite and the RMF. Lending policies and performance
against risk appetite are reviewed regularly.
The Group uses a variety of lending criteria when assessing applications for mortgage and personal customers. The approval process uses
credit scorecards, as well as manual underwriting, and involves a review of an applicant’s previous credit history using information held by
credit reference agencies.
The Group also assesses the affordability of the borrower under stressed scenarios including increased interest rates. In addition, the
Group has in place quantitative thresholds, such as maximum limits on the level of borrowing to income and the ratio of borrowing to
collateral. Some of these limits relate to internal approval levels and others are hard limits above which the Group will reject the application.
For residential mortgages, the Group’s policy is to accept only standard applications with an LTV less than 95%. The Group has maximum
percentage LTV limits which depend upon the loan size. Product types such as BTL and residential interest-only mortgages are controlled
by transactional limits covering both LTV and value.
For business customers, credit risk is further mitigated by focusing on business sectors where the Group has specific expertise and through
limiting exposures on higher value loans and to certain sectors. When making credit decisions for business customers the Group will
routinely assess the primary source of repayment, most typically the cash generated by the customer through its normal trading cycle.
Secondary sources of repayment are also considered and while not the focus of the lending decision, collateral will be taken when
appropriate. The Group seeks to obtain security cover, and where relevant, personal guarantees from borrowers.
Monitoring
Credit policies and procedures, which are subject to ongoing review, are documented and disseminated in a form that supports the credit
operations of the Group.
— Credit Risk Committee (CRC): The CRC ensures that the credit RMF and associated policies remain effective. The Committee has
oversight of the quality, composition and concentrations of the credit risk portfolio and considers strategies to adjust the portfolio
to react to changes in market conditions.
— RAS measures: Measures are monitored monthly and reviewed bi-annually, at a minimum, or where specific action is merited, to ensure
that the measures accurately reflect the Group’s risk appetite, strategy and concerns relative to the wider macro environment.
All measures are subject to extensive engagement with the Executive Leadership Team and the Board, and are subject to endorsement
from executive governance committees prior to Board approval. Regulatory engagement is also scheduled as appropriate.
— Risk concentration: Concentration of risk is managed by counterparty, product, geographical region and industry sector. In addition,
single name exposure limits exist to control exposures to a single counterparty. Concentrations are also considered through the RAS
process focusing particularly on comparing the portfolio against market benchmarks.
— Single large exposure excesses: All excesses are reported to the Transactional Credit Committee (TCC) and the Head of Business Risk.
Any exposure which continues or is expected to continue beyond 30 days will also be submitted to the TCC with proposals to correct
the exposure within an agreed period, not to exceed 12 months.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 149
Concentration of lending assets
The following tables show the levels of concentration of the Group’s loans and advances.
Gross loans and advances to customers(1)
Property – mortgage
Instalment loans to individuals and other personal lending (including credit cards)
Agriculture, forestry, fishing and mining
Manufacturing
Wholesale and retail
Property – construction
Financial, investment and insurance
Government and public authorities
Other commercial and industrial
Impairment provisions on credit exposures
Fair value hedge adjustment
30 SEP 2019
(AUDITED)
£M
60,391
5,280
1,494
793
766
167
104
30
4,221
73,246
(362)
211
73,095
PRO FORMA(2)
30 SEP 2018
(UNAUDITED)
£M
59,302
4,471
1,569
836
766
243
113
25
3,543
70,868
(315)
75
70,628
REPORTED(3)
30 SEP 2018
(AUDITED)
£M
24,540
1,239
1,676
853
779
246
116
41
3,791
33,281
(1) The Group has a portfolio of fair valued business loans of £253m (2018: £362m) which are classified separately as financial assets at fair value through
profit or loss on the balance sheet. At 30 September 2019 the most significant concentrations of exposure were in agriculture, forestry, fishing and mining
(29%), real estate (25%), health and social work (15%), and government and public authorities (7%).
(2) Represents position for the Group as if Virgin Money Holdings (UK) PLC had always been part of the Group.
(3) The comparative year has not been restated to align with the current year presentation.
Contingent liabilities and credit-related commitments
Property – mortgage
Instalment loans to individuals and other personal lending (including credit cards)
Agriculture, forestry, fishing and mining
Manufacturing
Wholesale and retail
Property – construction
Financial, investment and insurance
Government and public authorities
Other commercial and industrial
30 SEP 2019
(AUDITED)
£M
2,642
9,069
302
582
472
119
103
350
1,632
15,271
PRO FORMA
30 SEP 2018
(UNAUDITED)
£M
3,687
7,424
294
587
477
–
84
276
1,680
14,509
REPORTED
30 SEP 2018
(AUDITED)
£M
1,937
1,800
294
587
477
–
84
276
1,680
7,135
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT
150
Gross loans and advances by IFRS 9 stage allocation (audited)
The distribution of the Group’s gross loans and advances by IFRS 9 stage allocation is analysed below.
Gross loans and advances to customers
as at 30 September 2019
Mortgages
Personal of which:
– credit cards
– personal overdrafts
– other personal lending
Business
Closing balance
Gross loans and advances to customers(1)
as at 1 October 2018 (excluding Virgin Money)
Mortgages
Personal of which:
– credit cards
– personal overdrafts
– other personal lending
Business
Closing balance
STAGE 1
£M
58,120
4,787
3,806
53
928
5,018
67,925
STAGE 1
£M
23,572
1,143
370
50
723
4,741
29,456
STAGE 2
<30 DPD
£M
1,637
392
353
–
39
2,280
4,309
STAGE 2
<30 DPD
£M
605
28
1
–
27
2,161
2,794
STAGE 2
>30 DPD
£M
168
32
25
1
6
5
205
STAGE 2
>30 DPD
£M
84
10
3
1
6
9
103
STAGE 2
TOTAL
£M
1,805
424
378
1
45
2,285
4,514
STAGE 2
TOTAL
£M
689
38
4
1
33
2,170
2,897
STAGE 3
£M
363
61
46
4
11
272
696
STAGE 3
£M
279
22
7
4
11
263
564
STAGE 3
POCI
£M
103
8
8
–
–
–
111
STAGE 3
POCI
£M
–
–
–
–
–
–
–
TOTAL
£M
60,391
5,280
4,238
58
984
7,575
73,246
TOTAL
£M
24,540
1,203
381
55
767
7,174
32,917
(1) Excludes loans designated at fair value through profit and loss, balances due from customers on acceptances, accrued interest and deferred and
unamortised fee income.
Overall, the lending portfolio increased by £40.3bn between 1 October 2018 and 30 September 2019. In addition to underlying growth,
the increase reflects the acquisition of Virgin Money Holdings (UK) PLC on 15 October 2018, with the acquired portfolio totalling £39.5bn
as at 30 September 2019. Of this, £111m is Stage 3 purchased or originated credit impaired (POCI), representing the acquired assets that
were classed as credit impaired at date of acquisition.
Mortgages
With total gross loans and advances of £60.4bn as at 30 September 2019, there has been underlying growth in the portfolio year-on-year,
although the increase in lending balance results mainly from the impact of the acquired portfolio. Over 95% are classed as Stage 1. Stage 3
POCI for Mortgages reduced from £137m on acquisition to £103m as at 30 September 2019 as a result of customer redemptions and
balance paydowns.
Personal
Of the £5.3bn total personal portfolio, the majority is credit cards, at £4.2bn. The year-on-year growth results mainly from the acquired
credit cards portfolio, however, underlying growth is evident on both the credit card and other personal lending portfolios. The personal
portfolio evidences stable performance with 91% of balances classed as Stage 1. Stage 3 POCI has reduced from £34m on acquisition to
£8m as at 30 September 2019, due to write-offs and customer balance paydowns.
Business
At £7.6bn, business lending continues to evidence core underlying growth. The proportion of lending in Stage 2 has remained stable at 30%
year-on-year, reflective of the Group’s controlled and cautious approach to identifying customers experiencing financial difficulty and,
where appropriate, providing early intervention assistance such as forbearance, to support customers in meeting their financial
commitments to the Group.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 151
Credit quality of loans and advances
The following tables highlight the significant exposure to credit risk in respect of which ECL model is applied for the Group’s mortgage,
personal and business loans and advances, including loan commitments and financial guarantee contracts, based on the following
risk gradings:
Credit risk exposure, by internal PD rating, by IFRS 9 stage allocation (audited)
The distribution of the Group’s credit exposures, by internal PD rating is analysed below.
As at 30 September 2019
MORTGAGES
<0.15
0.15 to <0.25
0.25 to <0.50
0.50 to <0.75
0.75 to <2.50
2.50 to <10.00
10.00 to <100.00
100.00 (Default)
Total
PERSONAL
<0.15
0.15 to <0.25
0.25 to <0.50
0.50 to <0.75
0.75 to <2.50
2.50 to <10.00
10.00 to <100.00
100.00 (Default)
Total
BUSINESS
<0.15
0.15 to <0.25
0.25 to <0.50
0.50 to <0.75
0.75 to <2.50
2.50 to <10.00
10.00 to <100.00
100.00 (Default)
Total
GROSS CARRYING AMOUNT
STAGE 1
12-MONTH
ECLS
£M
STAGE 2
(NOT CREDIT
IMPAIRED)
LIFETIME ECLS
£M
STAGE 3
(CREDIT
IMPAIRED)
LIFETIME ECLS
£M
STAGE 3
(POCI)
LIFETIME ECLS
£M
38,816
5,836
7,983
2,422
2,648
376
39
–
58,120
93
68
1,326
967
1,743
553
37
–
4,787
530
440
718
537
2,199
592
2
–
5,018
389
103
245
96
455
274
243
–
1,805
–
–
6
8
36
231
143
–
424
5
17
52
101
1,019
919
172
–
2,285
–
–
–
–
–
–
–
363
363
–
–
–
–
–
–
–
61
61
–
–
–
–
–
–
–
272
272
–
–
–
–
–
–
–
103
103
–
–
–
–
–
–
–
8
8
–
–
–
–
–
–
–
–
–
TOTAL
£M
39,205
5,939
8,228
2,518
3,103
650
282
466
60,391
93
68
1,332
975
1,779
784
180
69
5,280
535
457
770
638
3,218
1,511
174
272
7,575
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 152
As at 1 October 2018 (excluding Virgin Money)
MORTGAGES
<0.15
0.15 to <0.25
0.25 to <0.50
0.50 to <0.75
0.75 to <2.50
2.50 to <10.00
10.00 to <100.00
100.00 (Default)
Total
PERSONAL
<0.15
0.15 to <0.25
0.25 to <0.50
0.50 to <0.75
0.75 to <2.50
2.50 to <10.00
10.00 to <100.00
100.00 (Default)
Total
BUSINESS
<0.15
0.15 to <0.25
0.25 to <0.50
0.50 to <0.75
0.75 to <2.50
2.50 to <10.00
10.00 to <100.00
100.00 (Default)
Total
GROSS CARRYING AMOUNT
STAGE 1
12-MONTH
ECLS
£M
STAGE 2
(NOT CREDIT
IMPAIRED)
LIFETIME ECLS
£M
STAGE 3
(CREDIT
IMPAIRED)
LIFETIME ECLS
£M
STAGE 3
(POCI)
LIFETIME ECLS
£M
8,085
4,292
6,199
1,791
2,813
370
22
–
23,572
113
97
249
153
354
166
11
–
1,143
571
371
549
700
1,930
594
26
–
4,741
13
27
77
49
205
194
124
–
689
–
–
–
–
2
15
21
–
38
8
13
34
157
917
943
98
–
2,170
–
–
–
–
–
–
–
279
279
–
–
–
–
–
–
–
22
22
–
–
–
–
–
–
–
263
263
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
TOTAL
£M
8,098
4,319
6,276
1,840
3,018
564
146
279
24,540
113
97
249
153
356
181
32
22
1,203
579
384
583
857
2,847
1,537
124
263
7,174
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 153
ECL impairment allowance by IFRS 9 stage allocation (audited)
The following tables disclose the impairment allowance by portfolio:
As at 30 September 2019
Mortgages
Personal of which:
– credit cards
– personal overdrafts
– other personal lending
Business
Closing balance
As at 1 October 2018 (excluding Virgin Money)
Mortgages
Personal of which:
– credit cards
– personal overdrafts
– other personal lending
Business
Closing balance
STAGE 1
£M
6
53
42
2
9
20
79
STAGE 1
£M
3
15
6
2
7
35
53
STAGE 2
<30 DPD
£M
5
71
65
–
6
72
148
STAGE 2
<30 DPD
£M
2
5
–
–
5
71
78
STAGE 2
>30 DPD
£M
4
16
12
1
3
–
20
STAGE 2
>30 DPD
£M
1
7
1
1
5
–
8
STAGE 2
TOTAL
£M
9
87
77
1
9
72
168
STAGE 2
TOTAL
£M
3
12
1
1
10
71
86
STAGE 3
£M
26
37
28
3
6
55
118
STAGE 3
£M
23
18
7
3
8
44
85
STAGE 3
POCI
£M
(1)
(2)
(2)
–
–
–
(3)
STAGE 3
POCI
£M
–
–
–
–
–
–
–
TOTAL
£M
40
175
145
6
24
147
362
TOTAL
£M
29
45
14
6
25
150
224
The Group’s impairment allowance has increased by £138m in the period from 1 October 2018 to 30 September 2019, which is primarily
due to the impact of the acquisition of Virgin Money Holdings (UK) PLC. Acquisition accounting requires that the acquired loans and
advances balance is fair valued on acquisition, resulting in a nil ECL allowance on acquisition. The loans and advances balance is then
subject to the IFRS 9 ECL methodology with a full ECL allowance calculated, which resulted in a charge of £67m being recognised in the
Group income statement immediately following the acquisition date. The ECL allowance for the acquired portfolio subsequently increased
to £136m as at 30 September 2019.
Mortgages
The Mortgage impairment allowance of £40m is reflective of the level of collateral held and the low expected credit loss for this portfolio.
The increase of £11m from 2018 is due to the impact of the acquired mortgage portfolio.
Personal
The total impairment allowance for the personal portfolio of £175m has increased by £130m in the period. This is primarily due to the level
of impairment allowance relative to the acquired credit cards portfolio, where the ECL at point of acquisition was £60m and subsequently
increased to £125m as at 30 September 2019. The underlying impairment allowance for the personal exposures increased over the period
as a result of the combined effect of portfolio growth, higher default rates due to seasoning and maturation of the portfolio and routine
recalibration of underlying provisioning models.
Business
Total impairment allowance for the business portfolio decreased by £3m to £147m. This is the result of a £15m reduction in Stage 1 ECL,
primarily due to IFRS 9 modelling adjustments, partially offset by an £11m increase in Stage 3 due to a higher level of single name,
individually assessed provisions.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 154
ECL impairment allowance coverage ratios (audited)
As at 30 September 2019
Mortgages
Personal of which:
– credit cards
– personal overdrafts
– other personal lending
Business
Closing balance
As at 1 October 2018 (excluding Virgin Money)
Mortgages
Personal of which:
– credit cards
– personal overdrafts
– other personal lending
Business
Closing balance
STAGE 1
%
0.01
1.15
1.11
5.00
1.09
0.40
0.12
STAGE 1
%
0.01
1.38
1.78
3.66
1.03
0.73
0.18
STAGE 2
<30 DPD
%
0.29
18.22
18.49
14.17
15.56
3.13
3.41
STAGE 2
<30 DPD
%
0.32
18.17
9.52
10.02
18.61
3.25
2.77
STAGE 2
>30 DPD
%
2.26
51.18
46.91
66.02
68.29
2.27
9.68
STAGE 2
>30 DPD
%
1.61
65.20
53.16
59.21
71.71
5.13
7.86
STAGE 2
TOTAL
%
0.47
20.64
20.35
56.00
22.35
3.13
3.69
STAGE 2
TOTAL
%
0.48
30.04
39.89
51.07
28.05
3.26
2.95
STAGE 3
%
7.13
62.14
60.39
91.21
60.64
19.99
16.89
STAGE 3
%
8.19
80.36
94.32
78.12
72.56
16.79
15.05
STAGE 3
POCI
%
(0.80)
(22.61)
(22.61)
–
–
–
(2.30)
STAGE 3
POCI
%
–
–
–
–
–
–
–
TOTAL
%
0.07
3.39
3.42
11.41
2.75
1.93
0.50
TOTAL
%
0.12
3.78
3.94
10.06
3.24
2.08
0.68
The impact of the Virgin Money Holdings (UK) PLC acquisition results in a proportionately higher volume of the total portfolio being
mortgage lending which requires a lower proportionate impairment allowance, consequently the total portfolio coverage has reduced
by 18bps in line with the revised portfolio profile.
Mortgages
The coverage ratio reduced by 5bps in the period as a result of the composition, quality and value of the acquired mortgage portfolio.
Personal
The total coverage ratio reduced by 39bps, primarily in the credit card portfolio where the quality of the acquired portfolio, in particular
the growing Virgin Atlantic credit card portfolio, is stronger than the pre-existing portfolios.
Business
Coverage for the business portfolio decreased by 15bps, reflective of portfolio growth in Stage 1 where proportionately less provision
coverage is required, and a small number of significant write-offs from Stage 3.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 155
Reconciliation of movement in gross balances and impairment loss allowance (audited)
The following tables explain the changes in the loss allowance and gross carrying value of the portfolios between 30 September 2018 and
30 September 2019. Values are calculated using the individual customer account balances, and the stage allocation is taken as at the end
of each month. The monthly position of each account is aggregated to report a net closing position for the period, thereby incorporating all
movements an account has made during the year.
NON-CREDIT IMPAIRED
CREDIT IMPAIRED
STAGE 1
STAGE 2
STAGE 3
STAGE 3 POCI
GROSS
LOANS
£M
ECL
£M
GROSS
LOANS
£M
ECL
£M
GROSS
LOANS
£M
MORTGAGES
Opening balance at 30 September 2018
IFRS 9 restatements
Opening balance at 1 October 2018
Acquisition of Virgin Money
New assets originated or purchased
Movements:
–
–
23,572
34,641
10,089
Transfer to lifetime ECL
(non-credit impaired)
Transfer to credit impaired
Transfer to 12-month ECL
Transfer from credit impaired
Repayments and other movements
Changes to model methodology
Repaid or derecognised (exc write-offs)
Decrease due to write-offs
Cash recoveries
Individually assessed impairment
P&L charge
–
Closing balance at 30 September 2019 58,120
–
–
3
7
1
(4)
(1)
1
–
–
–
(1)
–
–
–
6
–
–
689
–
3
3,835
(185)
(2,401)
72
(48)
–
(160)
–
–
–
1,805
–
–
3
–
–
22
(4)
(9)
1
(3)
–
(1)
–
–
–
9
–
–
279
–
1
–
276
–
(105)
(17)
–
(63)
(8)
–
–
363
ECL
£M
–
–
23
–
–
–
11
–
(4)
–
–
(2)
(3)
–
1
26
GROSS
LOANS
£M
–
–
–
137
–
–
–
–
–
(14)
–
(20)
–
–
–
103
NON-CREDIT IMPAIRED
CREDIT IMPAIRED
STAGE 1
STAGE 2
STAGE 3
STAGE 3 POCI
PERSONAL
Opening balance at 30 September 2018
IFRS 9 restatements
Opening balance at 1 October 2018
Acquisition of Virgin Money
New assets originated or purchased
Movements:
Transfer to lifetime ECL
(non-credit impaired)
Transfer to credit impaired
Transfer to 12-month ECL
Transfer from credit impaired
Repayments and other movements
Changes to model methodology
Repaid or derecognised (exc write-offs)
Decrease due to write-offs
Cash recoveries
Individually assessed impairment
P&L charge
–
Closing balance at 30 September 2019 4,787
ECL
£M
–
–
15
60
25
(48)
(1)
12
–
(5)
(1)
(4)
–
–
–
53
GROSS
LOANS
£M
–
–
38
–
2
970
(95)
(422)
2
(24)
(32)
(15)
–
–
–
424
ECL
£M
–
–
12
–
–
194
(56)
(70)
1
17
(6)
(5)
–
–
–
87
GROSS
LOANS
£M
–
–
22
–
1
–
125
–
(7)
5
–
(7)
(78)
–
–
61
ECL
£M
–
–
18
–
1
–
91
–
(6)
(2)
–
(6)
(165)
27
79
37
GROSS
LOANS
£M
–
–
–
34
–
–
–
–
–
(3)
–
(1)
(22)
–
–
8
(3,851)
(92)
2,393
29
(2,412)
–
(6,249)
–
–
GROSS
LOANS
£M
–
–
1,143
3,042
1,387
(931)
(28)
403
3
(20)
32
(244)
–
–
TOTAL
PROVISION
(IAS 39)
£M
ECL
£M
TOTAL
GROSS
LOANS
£M
TOTAL
PROVISIONS
£M
–
–
–
–
–
–
–
–
–
(1)
–
–
–
–
–
(1)
32
(32)
–
–
– 24,540
– 34,778
– 10,093
–
–
–
–
–
–
–
–
–
(16)
(1)
(8)
(4)
(2,491)
–
(6,492)
(8)
–
–
–
– 60,391
32
(32)
29
7
1
18
6
(8)
(3)
(4)
–
(4)
(3)
–
1
40
TOTAL
PROVISION
(IAS 39)
£M
ECL
£M
TOTAL
GROSS
LOANS
£M
TOTAL
PROVISIONS
£M
–
–
–
–
–
–
–
–
–
(2)
–
–
–
–
–
(2)
27
(27)
–
–
– 1,203
– 3,076
– 1,390
–
–
–
–
–
–
–
–
–
39
2
(19)
(2)
(42)
–
(267)
(100)
–
–
–
– 5,280
27
(27)
45
60
26
146
34
(58)
(5)
8
(7)
(15)
(165)
27
79
175
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT
156
BUSINESS
Opening balance at 30 September 2018
IFRS 9 restatements
Opening balance at 1 October 2018
Acquisition of Virgin Money
New assets originated or purchased
Movements:
Transfer to lifetime ECL
(non-credit impaired)
Transfer to credit impaired
Transfer to 12-month ECL
Transfer from credit impaired
Repayments and other movements
Changes to model methodology
Repaid or derecognised (exc write-offs)
Decrease due to write-offs
Cash recoveries
Individually assessed impairment
P&L charge
–
Closing balance at 30 September 2019 5,018
NON-CREDIT IMPAIRED
CREDIT IMPAIRED
STAGE 1
STAGE 2
STAGE 3
STAGE 3 POCI
GROSS
LOANS
£M
–
–
4,741
–
8,077
(1,770)
(33)
823
9
1,448
(1,784)
(6,493)
–
–
ECL
£M
–
–
35
–
59
(8)
–
4
–
(18)
(4)
(48)
–
–
GROSS
LOANS
£M
–
–
2,170
–
999
1,765
(216)
(827)
54
(196)
–
(1,464)
–
–
–
20
–
2,285
ECL
£M
–
–
71
–
65
41
(22)
(19)
4
3
–
(71)
–
–
–
72
GROSS
LOANS
£M
–
–
263
–
44
–
249
–
(63)
(50)
–
(142)
(29)
–
–
272
ECL
£M
–
–
44
–
6
–
23
–
(8)
(7)
–
(7)
(31)
1
34
55
GROSS
LOANS
£M
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
TOTAL
PROVISION
(IAS 39)
£M
ECL
£M
TOTAL
GROSS
LOANS
£M
TOTAL
PROVISIONS
£M
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
136
(136)
–
–
– 7,174
–
–
– 9,120
(5)
–
–
–
(4)
–
–
–
– 1,202
(1,784)
–
(8,099)
–
(29)
–
–
–
–
–
– 7,575
136
(136)
150
–
130
33
1
(15)
(4)
(22)
(4)
(126)
(31)
1
34
147
The contractual amount outstanding on loans and advances that were written off during the reporting period or still subject to enforcement
activity was £3.7m.
IFRS 9 restatements
At adoption of IFRS 9, the provision balances previously calculated under IAS 39 methodology are reversed out.
Opening balance at 1 October 2018
The day 1 balance sheet positions calculated under the IFRS 9 methodology applies a 12-month ECL for assets in Stage 1 and a lifetime
ECL for assets in Stage 2 and Stage 3.
Acquisition of Virgin Money
The opening value of the acquired assets; purchased at fair value. All assets classed as Stage 1 at point of acquisition, with the exception
of those assets assessed as credit impaired which are classed as Stage 3 POCI.
New assets originated or purchased
The balance and ECL calculated on newly opened or originated assets. Assets where the term has ended, and a new facility has been
provided are reported as new assets.
Transfer to lifetime ECL (non-credit impaired)
IFRS 9 requires a lifetime ECL calculation where an asset has been assessed as experiencing a significant increase in credit risk,
as determined by the Group’s staging criteria. The non-credit impaired movements are classed as Stage 2.
Transfer to credit impaired
IFRS 9 requires a lifetime ECL calculation where an asset has been assessed as experiencing a significant increase in credit risk,
as determined by the Group’s staging criteria. The credit impaired movements are classed as Stage 3.
Transfer to 12-month ECL
IFRS 9 requires a 12-month ECL calculation where an asset, that had previously been classed as Stage 2, has reverted back to the
conditions observed at the initial credit assessment.
Transfer from credit impaired
IFRS 9 requires that where an asset, that had previously been classed as Stage 3, has reverted back to the conditions observed at the
initial credit assessment, a 12-month ECL should be calculated.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT
157
Repayments and other movements
Movements due to customer repayment and other minor movements not captured under any other category.
Changes in model methodology
ECL value changes resulting from a change to an underlying model methodology.
Repaid or derecognised (excluding write-offs)
ECL impact from customer repayment or derecognition of all or part of an asset, other than that resulting from a write-off.
Decrease due to write-offs
ECL impact due to the reduction of all, or part, of an asset balance due to a write-off approved by the Group. ECL release may appear
higher than the asset balance on some occasions as a result of the initial ECL lifetime being released, in addition to the individually
assessed provision applied for the asset balance write-off.
Cash recoveries
ECL impact of payments received on assets that had previously been written off.
Individually assessed profit and loss charge
The charge taken to profit or loss where an individually assessed provision has been recognised or a direct write-off has been applied to an
asset balance and reported separately from IFRS 9 Stage 3 provision.
Collateral
Collateral held as security and other credit enhancements
The Group evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Group upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held can vary,
but may include:
— specific charges over defined assets of the counterparty;
— a floating charge over all assets and undertakings of an entity;
— specific or interlocking guarantees; and
— loan agreements which include affirmative and negative covenants and, in some instances, guarantees of counterparty obligations.
Generally, the Group does not take possession of collateral it holds as security or call on other credit enhancements that would result
in recognition of an asset on its balance sheet.
It is the Group’s policy to dispose of repossessed properties with the proceeds used to reduce or repay the outstanding balance. In general,
the Group does not occupy repossessed properties for its own business use.
Mortgage lending by average LTV (audited)
The LTV ratio of mortgage lending, coupled with the relationship of the debt to customers’ income, is integral to the credit quality of these
loans. The table below sets out the indexed LTV analysis of the Group’s mortgage stock:
LTV(2)
Less than 50%
50% to 75%
76% to 80%
81% to 85%
86% to 90%
91% to 95%
96% to 100%
Greater than 100%
Unknown
2019
%
35
48
6
5
4
2
–
–
–
100
2018(1)
%
31
51
6
5
4
2
–
–
1
100
(1) 30 September 2018 shown as reported, excluding Virgin Money.
(2) LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance. Currently the Clydesdale Bank PLC portfolio is indexed using the MIAC
Acadametrics indices at a given date, while the Virgin Money Holdings (UK) PLC portfolio is indexed using the Markit indices. The Group view is a combined
summary of the two portfolios. ‘Unknown’ in the prior period represented loans where data was not available due to front book data matching and a de
minimis amount due to weaknesses in historic data capture processes.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT
158
Residential mortgages
Residential property is the Group’s main source of collateral and means of mitigating loss in the event of the default credit risk inherent in its
residential mortgage portfolios. All lending activities are supported by an appropriate form of valuation using either professional or indexed
(subject to policy rules and confidence levels) valuations.
Commercial property
Commercial property is the Group’s main source of collateral on business lending and means of mitigating loss in the event of default.
Collateral for the majority of commercial loans comprises first legal charges over freehold or long leasehold property (including formal
Companies House registration where appropriate). All commercial property collateral is subject to an independent, professional valuation
when taken and thereafter subject to periodic review in accordance with policy requirements.
Non-property related collateral
In addition to residential and commercial property based security, the Group also takes other forms of collateral when lending. This can
involve obtaining security against the underlying loan through the use of cash collateral and/or netting agreements, both of which reduce
the original exposure by the amount of collateral held, subject to volatility and maturity adjustments where applicable.
The Group also operates a policy of obtaining security against the underlying loan via the use of guarantees, which can be either limited
or unlimited, making the guarantor liable for only a portion or all of the debt.
The following table shows the total non-property collateral held by sector at 30 September in terms of cash, guarantees (these guarantors
are predominantly other financial institutions who are considered to be of a high credit quality) and netting. The exposure amount shown
below is the total gross exposure (before any credit risk mitigation and after credit conversion factors have been applied where applicable)
for arrangements which have some form of associated collateral held against it and is not the total exposure for each asset class,
as disclosed elsewhere in this section.
2019 (audited)
Exposure classes
Corporates
Total IRB approach
Central governments or central banks
Regional governments
or local authorities
Institutions
Corporates
Secured by mortgages
on residential real estate
Secured by mortgages
on commercial real estate
Exposures in default
Total standardised approach
Total
–
–
4
–
–
–
3,813
3,825
2018 (audited)(1)
Central government or central banks
Corporates
Financial institutions
Exposures in default
Regional government or local authorities
Secured by mortgages on commercial real estate
Secured by mortgages on residential property
CASH
£M
12
12
3,809
GUARANTEE
£M
–
–
–
NETTING
£M
69
69
–
DEBT SECURITIES
£M
–
–
–
–
–
6
–
–
–
6
6
CASH
£M
3,057
28
–
–
–
–
–
3,085
110
–
–
–
–
–
110
179
GUARANTEE
£M
–
15
–
–
–
–
–
15
–
304
–
–
–
–
304
304
NETTING
£M
–
75
–
–
83
–
–
158
TOTAL
£M
81
81
3,809
110
304
10
–
–
–
4,233
4,314
TOTAL
£M
3,057
118
–
–
83
–
–
3,258
EXPOSURE
£M
203
203
5,695
110
360
10
2
1
–
6,178
6,381
EXPOSURE
£M
4,525
180
–
1
83
38
4
4,831
(1) All exposures were measured under the standardised approach as at 30 September 2018.
The increase in cash collateral held and corresponding exposure is due to increased repurchase (repo) and similar transactions outstanding
at 30 September 2019 (including TFS drawings), reflected within central governments or central banks. The new debt securities collateral
held and corresponding exposure in financial institutions is due to a new repo where UK Gilts were placed as security.
Corporates is the largest sector utilising other risk mitigation techniques, with all three methods utilised dependent on credit quality.
The extent to which these will be used is dependent on the specific circumstances of the customer.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 159
Forbearance
Forbearance is considered to take place when the Group grants concessions to assist customers who are experiencing, or who are about
to experience, difficulties in meeting their financial commitments to the Group. The Group’s forbearance policies and definitions comply
with the guidance established by the European Banking Authority for financial reporting. Forbearance concessions include the granting
of more favourable terms and conditions than those provided either at drawdown of the facility or which would not ordinarily be available
to other customers with a similar risk profile. Forbearance parameters are regularly reviewed and refined as necessary to ensure they are
consistent with the latest industry guidance and prevailing practice, as well as ensuring that they adequately capture and reflect the most
recent customer behaviours and market conditions. The Group makes every effort to treat customers fairly and aligns its forbearance
practices to that principle.
While forbearance alone is not necessarily an indicator of impaired status, it is a trigger for a review of the customer’s credit profile
and forbearance is only granted when there is a realistic prospect of the customer repaying all facilities in full. If there is any concern over
future cash flows and the Group incurring a loss, then forborne loans will also be classified as impaired in accordance with the Group’s
impairment policy.
Exposures classified as forborne and performing at the date forbearance measures are granted, continue to be reported as subject to
forbearance for a minimum period of two years from that date (the probation period). Exposures classified as forborne and which are
non-performing when customers were granted forbearance cannot exit non-performing status for a minimum of 12 months from the
date forbearance was granted and cannot exit forbearance status for a further two years from the date of returning to performing status
(three years in total). Forbearance activity is reviewed on a regular basis to ensure the operational processes remain appropriate and,
where required, system changes are made to enhance forbearance data capture.
The Group has identified a number of situations that in isolation are not considered to be forbearance:
— facilities that have been temporarily extended pending review and where no concession has been granted for reasons relating to the
actual or apparent financial stress of a customer;
— a reduction in asset quality to a level where actual, or apparent, financial stress is not evident;
— where changes are made to the terms of a borrower’s interest structure or repayment arrangement on a commercial basis; and
— late provision of financial information, in the absence of other indicators of financial difficulty, is not in all cases considered
a non-commercial breach of non-financial covenants.
Where the Group has made a demand for repayment, the customer’s facilities have been withdrawn or where a debt repayment process
has been initiated, the exposure is classified as forborne if the debt is subject to any of the mentioned forbearance concessions.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 160
Mortgage and personal forbearance
The Group utilises various forbearance measures for mortgage and personal customers, specific to the individual customer and their
circumstances. Customers may potentially be subject to more than one forbearance strategy at any one time where this is considered
to be the most appropriate course of action.
Debt management for mortgage customers in financial difficulty
To support customers who are encountering financial difficulties, cases are managed on an individual basis, with the circumstances of
each customer considered separately and the action taken judged as being affordable and sustainable for the customer. Operationally,
the provision and review of such assistance is controlled by various methods. These include the application of an appropriate policy
framework, controls around the execution of policy, regular review of the different treatments to confirm that they remain appropriate,
monitoring of customers’ performance including the level of payments received, and management visibility of the nature and extent
of assistance provided and the associated risk.
Help is provided through specialist teams such as the Financial Care Team where tailored repayment programmes can be agreed.
Customers are actively supported and referred to free money advice agencies when they have multiple credit facilities, including those
at other lenders, that require restructuring.
One component of the Group’s approach is to contact customers showing signs of financial difficulty to discuss their circumstances
and offer solutions to prevent their accounts falling into arrears.
The table below summarises the level of forbearance in respect of the Group’s mortgage and credit card portfolios at each balance sheet
date. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.
As at 30 September 2019 (audited)
MORTGAGES
Formal arrangements
Temporary arrangements
Payment arrangement(1)
Payment holiday(1)
Interest only conversion
Term extension
Other
Legal
Total mortgage forbearance
Personal forbearance – credit cards
Total
TOTAL LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
IMPAIRMENT ALLOWANCE ON
LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
NUMBER OF
LOANS
GROSS
CARRYING
AMOUNT
£M
% OF TOTAL
PORTFOLIO
IMPAIRMENT
ALLOWANCE
£M
COVERAGE
%
1,352
913
1,118
981
358
174
35
130
5,061
5,522
10,583
157
119
113
114
54
16
3
13
589
24
613
0.26
0.20
0.19
0.19
0.09
0.03
0.00
0.02
0.98
0.53
0.95
4.4
3.1
1.6
0.7
0.3
0.1
–
0.3
10.5
9.5
20.0
2.83
2.62
1.41
0.58
0.57
0.64
0.50
2.46
1.79
41.30
3.31
(1) Payment arrangement and payment holiday have been introduced as additional concession types within the Group’s mortgage forbearance policy.
As at 30 September 2018 (excluding Virgin Money)
(audited)
MORTGAGES
Formal arrangements
Temporary arrangements
Interest only conversion
Term extension
Other
Legal
Total mortgage forbearance
Personal forbearance – credit cards
Total
TOTAL LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
IMPAIRMENT ALLOWANCE ON
LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
NUMBER OF
LOANS
GROSS
CARRYING
AMOUNT
£M
% OF TOTAL
PORTFOLIO
IMPAIRMENT
ALLOWANCE
£M
COVERAGE
%
1,497
1,275
231
150
41
148
3,342
787
4,129
168
161
32
12
4
15
392
2
394
0.68
0.66
0.13
0.05
0.02
0.06
1.60
0.18
1.58
3.3
2.3
0.1
0.1
–
0.5
6.3
0.9
7.2
2.00
1.45
0.18
0.48
0.36
3.34
1.61
40.68
1.83
The increase in mortgage and credit card forbearance is attributable to the acquisition of the Virgin Money Holdings (UK) PLC portfolios.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 161
When all other avenues of resolution including forbearance have been explored, the Group will take steps to repossess and sell underlying
collateral. In the 12-month period to 30 September 2019, there were 66 repossessions of which 14 were voluntary (12 months to
30 September 2018 (excluding Virgin Money): 38 including 16 voluntary).
Forbearance – other personal lending
Excluding credit cards, the Group currently exercises limited forbearance strategies in relation to other types of personal lending; namely
current accounts and personal loans. The Group has assessed the total loan balances subject to forbearance on other types of personal
lending to be £11.5m as at 30 September 2019 (30 September 2018 (excluding Virgin Money): £10.1m), representing 1.10% of the personal
lending portfolio (30 September 2018: 1.22%).
Impairment provisions on forborne balances totalled £3.6m as at 30 September 2019 (30 September 2018 (excluding Virgin Money): £2.8m)
providing overall coverage of 31.58% (30 September 2018: 28.30%).
Business forbearance
Forbearance is considered to exist for business customers where one or more concessions are granted on a non-commercial basis.
The Group reports business forbearance at a customer level and at a value which incorporates all facilities and the related impairment
allowance, irrespective of whether each individual facility is subject to forbearance. Authority to grant forbearance measures for business
customers is held by the Group’s Strategic Business Services unit and is exercised, where appropriate, on the basis of detailed
consideration of the customer’s financial position and prospects.
Where a customer is part of a larger group, forbearance is exercised and reported across the Group at the individual entity level.
Where modification of the terms and conditions of an exposure meeting the criteria for classification as forbearance results in derecognition
of loans and advances from the balance sheet and the recognition of a new exposure, the new exposure shall be treated as forborne.
The tables below summarise the total number of arrangements in place and the loan balances and impairment provisions associated
with those arrangements. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.
As at 30 September 2019 (audited)
Term extension
Deferral of contracted capital repayments
Reduction in contracted interest rate
Alternative forms of payment
Debt forgiveness
Refinancing
Covenant breach/reset/waiver
Total business forbearance
As at 30 September 2018 (audited)
Term extension
Deferral of contracted capital repayments
Reduction in contracted interest rate
Alternative forms of payment
Debt forgiveness
Refinancing
Covenant breach/reset/waiver
Total business forbearance
TOTAL LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
IMPAIRMENT ALLOWANCE ON
LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
NUMBER OF
CUSTOMERS
187
98
3
2
2
16
60
368
GROSS
CARRYING
AMOUNT
£M
153
134
1
7
4
10
200
509
% OF TOTAL
PORTFOLIO
1.93
1.68
0.02
0.08
0.05
0.12
2.50
6.38
IMPAIRMENT
ALLOWANCE
£M
14.9
15.0
–
0.4
–
1.5
23.6
55.4
COVERAGE
%
9.70
11.16
3.37
5.37
1.06
15.03
11.82
10.87
TOTAL LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
IMPAIRMENT ALLOWANCE ON
LOANS AND ADVANCES
SUBJECT TO FORBEARANCE MEASURES
NUMBER OF
CUSTOMERS
179
103
2
4
4
17
61
370
GROSS
CARRYING
AMOUNT
£M
162
129
1
25
11
10
207
545
% OF TOTAL
PORTFOLIO
2.15
1.73
0.01
0.33
0.14
0.13
2.75
7.24
IMPAIRMENT
ALLOWANCE
£M
10.5
15.6
–
7.5
0.6
1.0
9.2
44.4
COVERAGE
%
6.48
12.02
4.05
30.46
5.64
9.87
4.43
8.14
Included in other financial assets at fair value is a portfolio of loans that is included in the above table. The gross value of fair value loans
subject to forbearance as at 30 September 2019 is £8m (30 September 2018: £15m), representing 0.11% of the total business portfolio
(30 September 2018: 0.19%). The credit risk adjustment on these amounts totalled £0.6m (30 September 2018: £2m), a coverage of 6.94%
(30 September 2018: 11.66%).
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 162
Other credit risks
The Group is exposed to credit risk on its other banking and Treasury-related activities, which are subject to mitigation and monitoring.
No ECL provisions are currently held for these exposures.
Offsetting of financial assets and liabilities
The Group reduces exposure to credit risk through central clearing for eligible derivatives and daily posting of cash collateral on such
transactions as detailed in note 3.6 to the financial statements. The amounts offset on the balance sheet, as shown below, represent
derivatives and variation margin collateral with central clearing houses which meet the criteria for offsetting under IAS 32. The table
excludes financial instruments not subject to offset and that are only subject to collateral arrangements (e.g. loans and advances).
The Group enters into derivatives with various counterparties which are governed by industry standard master netting agreements.
The Group holds and provides collateral in respect of derivatives transactions covered by these agreements. The right to offset balances
under these master netting agreements only arises in the event of non-payment or default and, as a result, these arrangements do not
qualify for offsetting under IAS 32.
The net amounts presented in the table are not intended to represent the Group’s exposure to credit risk, as the Group will use a wide
range of strategies to mitigate credit risk in addition to netting and collateral.
2019 (audited)
Assets
Derivative financial instruments(2)
Liabilities
Derivative financial instruments(2)
Securities sold under
repurchase agreement
2018 (audited)
Assets
Derivative financial instruments(2)
Liabilities
Derivative financial instruments(2)
Securities sold under
repurchase agreement
GROSS AMOUNTS
£M
GROSS AMOUNTS
OFFSET ON
BALANCE SHEET
£M
478
739
(112)
(466)
NET AMOUNTS
PRESENTED ON
BALANCE SHEET(1)
£M
366
273
NET AMOUNTS NOT OFFSET
ON BALANCE SHEET
SUBJECT TO
MASTER NETTING
AGREEMENTS
£M
CASH
COLLATERAL
PLEDGED/
RECEIVED
£M
NET AMOUNT
£M
(70)
(70)
(8)
288
(190)
–
13
–
1,554
–
1,554
(1,554)
GROSS AMOUNTS
£M
GROSS AMOUNTS
OFFSET ON
BALANCE SHEET
£M
262
361
802
–
–
–
NET AMOUNTS NOT OFFSET
ON BALANCE SHEET
SUBJECT TO
MASTER NETTING
AGREEMENTS
£M
CASH
COLLATERAL
PLEDGED/
RECEIVED
£M
(99)
(99)
(802)
(26)
(234)
–
NET AMOUNTS
PRESENTED ON
BALANCE SHEET(1)
£M
262
361
802
NET AMOUNT
£M
137
28
–
(1) Cash collateral amounts are limited to the net balance sheet exposure in order to exclude any over collateralisation. In addition to cash collateral, the Group
holds securities collateral in respect of derivative transactions subject to master netting agreements of £57m (2018: £Nil), which is not recognised on the
balance sheet.
(2) Derivative financial instruments comprise both trading and hedging derivative assets and liabilities.
CREDIT RISKVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 163
FINANCIAL
RISK
Strong foundations supporting resilience and growth
A robust balance sheet position underpinned by strategy-aligned
risk appetite and proactive incorporation of the impact of
changing regulatory obligations.
Financial risk covers several categories of risk which impact the
manner in which the Group can support its customers in a safe and
sound manner. They include capital risk, funding risk, liquidity risk,
market risk, model risk, pension risk and financial risks arising from
climate change.
Risk appetite
The primary objective for the management of financial risks is
to control the risk profile within approved risk limits, to maintain
the confidence of the Group’s customers and other stakeholders.
Financial risks are also managed to protect current and future
earnings from the impact of market volatility. The Group applies
a prudent approach to financial risks in order to safeguard the
ongoing strength and resilience of the balance sheet.
Financial risk appetite is approved by the Board, with authority
delegated to ALCO for subsequent implementation and monitoring.
The Board has established a range of capital risk appetite measures
including CET1, leverage and minimum holdings of capital.
Measures for funding and liquidity risks consider the structure
of the balance sheet and the Group’s overall funding profile and
compliance with the Overall Liquidity Adequacy Rule (OLAR).
Board approved risk appetite covers both regulatory and internal
liquidity requirements and the need to maintain access to liquidity
resources sufficient to accommodate outflows of funds in a range
of stress scenarios over a one-month and three-month period.
The Group’s participation in wholesale markets, along with its
use of financial instruments, is to fund its banking activities and
manage the liquidity and interest rate risks arising from these
activities. The Group establishes an appetite for these risks based
on an overriding principle that the Group will not engage in
proprietary risk taking.
The Group’s pension risk appetite is a component of the Group-
wide RAS framework for the management of balance sheet risks
and is considered in the context of potential capital impacts
as a result of volatility in the Scheme’s valuations.
In delivering its strategic objectives, the Group accepts a level
of loss may arise from model error. Implementing key controls
ensures that model error remains within acceptable limits.
The explicit consideration of appetite for model risk is defined and
articulated in the Group RAS. Specifically, in the case of model risk,
the Board establishes the extent of its willingness, or otherwise,
to accept results from using models. Model risk appetite is
reported regularly to both the Board and the MGC.
Capital risk
Capital is held by the Group to protect its depositors, to cover
inherent risks in a normal and stressed operating environment
and to support the Group’s strategy of pioneering growth. Capital
risk is the risk that the Group has insufficient quantity or quality
of capital to support its operations.
Exposures
Capital risk exposures arise when the Group has insufficient
capital resources to support its business activities and to meet
regulatory capital requirements under normal operating conditions
or stressed scenarios.
Measurement
The Group manages capital in accordance with prudential rules
issued by the PRA and the FCA, which are implemented through
the CRD IV CRR regulatory framework. Pillar 1 capital requirements
for the year ended 30 September 2019 are calculated in respect
of credit risk, operational risk, market risk, counterparty credit risk
and credit valuation adjustments. The capital requirements for retail
mortgages are calculated using an advanced internal ratings based
(AIRB) approach while the business portfolios use a foundation
internal ratings based (FIRB) approach. All other requirements are
calculated using the standardised approach.
Although the Group obtained IRB accreditation for certain
portfolios in October 2018, the PRA has since released a final policy
statement outlining its approach to implementing definition of
default in line with EBA guidelines. Further to this, there are
recommended changes to both PD and LGD model components
relating directly to the calculation of risk-weighted capital
requirements. These changes are required to be implemented
by 31 December 2020 for residential mortgage portfolios and
by 1 January 2022 for all other exposure classes, subject to
PRA approval.
A rigorous approach is taken to assessing risks that are not
adequately covered by Pillar 1, including interest rate risk and
pension risk. The Group also undertakes analysis of a range of
stress scenarios to test the impact on capital arising from severe
yet plausible scenarios. These approaches to capital are thoroughly
documented in the Group’s ICAAP which is subject to review,
challenge and approval by the Board.
The Group IRB portfolio and framework looks at the customer
and business propensity to default (PD) along with loss severity
(EAD and LGD). The outputs are used in the calculation of RWA, EL
and IFRS 9. However, the IRB parameters and rating assessments
are actively embedded in the following day-to-day processes:
— Credit Approval – IRB models and parameters are used to
assess the customer risk and IRB outputs are used to inform
cut-off models that drive the lending decisions;
— Pricing – IRB outputs and estimates are used in the assessment
of new products and portfolio pricing reviews;
— Risk Appetite – IRB parameters are included and models are
analysed to inform the risk capacity and appetite; and
— Asset Quality – IRB parameters are monitored to understand
the product and segment performance of the Group’s portfolios.
Capital buffers
The regulatory capital buffer framework is intended to ensure
firms maintain a sufficient amount of capital above their regulatory
minimum in order to withstand periods of stress. The UK has
implemented the provisions on capital buffers outlined in the CRD
to create combined capital buffers including a Capital Conservation
Buffer (CCB), a Countercyclical Capital Buffer (CCyB), a Global
Systemically Important Institution Buffer, and a Systemic Risk
Buffer (SRB) for ring-fenced banks. In the UK, the transitional
period for the CCB has ended and it is set at 2.50%, effective
from 1 January 2019.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 164
FINANCIAL
RISK
CET1
13.3%
LDR
114%
LCR
152%
REPORTED 2018: 10.5%
PRO FORMA 2018: 15.1%
REPORTED 2018: 115%
PRO FORMA 2018: 116%
REPORTED 2018: 137%
PRO FORMA 2018: 161%
The CCyB has been effective from 1 May 2014 and is dependent
upon the BoE’s view of credit conditions in the economy. The CCyB
at 30 September 2019 was 1.00% of RWAs, increasing from 0.5%
at 30 September 2018.
The PRA’s final rules on the approach to identifying other
systemically important institutions (O-SII) were published in
February 2016. In line with expectations, the Group was not
designated an O-SII. Similarly, the Financial Policy Committee
(FPC) issued its final framework for setting the SRB in May 2016.
This confirmed that banks with total assets of less than £175bn
(which includes the Group) will be subject to a 0% SRB.
The Group’s capital planning process considers the impact of all
relevant capital buffers.
Mitigation
The Group’s capital risk policy standard provides the framework
for the manner in which capital is managed within the Group.
The objectives of the policy standard are to efficiently manage
the capital base to optimise shareholder returns while maintaining
robust capital adequacy, meeting regulatory requirements,
managing the rating agencies’ assessment of the Group,
and ensuring that excessive leverage is not taken.
The Group is able to accumulate additional capital through the
retention of profit over time, by cutting costs, by raising new equity
via, for example, a rights issue or debt exchange, by reducing or
cancelling distributions on capital instruments, and by raising AT1
and Tier 2 capital. The availability and cost of additional capital is
dependent upon market conditions and perceptions at the time.
The Group is also able to manage the demands for capital through
management actions including adjusting lending strategy.
Capital optimisation remains a key strategic priority of the Group
and approval for the use of IRB models for the retail mortgage and
business portfolios was obtained in October 2018. Work is ongoing
to consider transition to the IRB approach for other portfolios.
Minimum requirement for own funds and eligible liabilities (MREL)
Monitoring
The capital plan is approved by the Board on an annual basis.
The Group’s ALCO monitors the capital plan and forecast positions
on a monthly basis. This ensures that performance trends are
appropriately reviewed and that there is transparency of the
impact on capital ratios, risk appetite and the future outlook.
In November 2016, the BoE provided additional information on
how MREL will be applied to firms that are subject to the use of
resolution tools that the BoE would employ in the event of a firm
entering resolution. From 1 January 2022, those firms (which
include the Group) will be required to hold both their going concern
requirements together with additional MREL of an amount equal
to those going concern requirements. The timetable for meeting
MREL has been extended to 2022 and the BoE will review
calibration and transition by the end of 2020, before setting
end-state MREL. Interim MREL has been established for the
transitional period.
During 2019, the Group issued £650m of debt that contributes to
its MREL requirements (£400m senior unsecured term funding and
£250m subordinated debt). The Group continues to meet interim
requirements which, from 1 January 2020 until 31 December 2021,
are expected to be 18% of RWA. From 1 January 2022, the Group
will be subject to an end-state MREL of two times the sum of
Pillar 1 and Pillar 2A capital subject to final regulatory guidance.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 165
Capital position
The Group’s capital position as at 30 September 2019 is summarised below:
Regulatory capital (unaudited)(1)
Statutory total equity
CET1 CAPITAL: REGULATORY ADJUSTMENTS(2)
Additional Tier 1 (AT1) capital instruments
Defined benefit pension fund assets
Prudent valuation adjustment
Intangible assets
Goodwill
Deferred tax asset relying on future profitability
Cash flow hedge reserve
Excess expected losses
AT1 coupon accrual
IFRS 9 transitional adjustments
Total CET1 capital
AT1 CAPITAL
AT1 capital instruments
Total AT1 capital
Total Tier 1 capital
TIER 2 CAPITAL
Subordinated debt
Credit risk adjustments(3)
Total Tier 2 capital
Total regulatory capital
(1) This table shows the capital position on a CRD IV ‘fully loaded’ basis and transitional IFRS 9 basis.
(2) A number of regulatory adjustments to CET1 capital are required under CRD IV regulatory capital rules.
(3) The current period does not include Tier 2 credit risk adjustments due to the transition to IFRS 9 reporting.
2019
£M
5,021
(915)
(257)
(5)
(501)
(11)
(146)
26
(88)
(20)
100
3,204
915
915
2018
£M
3,186
(450)
(138)
(3)
(412)
–
(99)
39
–
(10)
–
2,113
450
450
4,119
2,563
721
–
721
474
152
626
4,840
3,189
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 166
FINANCIAL
RISK
Regulatory capital flow of funds (unaudited)(1)
CET1 CAPITAL(2)
CET1 capital at 1 October
Share capital and share premium
Retained earnings and other reserves (including special purpose entities)
Acquisition of Virgin Money Holdings (UK) plc
Prudent valuation adjustment
Intangible assets
Goodwill arising on acquisition of Virgin Money Holdings (UK) plc
Deferred tax asset relying on future profitability
Defined benefit pension fund assets
Cash flow hedge reserve
IRB shortfall of credit risk adjustments to expected losses
IFRS 9 transitional relief
Total CET1 capital at 30 September
AT1 CAPITAL
AT1 capital at 1 October
AT1 capital issued and transferred from Virgin Money Holdings (UK) plc
Total AT1 capital at 30 September
Total Tier 1 capital at 30 September
TIER 2 CAPITAL
Tier 2 capital at 1 October
Credit risk adjustments(3)
Other movements
Capital instruments issued: subordinated debt
Tier 2 capital at 30 September
Total capital at 30 September
CRD IV
2019
£M
2,113
3
(210)
1,567
(2)
(89)
(11)
(47)
(119)
(13)
(88)
100
3,204
450
465
915
4,119
626
(152)
–
247
721
4,840
CRD IV
2018
£M
2,437
1
(217)
–
1
(73)
–
(71)
(3)
38
–
–
2,113
450
–
450
2,563
627
(2)
1
–
626
3,189
(1) The table shows the capital position on a CRD IV ‘fully loaded’ basis and transitional IFRS 9 basis.
(2) CET1 capital is comprised of shares issued and related share premium, retained earnings and other reserves less specified regulatory adjustments.
(3) The transition to IFRS 9 reporting has removed the requirement for Tier 2 credit risk adjustments.
The Group’s CET1 capital increased by £1,091m in the year primarily driven by the positive impact of the acquisition of Virgin Money
Holdings (UK) plc, offset by exceptional items in the year.
During the year, there were also increases in AT1 and Tier 2 capital. The Group issued an additional £250m of Tier 2 capital in December
2018 in the form of Fixed Rate Reset 10 non-call 5-year Subordinated Contingent Convertible Notes. In addition, in August 2019, Virgin
Money Holdings (UK) plc successfully received investor consent to transfer obligations on its outstanding AT1 (£230m) to Virgin Money
UK PLC.
Minimum Pillar 1 capital requirements (unaudited)
Credit risk
Operational risk
Counterparty credit risk
Credit valuation adjustment
Total Pillar 1 regulatory capital requirements
2019
£M
1,685
209
15
15
1,924
2018
£M
1,449
132
10
17
1,608
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 167
IFRS 9 transitional arrangements (unaudited)(1)
Available capital (amounts)
CET1 capital
Tier 1 capital
Total capital
RWA (amounts)
Total RWA
CAPITAL RATIOS
CET1 (as a percentage of RWA)
Tier 1 (as a percentage of RWA)
Total capital (as a percentage of RWA)
LEVERAGE RATIO
Leverage ratio total exposure measure
Leverage ratio
30 SEPTEMBER 2019 (£M)
IFRS 9
TRANSITIONAL
BASIS
3,204
4,119
4,840
IFRS 9
FULLY LOADED
BASIS
3,104
4,019
4,740
24,046
23,983
13.3%
17.1%
20.1%
94,744
4.3%
12.9%
16.8%
19.8%
94,644
4.2%
(1) The table shows a comparison of capital resources, requirements and ratios with and without the application of transitional arrangements for IFRS 9.
RWA movements (unaudited)
12 MONTHS TO 30 SEPTEMBER 2019
12 MONTHS TO 30 SEPTEMBER 2018
RWA flow statement
RWA at 1 October
Asset size
Asset quality
Model updates
Methodology and policy
Acquisitions and disposals
IRB accreditation
Other
RWA at 30 September
IRB RWA
£M
–
958
(291)
(396)
250
4,330
STD RWA
£M
18,104
478
(8)
–
–
2,870
10,247 (15,592)
101
5,953
6
15,104
OTHER RWA
£M
1,998
10
–
–
–
962
–
19
2,989
TOTAL
£M
20,102
1,446
(299)
(396)
250
8,162
(5,345)
126
24,046
CAPITAL
REQUIRED
£M
1,608
116
(24)
(32)
20
654
(428)
10
1,924
IRB RWA
£M
–
–
–
–
–
–
–
–
–
STD RWA
£M
17,753
347
4
–
–
–
–
–
18,104
OTHER
RWA(2)
£M
1,925
73
–
–
–
–
–
–
1,998
TOTAL
£M
19,678
420
4
–
–
–
–
–
20,102
CAPITAL
REQUIRED
£M
1,574
34
–
–
–
–
–
–
1,608
In October 2018, the Group received IRB accreditation from the PRA for both the mortgage and business portfolios. The impact of this
can be seen in the IRB accreditation line above. Also in October 2018, the Group acquired Virgin Money Holdings (UK) plc, which calculates
RWA on mortgages under IRB methodology and on all other portfolios under standardised methodology. This impact can be seen in the
Acquisitions and disposals line above.
Formal FIRB accreditation for the business portfolios was received in October 2018 for a suite of recalibrated models which were
implemented during November 2018, resulting in a £170m model impact, included within the Model updates line above. The differential is
predominantly in relation to the retail mortgage quarterly PD model calibrations. Since this implementation, no additional model changes
have occurred.
Methodology and processing enhancements implemented prior to formal IRB reporting are captured within the Methodology and policy line.
Other includes operational risk, CVA and counterparty credit risk.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 168
FINANCIAL
RISK
Pillar 1 RWAs and capital requirements by business line (unaudited)
AT 30 SEPTEMBER 2019
AT 30 SEPTEMBER 2018
Capital requirements for calculating RWA
Corporates
Retail
Total IRB approach
Central governments or central banks
Regional governments or local authorities
Public sector entities
Multilateral development banks
Financial institutions
Corporates
Retail
Secured by mortgages on immovable property
Exposures in default
Collective investments undertakings
Equity exposures
Items associated with particularly high risk
Covered bonds
Other items
Total standardised approach
Total credit risk
Operational risk
Counterparty credit risk
Credit valuation adjustment
Total Pillar 1 regulatory capital requirements
CAPITAL
REQUIRED
£M
501
708
1,209
1
1
–
–
16
28
319
40
5
–
1
1
11
53
476
1,685
209
15
15
1,924
EXPOSURE
£M
8,587
64,067
72,654
11,663
175
335
1,034
948
376
5,324
875
55
1
9
7
1,415
754
22,971
95,625
RWA
£M
6,258
8,846
15,104
9
13
5
–
195
347
3,993
498
59
1
11
11
141
670
5,953
21,057
2,606
191
192
24,046
CAPITAL
REQUIRED
£M
–
–
–
–
1
–
–
11
316
90
938
45
–
–
4
5
39
1,449
1,449
132
10
17
1,608
EXPOSURE
£M
–
–
–
11,361
143
155
155
630
4,311
1,499
28,423
465
1
4
33
615
715
48,510
48,510
RWA
£M
–
–
–
1
12
2
–
136
3,956
1,124
11,708
562
1
5
49
61
487
18,104
18,104
1,655
125
218
20,102
The exposure amounts disclosed above are post-credit conversion factors and pre-credit mitigation.
Additional breakdown analysis of the IRB portfolios can be seen within the ‘EU CR6 – IRB Approach – Credit risk by exposure class
and PD range’ table in the Group’s Pillar 3 disclosures.
Prior period comparatives are reported under the standardised approach to credit risk as accreditation for IRB was received
in October 2018.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 169
Capital position and CET1 (unaudited)
RWA(1)
Retail mortgages
Business lending
Other retail lending
Other lending
Other(2)
Credit risk
Credit valuation adjustment
Operational risk
Counterparty credit risk
Total RWA
CAPITAL RATIOS
CET1 ratio
Tier 1 ratio
Total capital ratio
2019
£M
PRO FORMA 2018
£M
REPORTED 2018
£M
8,846
7,124
4,042
481
564
21,057
192
2,606
191
24,046
13.3%
17.1%
20.1%
8,794
6,604
3,463
109
1,013
19,983
243
2,523
194
22,943
15.1%
18.3%
20.6%
9,002
7,407
981
109
605
18,104
218
1,655
125
20,102
10.5%
12.7%
15.9%
(1) RWA are calculated under the AIRB approach for the mortgage portfolio and the FIRB approach for the business portfolio, with all other portfolios
being calculated under the standardised approach, via either sequential IRB implementation or Permanent Partial Use (PPU).
(2) The items included in the Other exposure class that attract a capital charge include items in the course of collection, fixed assets, prepayments,
other debtors and deferred tax assets that are not deducted.
The Group measures the amount of capital it is required to hold by applying CRD IV as implemented in the UK by the PRA and supplemented
through additional regulation under the PRA Rulebook. The table below summarises the amount of capital in relation to RWAs the Group
is currently required to hold, excluding any PRA buffer.
Minimum requirements (unaudited)
Pillar 1(1)
Pillar 2A
Total capital requirement
Capital conservation buffer
UK countercyclical capital buffer(2)
Total (excluding PRA buffer)(3)
AS AT 30 SEP 2019
CET1
4.5%
3.0%
7.5%
2.5%
1.0%
11.0%
TOTAL CAPITAL
8.0%
5.3%
13.3%
2.5%
1.0%
16.8%
(1) The minimum amount of total capital under Pillar 1 of the regulatory framework is determined as 8% of RWAs, of which at least 4.5% of RWAs is required
to be covered by CET1 capital.
(2) The UK countercyclical capital buffer (CCyB) may be set between 0% and 2.5%. On 28 November 2018 the UK CCyB increased from 0.5% to 1.0%. At its
October 2019 meeting, the FPC maintained the UK CCyB rate at 1%, noting the underlying vulnerabilities (excluding Brexit) that can amplify economic
shocks have not changed materially since the November 2018 Financial Stability Report and remain at a standard level overall in the UK.
(3) The Group may be subject to a PRA buffer as set by the PRA but is not permitted to disclose the level of any buffer. A PRA buffer can consist of two
components:
— a risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements; and
— a buffer relating to the results of the BoE stress tests.
Underlying capital generation by the core divisions post additional AT1 distribution was 77bps, largely driven by strong underlying profits
more than offsetting asset growth and investment spending. After absorbing the net impact of costs associated with restructuring,
the acquisition of Virgin Money Holdings (UK) plc and legacy conduct issues, the Group’s CET1 ratio was 13.3%.
In August 2019, Virgin Money Holdings (UK) plc successfully received investor consent to transfer obligations on its outstanding AT1
(£230m) and Senior Notes (£350m) to Virgin Money UK PLC (formerly named CYBG PLC). All of the Group’s regulatory capital and MREL
instruments are now issued out of Virgin Money UK PLC, consistent with the single point of entry resolution model. This also removed
the previous need to adjust for non-controlling interests in the Group’s capital calculations.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 170
FINANCIAL
RISK
Dividend
As disclosed on page 3 of the Strategic report, the Board has recommended not to pay a final dividend for the financial year ending
30 September 2019.
Leverage
Leverage ratio (unaudited)
TOTAL TIER 1 CAPITAL FOR THE LEVERAGE RATIO
Total CET1 capital
AT1 capital
Total Tier 1
EXPOSURES FOR THE LEVERAGE RATIO
Total assets as per published financial statements
Adjustment for off-balance sheet items
Adjustment for derivative financial instruments
Adjustment for securities financing transactions (SFTs)
Other regulatory adjustments
Leverage ratio exposure
CRD IV leverage ratio(1)
UK leverage ratio(2)
2019
£M
REPORTED 2018
£M
3,204
915
4,119
90,999
2,728
(35)
1,934
(882)
94,744
2,113
450
2,563
43,456
1,763
(134)
1,468
(613)
45,940
2019
£M
4.3%
4.9%
PRO FORMA 2018
£M
4.6%
5.1%
REPORTED 2018
£M
5.6%
6.5%
(1) IFRS 9 transitional capital arrangements have been applied to the leverage ratio calculation as at 30 September 2019.
(2) The Group’s leverage ratio on a modified basis as at 30 September 2019, excluding qualifying central bank claims from the exposure measure in accordance
with the policy statement issued by the PRA in October 2017.
The UK leverage ratio framework, which came into force on 1 January 2016, is relevant to PRA regulated banks and building societies
with consolidated retail deposits equal to or greater than £50bn. The Group is currently excluded from the full reporting requirements
of the UK leverage ratio framework but will be required to comply in the first reporting period following the date at which this threshold
is breached, which is 31 December 2019.
The leverage ratio is monitored against a Board approved RAS, with responsibility for managing the ratio delegated to the Group’s ALCO,
which monitors it on a monthly basis.
The leverage ratio is the ratio of Tier 1 capital to total exposures, defined as:
— capital: Tier 1 capital defined on a CRD IV fully loaded and IFRS 9 transitional basis; and
— exposures: total on- and off-balance sheet exposures (subject to credit conversion factors) as defined in the delegated act amending
CRR article 429 (Calculation of the Leverage Ratio), which includes deductions applied to Tier 1 capital.
Other regulatory adjustments consist of adjustments that are required under CRD IV to be deducted from Tier 1 capital. The removal
of these from the exposure measure ensures consistency is maintained between the capital and exposure components of the ratio.
The Group’s leverage ratio is 4.3% (30 September 2018 pro forma: 4.6%) which exceeds the Basel Committee’s proposed minimum of 3%,
applicable from 2018, and the UK minimum ratio of 3.60% (3.25% plus 0.35% countercyclical leverage buffer.)
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 171
Funding and liquidity risk
Funding risk occurs where the Group is unable to raise or maintain
funds of sufficient quantity and quality to support the delivery of
the business plan or sustain lending commitments. Prudent funding
risk management reduces the likelihood of liquidity risks occurring,
increases the stability of funding sources, minimises concentration
risks and controls future balance sheet growth. Liquidity risk occurs
when the Group is unable to meet its current and future financial
obligations as they fall due or at acceptable cost, or when the
Group reduces liquidity resources below internal or regulatory
stress requirements.
Exposures
The Group is predominantly funded by personal and business
customers. Customer funding is supported by the Group’s ongoing
wholesale funding programmes, medium-term secured funding
issuance (e.g. the Group’s Lanark securitisation programme), the
Regulated Covered Bond platform and unsecured medium-term
notes. Funding risk exposures arise from an unsustainable or
undiversified funding base, for example, a reliance on short-term
wholesale deposits. The risk may result in deviation from funding
strategy, requiring funding to be originated rapidly at excessive
cost, or require a reduction in lending growth, which are outcomes
that may adversely affect customers or shareholders.
The Group’s primary liquidity risk exposure arises through the
redemption of retail deposits where customers have the ability to
withdraw funds with limited or no notice. Exposure also arises from
the refinancing of customer and wholesale funding at maturity and
the ability to fund new and existing committed lending obligations
including mortgage pipeline and credit card facilities.
Measurement
Funding and liquidity risks are subject to a range of measures
contained within the Group’s RAS and a series of limits agreed
by ALCO. These measures provide a short-and long-term view
of risks under both normal and stressed conditions. The measures
focus on: cash outflows and inflows under stress; concentration
risks; refinancing risks; asset encumbrance; and readiness of
mitigating actions.
The Group’s funding plan establishes an acceptable level of funding
risk which is approved by the Board and is consistent with risk
appetite and the Group’s strategic objectives. The development
of the Group’s funding plan is informed by the requirements of the
Group’s financial risk policy standards. A series of metrics is used
across the Group to measure risk exposures, including funding
ratios, limits to concentration risk and maximum levels
of encumbrance.
Liquidity risk exposures are subject to assessment under both
regulatory and internal requirements. The volume and quality
of the Group’s liquid asset portfolio is defined through a series of
stress tests across a range of time horizons and stress conditions.
The high quality liquid asset (HQLA) requirement is quantified as
the outflow of funds under a series of stress scenarios less the
impact of inflows from assets. Stress cash outflow assumptions
have been established for individual liquidity risk drivers across
idiosyncratic and market-wide stresses. Liquidity within the Group
is managed in accordance with the ILAAP, which is approved by
the Board.
The Treasury function is responsible for the development and
execution of strategy subject to oversight from the Risk function.
In relation to funding and liquidity risk, the primary management
committee is the ALCO. The Group continues to maintain its strong
funding and liquidity position and seeks to achieve an appropriate
balance between profitability, liquidity risk and capital optimisation.
Monitoring
Liquidity is actively monitored by the Group. Reporting is
conducted through ALCO and the Executive Risk Committee.
In a stress situation, the level of monitoring and reporting would
be increased commensurate with the nature of the stress event.
Monitoring and control processes are in place against internal
and regulatory liquidity requirements. The Group monitors a range
of market and internal early warning indicators on a routine basis
for early signs of liquidity risk in the market or specific to the
Group. These indicators cover a mixture of quantitative and
qualitative measures including daily variation of customer balances,
measurement against stress requirements and monitoring of the
macro economic environment.
Mitigation
The Group holds a portfolio of HQLA that can be utilised to
raise funding in times of stress. The size of the HQLA portfolio
is calibrated based on a view of potential outflows under both
systemic and idiosyncratic stress events. In addition, the Group
can use the repo market to generate funds and can also participate
in BoE operations through the Sterling Monetary Framework.
The Group has several sources of funding which are
well-diversified in terms of the type of instrument and product,
counterparty, term structure and market. In addition to customer
funding, wholesale funding is used to support balance sheet
growth, lengthen the contractual tenor of funding and diversify
sources of funding. These funding programmes are a source
of strength for the Group and leverage the Group’s high quality
mortgage book as a source of collateral for secured funding.
The funding plan includes an assessment of the Group’s capacity
for raising funds from its primary sources, mitigating funding risk.
Refinancing risks are carefully managed and are subject to
controls overseen by ALCO. The Group’s funding plan includes
an embedded Term Funding Scheme repayment profile designed
to manage refinancing risk.
The Group operates a Funds Transfer Pricing (FTP) system. A key
purpose of FTP is to ensure that liquidity risk is a factor in the
pricing of loans and deposits.
A Liquidity Contingency Plan has been established for management
of an escalated liquidity requirement if the Group experiences
either restricted access to wholesale funding or a significant
increase in the withdrawal of funds. The plan identifies triggers
for escalation, details the action required, allocates the key tasks
to individuals, provides a time frame and defines a management
committee to manage the action plan.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 172
Sources of funding
FINANCIAL
RISK
The table below provides an overview of the Group’s sources of funding as at 30 September 2019.
Total assets
Less: other liabilities(2)
Funding requirement
FUNDED BY:
Customer deposits
Debt securities in issue
Due to other banks
of which:
Secured loans
Securities sold under agreements to repurchase
Transaction balances with other banks
Deposits with other banks
Equity
Total funding
2019
(AUDITED)
£M
90,999
(3,471)
87,528
64,000
9,591
8,916
7,308
1,554
12
42
5,021
87,528
PRO FORMA 2018
(UNAUDITED)
REPORTED 2018
(AUDITED)
£M(1)
88,548
(3,700)
84,848
61,015
8,505
10,144
8,529
1,575
29
11
5,184
84,848
£M(1)
43,456
(3,305)
40,151
28,904
4,973
3,088
2,254
802
29
3
3,186
40,151
(1) The comparative year has been restated in line with the current year presentation. Derivative collateral in relation to clearing houses has been reclassified
between other assets/liabilities and due from/to other banks.
(2) Other liabilities includes customer deposits at fair value through profit or loss, derivative financial instruments, deferred tax liabilities, provisions for liabilities
and charges, and other liabilities as per the balance sheet line item.
The Group’s funding objective is to prudently manage the sources and tenor of funds in order to provide a sound base from which
to support sustainable customer growth. At 30 September 2019, the Group had a funding requirement of £87,528m (2018 pro forma:
£84,848m) with the majority being used to support loans and advances to customers.
The Group’s funding mix has not materially changed as a result of the acquisition of Virgin Money Holdings (UK) plc. The Group continues to
provide competitive retail funding products and has been active in the covered bond, securitisation and senior debt markets during the year.
Customer deposits
The majority of the Group’s funding requirement was met by customer deposits of £64,000m (2018 pro forma: £61,015m). Customer
deposits are comprised of interest bearing deposits, term deposits and non-interest bearing demand deposits from a range of sources
including personal and business customers. The increase of £2,985m in 2019 is primarily due to increased fixed rate term deposits and
variable rate savings accounts.
Equity
Equity of £5,021m (2018 pro forma: £5,184m) was also used to meet the Group’s funding requirement. Equity is comprised of ordinary share
capital, retained earnings, other equity investments and a number of other reserves. For full details on equity refer to note 4.1 within the
consolidated financial statements.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 173
Liquid assets
The quantity and quality of the Group’s liquid assets are calibrated to the Board’s view of liquidity risk appetite and remain at a prudent level
above regulatory requirements. The Group was compliant with all internal and regulatory liquidity metrics at 30 September 2019
(30 September 2018: compliant). The LCR moved from 137% to 152% during the year.
The liquid asset portfolio provides a buffer against sudden and potentially sharp outflows of funds. Liquid assets must therefore be of
a high quality so they can be realised for cash and cannot be encumbered for any other purpose (e.g. to provide collateral for payments
systems). The liquid asset portfolio is primarily comprised of cash at BoE, UK government securities (gilts) and listed securities (e.g. bonds
issued by supra-nationals and AAA-rated covered bonds).
Liquid asset portfolio(1)
LEVEL 1
Cash and balances with central banks
UK government treasury bills and gilts
Other debt securities
Total level 1
LEVEL 2(2)
Total LCR eligible assets
(1) Excludes encumbered assets.
(2) Includes Level 2A and Level 2B.
2019
(AUDITED)
£M
PRO FORMA
2018
(UNAUDITED)
£M
REPORTED
2018
(AUDITED)
£M
CHANGE
(AUDITED)
%
AVERAGE
2019
(AUDITED)
£M
AVERAGE
2018
(AUDITED)
£M
7,469
1,076
2,867
11,412
29
11,441
7,979
908
2,180
11,067
175
11,242
3,942
513
943
5,398
–
5,398
89.5%
109.7%
204.0%
111.4%
–
111.9%
7,266
870
2,604
10,740
103
10,843
3,405
568
913
4,886
–
4,886
Before investing in any security an assessment is completed for both the credit quality and the treatment for liquidity purposes.
ALCO oversees the composition of the liquid asset portfolio.
Further information can be found in notes 3.4 (cash and balances with central banks) and 3.7 (FVOCI) to the consolidated financial
statements.
Cash and balances with central banks of £10,296m, as per note 3.4, includes: £2,578m of assets that are encumbered to support the
issuance of Scottish bank notes (excluding notes not in circulation) and to support payments systems; £183m of mandatory central bank
deposits; and £66m excluded from LCR due to operating expenses.
Financial assets at fair value through other comprehensive income of £4,328m, as per note 3.7, includes: £385m of encumbered UK
Government Treasury bills and gilts, £311m of which is encumbered to support Operational Continuity in Resolution (OCIR) and £74m
of which is encumbered to support structured funding programmes.
Encumbered assets by asset category
The Group manages the level of asset encumbrance to ensure appropriate assets are maintained to support potential future planned and
stressed funding requirements. Encumbrance limits are set in the Group RAS and calibrated to ensure that after a stress scenario is applied
that increases asset encumbrance, the balance sheet can recover over an acceptable period of time. Examples of reasons for asset
encumbrance include, among others, supporting the Group’s secured funding programmes to provide stable term funding to the Group,
the posting of assets in respect of drawings under the Term Funding Scheme, use of assets as collateral for payments systems in order
to support customer transactional activity, and providing security for the Group’s issuance of Scottish bank notes.
Encumbered assets by asset category (audited)
September 2019
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Derivative financial instruments
Financial instruments at fair value
through other comprehensive income
Other assets
Total assets
ASSETS ENCUMBERED WITH
NON-CENTRAL BANK COUNTERPARTIES
COVERED
BONDS
£M
SECURI-
TISATIONS
£M
2,896
–
156
–
41
–
3,093
8,571
–
550
–
34
–
9,155
OTHER
£M
TOTAL
£M
– 11,467
–
–
877
171
–
–
555
409
630
409
1,135 13,383
POSITIONED
AT THE
CENTRAL
BANK
(INCLUDING
ENCUMBERED)
£M
19,929
3,219
–
–
–
–
23,148
OTHER ASSETS
ASSETS NOT POSITIONED
AT THE CENTRAL BANK
READILY
AVAILABLE FOR
ENCUMBRANCE
£M
OTHER
ASSETS
CAPABLE
OF BEING
ENCUMBERED
£M
19,933
7,077
–
–
18,589
–
131
–
CANNOT BE
ENCUMBERED
£M
TOTAL
£M
TOTAL
£M
3,430 61,881 73,348
– 10,296 10,296
1,018
366
10
366
141
366
3,697
–
30,707
–
173
18,893
4,328
3,698
1
1,061
1,643
1,234
4,868 77,616 90,999
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 174
FINANCIAL
RISK
ASSETS ENCUMBERED WITH
NON-CENTRAL BANK COUNTERPARTIES
COVERED
BONDS
£M
SECURI-
TISATIONS
£M
1,393
–
161
–
–
–
–
1,554
5,243
–
299
–
–
–
–
5,542
OTHER
£M
–
–
163
–
36
–
143
342
TOTAL
£M
6,636
–
623
–
36
–
143
7,438
POSITIONED
AT THE
CENTRAL
BANK
(INCLUDING
ENCUMBERED)
£M
6,940
2,809
–
–
46
–
–
9,795
OTHER ASSETS
ASSETS NOT POSITIONED
AT THE CENTRAL BANK
READILY
AVAILABLE FOR
ENCUMBRANCE
£M
OTHER
ASSETS
CAPABLE
OF BEING
ENCUMBERED
£M
CANNOT BE
ENCUMBERED
£M
TOTAL
£M
TOTAL
£M
5,016
3,764
–
–
1,468
–
–
10,248
11,322
–
70
–
5
362
95
11,854
2,830 26,108 32,744
6,573
6,573
–
693
70
–
262
262
262
1,562
1,526
7
362
362
–
1,022
1,260
1,117
4,121 36,018 43,456
September 2018
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Derivatives
Financial assets – available for sale
Other financial assets
Other assets
Total assets
The Group’s total non-central bank asset encumbrance increased by £5,945m to £13,383m as at 30 September 2019. This was primarily
due to the addition of Virgin Money Holdings (UK) plc structured funding programmes in addition to assets encumbered due to Operational
Continuity in Resolution (OCIR) requirements. Current levels of encumbrance include the impact of use of the Term Funding Scheme which
is subject to a repayment profile.
Assets and liabilities by maturity
The following tables represent a breakdown of the Group’s balance sheet, according to the contractual maturity of the assets and liabilities.
Many of the longer-term monetary assets are variable rate products, with behavioural maturities shorter than the contractual terms.
Accordingly, this information is not relied upon by the Group in its management of interest rate risk. The Group has disclosed certain term
facilities within loans and advances to customers with a revolving element at the maturity of the facility as this best reflects their
contractual maturity.
2019 (audited)
ASSETS
Financial assets at amortised cost
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Financial assets at fair value through profit or loss
Loans and advances to customers
Derivative financial instruments
Other financial assets
Financial assets at fair value through other
comprehensive income
Other assets
Total assets
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit or loss
Customer deposits
Derivative financial instruments
Other liabilities
Total liabilities
OFF-BALANCE SHEET ITEMS
Contingent liabilities
Other credit commitments
Total off-balance sheet items
CALL
£M
3 MONTHS
OR LESS
£M
3 TO 12
MONTHS
£M
1 TO 5
YEARS
£M
OVER
5 YEARS
£M
NO SPECIFIED
MATURITY
£M
TOTAL
£M
1,097
8,722
225
1,804
–
793
–
–
–
6
8
–
1,738
–
–
26
34
–
9,777
–
–
96
226
–
54,462
–
–
125
98
–
4,217
1,574
–
73,095
10,296
1,018
–
–
14
253
366
14
–
–
10,044
125
66
2,802
784
176
2,758
1,735
–
11,834
1,684
–
56,369
–
1,387
7,192
4,328
1,629
90,999
40,512
–
45
–
–
2,277
42,834
–
15,158
15,158
5,558
574
1,361
2
7
78
7,580
23
–
23
10,168
1,258
181
2
14
99
11,722
7,762
5,168
7,329
–
64
–
20,323
24
–
24
18
–
18
–
2,591
–
–
188
–
2,779
48
–
48
–
–
–
–
–
740
740
64,000
9,591
8,916
4
273
3,194
85,978
–
–
–
113
15,158
15,271
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 175
2018 (audited)
ASSETS
Financial assets at amortised cost
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Financial assets at fair value through profit or loss
Loans and advances to customers
Derivative financial instruments
Financial assets available for sale
Other assets
Total assets
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit or loss
Customer deposits
Derivative financial instruments
Other liabilities
Total liabilities
OFF-BALANCE SHEET ITEMS
Contingent liabilities
Other credit commitments
Total off-balance sheet items
CALL
£M
3 MONTHS
OR LESS
£M
3 TO 12
MONTHS
£M
1 TO 5
YEARS
£M
OVER
5 YEARS
£M
NO SPECIFIED
MATURITY
£M
TOTAL
£M
1,093
4,917
164
–
–
–
143
6,317
23,142
–
19
–
–
2,288
25,449
–
7,016
7,016
1,200
–
529
8
13
5
128
1,883
981
359
519
2
10
93
1,964
26
–
26
983
–
–
36
26
79
62
1,186
1,787
631
300
6
19
109
2,852
36
–
36
4,623
–
–
144
164
658
–
5,589
2,994
2,464
2,250
7
133
–
7,848
10
–
10
24,468
–
–
174
59
810
–
25,511
–
1,519
–
–
199
–
1,718
2
–
2
381
1,656
–
–
–
10
923
2,970
–
–
–
–
–
439
439
45
–
45
32,748
6,573
693
362
262
1,562
1,256
43,456
28,904
4,973
3,088
15
361
2,929
40,270
119
7,016
7,135
Cash flows payable under financial liabilities by contractual maturity
2019 (audited)
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit or loss
Customer deposits
Trading derivative financial instruments
Hedging derivative liabilities
Contractual amounts payable
Contractual amounts receivable
Other liabilities
Total liabilities
2018 (audited)
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit or loss
Customer deposits
Trading derivative financial instruments
Hedging derivative liabilities
Contractual amounts payable
All other liabilities
Total liabilities
CALL
£M
3 MONTHS
OR LESS
£M
3 TO 12
MONTHS
£M
1 TO 5
YEARS
£M
OVER
5 YEARS
£M
NO SPECIFIED
MATURITY
£M
TOTAL
£M
40,512
–
45
–
–
–
–
2,277
42,834
5,590
602
1,375
2
15
7
–
78
7,669
10,321
1,402
240
2
14
36
(1)
99
12,113
8,014
5,704
7,380
–
36
197
(81)
–
21,250
–
2,611
–
–
28
619
(532)
–
2,726
–
–
–
–
–
–
–
740
740
CALL
£M
3 MONTHS
OR LESS
£M
3 TO 12
MONTHS
£M
1 TO 5
YEARS
£M
OVER
5 YEARS
£M
NO SPECIFIED
MATURITY
£M
23,143
–
19
–
–
981
364
519
3
13
–
2,288
25,450
8
93
1,981
1,788
696
314
6
31
42
109
2,986
2,995
2,746
2,282
8
40
253
–
8,324
–
1,665
–
–
17
235
–
1,917
–
–
–
–
–
–
439
439
64,437
10,319
9,040
4
93
859
(614)
3,194
87,332
TOTAL
£M
28,907
5,471
3,134
17
101
538
2,929
41,097
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 176
FINANCIAL
RISK
The balances in the cash flow tables above will not agree directly to the balances in the consolidated balance sheet as the table
incorporates all cash flows, on an undiscounted basis, related to both principal and future coupon payments.
The table below shows the residual maturity of the Group’s debt securities in issue.
Analysis of debt securities in issue by residual maturity (unaudited)
Covered bonds
Securitisation
Medium term notes
Subordinated debt
Total debt securities in issue
Of which issued by Virgin Money UK PLC
External credit ratings
The Group’s long-term credit ratings are summarised below:
3 MONTHS
OR LESS
£M
–
574
–
–
574
–
3 TO 12
MONTHS
£M
10
928
311
9
1,258
18
1 TO 5
YEARS
£M
599
3,549
298
722
5,168
1,016
OVER
5 YEARS
£M
1,303
–
1,288
–
2,591
1,223
TOTAL
2019
1,912
5,051
1,897
731
9,591
2,257
TOTAL
2018
742
2,956
796
479
4,973
1,276
Material risk for the Group
VIRGIN MONEY UK PLC
Moody’s
Fitch
Standard & Poor’s
CLYDESDALE BANK PLC
Moody’s(2)
Fitch
Standard & Poor’s
VIRGIN MONEY HOLDINGS (UK) PLC
Moody’s
Fitch
VIRGIN MONEY PLC
Moody’s
Fitch
OUTLOOK AS AT
30 SEP 2019(1)
AS AT
30 SEP 2019
30 SEP 2018
Positive
Rating Watch Negative
Stable
Positive
Rating Watch Negative
Stable
Stable
Rating Watch Negative
Positive
Rating Watch Negative
Baa3
BBB+
BBB-
Baa1
A-
BBB+
Baa3
BBB+
Baa1
A-
Not rated
BBB+
BBB-
Baa1
BBB+
BBB+
Baa3
BBB+
Baa2
BBB+
(1) For detailed background on the latest credit opinion by S&P and Fitch, please refer to the respective rating agency websites.
(2) Long-term deposit rating
On 1 March 2019, due to a reassessment of the probability of a no-deal/disruptive Brexit scenario, Fitch placed all of the Group’s long-term
Issuer Default Ratings (IDR) on Rating Watch Negative (along with 19 UK banks in total). None of the Group’s other ratings or its ‘anchor’
Viability Rating have been impacted.
On 3 June 2019, Fitch upgraded the long-term ratings of Clydesdale Bank PLC and Virgin Money PLC to A-. The upgrades followed an
increase in the junior debt buffer at Clydesdale Bank PLC.
On 21 October 2019, Fitch and Moody’s withdrew the long-and short-term ratings of Virgin Money Holdings (UK) PLC and Virgin Money PLC
following completion of the FSMA Part VII transfer. None of the Group’s other ratings was impacted by the FSMA Part VII transfer.
As at 27 November 2019, there have been no other changes to the Group’s long-term credit ratings or outlooks since the report date, with
the exception of the outlook on the Virgin Money UK PLC and Clydesdale Bank PLC Moody’s ratings, which were moved from ‘positive’ to
‘stable’ on 12 November 2019. This followed a revision in Moody’s outlook for the UK Sovereign from ‘stable’ to ‘negative’. This was as a
result of Moody’s view that UK institutions have weakened and the UK’s economic and fiscal strength are likely to be weaker going forward.
Subsequently, Moody’s adjusted the ratings outlook for 15 UK banks, including the Group.
Additional collateral to be provided in the event of a notch downgrade The Group monitors the movements in its credit ratings and the
related requirement to post collateral for payment systems and clearing houses. These figures are not considered material compared to the
volume of unencumbered liquid assets.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 177
Market risk
Market risk is the risk associated with adverse changes in the
economic value, or net interest income, of assets and liabilities
held by the Group as a result of movements in market factors such
as foreign exchange risk, interest rates (duration risk), customer
behaviour (optionality risk), and the movement in rate spreads
across types of assets or liabilities (basis risk and credit spread
risk). The Group’s balance sheet is predominantly UK based and
is denominated in GBP, therefore foreign exchange risk is not a
material risk for the Group.
Exposures
The Group’s principal exposure comes from structural interest rate
risk. It comprises the sensitivity of the Group’s current and future
net interest income and economic value to movements in market
interest rates. The major contributors to interest rate risk are:
— the investment of non-interest bearing deposits and equity into
interest-bearing assets;
— the mismatch, or duration, between repricing dates of interest-
bearing assets and liabilities;
— basis risk, for example, the inability of the pricing ‘basis’ for
customer asset and liability products to be replicated in the
financial markets or the risk arising from changing relationships
between different interest rate yield curves; and
— customer optionality, e.g. the right to repay borrowing in
advance of contractual maturity dates.
The focus of the Group’s activity is to provide high-quality banking
services to its customers. These services include the provision
of foreign exchange products and derivative products to enable
customers to manage risks within their businesses. As a result of
these activities, the Group may be exposed to forms of market
risk that would arise from movements in price on these products,
however, these risks are not a major part of the Group’s risk profile.
Controls include the hedging of these products as and when
they arise.
Measurement
Interest rate risk in the banking book (IRRBB) is measured,
monitored, and managed from both an internal management and
regulatory perspective. The RMF incorporates both market
valuation and earnings-based approaches. In accordance with the
Group IRRBB policy standard risk measurement techniques include:
basis point sensitivity value at risk (VaR), earnings at risk (EaR),
economic value of equity (EVE), interest rate risk stress testing,
repricing analysis, cash flow analysis, and scenario analysis.
The key features of the internal interest rate risk management
model are:
— the use of basis point sensitivity analysis;
— VaR and EaR are measured on a statistical basis: 99%
confidence level with appropriate holding periods depending
on varying risk types; triggers for reporting deterioration in EVE
in line with EBA guidelines;
— historical simulation approach utilising instantaneous interest
rate shocks including parallel rate movements and twists in the
yield curve to explore risks around exposures to movements in
short- or long-term interest rates;
— static balance sheet (i.e. any new business is assumed to be
matched, hedged or subject to immediate repricing);
— investment term for capital is modelled with a benchmark term
agreed by ALCO;
— investment term for core non-interest bearing assets and
liabilities is modelled on a behavioural basis with a benchmark
term agreed by ALCO; and
— assumptions covering the behavioural life of products and
customer behaviour for optionality are reviewed and approved
by ALCO.
Credit spread risk in the banking book (CSRBB) is assessed through
a credit VaR applied to the Group’s liquid asset buffer portfolio.
Foreign exchange risk is assessed based on the absolute exposure
to each currency.
Mitigation
Market risks are overseen by ALCO with delegation for day-to-day
management given to Treasury. Treasury use a number of
techniques and products to manage market risks including interest
rate swaps, cash flow netting and foreign exchange. Basis risk may
be managed through a combination of wholesale market basis risk
management products, pricing strategies and product innovation.
Fair value hedges – the Group hedges part of its existing interest
rate risk, resulting from potential movements in the fair value of
fixed rate assets and liabilities. The fair value of these swaps is
disclosed in note 3.6. There were no transactions for which fair
value hedge accounting had to be discontinued in the year.
Cash flow hedges – the Group hedges a portion of the variability in
future cash flows attributable to interest rate and foreign currency
risk. The interest and foreign currency risk arise from variable
interest rate assets and liabilities which are hedged using cross
currency and interest rate swaps, and material non-GBP
denominated assets which are hedged using foreign exchange
forward contracts. There were no transactions for which cash flow
hedge accounting had to be discontinued in the year as a result of
the highly probable cash flows no longer being expected to occur.
The fair value of derivatives is disclosed in note 3.6.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 178
Monitoring
FINANCIAL
RISK
Model parameters and assumptions are reviewed and updated on at least an annual basis. Material changes require the approval of ALCO.
Oversight of market risk is conducted by the Group’s Financial Risk team which is independent of the Treasury function. The Board and
Executive Risk Committee, through ALCO’s oversight, monitor risk to ensure it remains within approved policy limits and Board requirements.
Market risk (audited)
12 months to 30 September
As at 30 September
Average value during the year
Minimum value during the year
Maximum value during the year
VALUE AT RISK(1)
EARNINGS AT RISK
2019
£M
33
35
25
42
2018(2)
£M
16
11
9
16
2019
£M
6
6
2
9
2018
£M
4
4
3
5
(1) VaR is a combination of interest rate and credit spread VaR.
(2) Seven months to September. VaR calculation parameters were changed effective from 31 March 2018 onwards. The changes improved the modelling
and measurement and did not represent a change in the Group’s risk appetite for Interest Rate Risk.
Market risk linkage to the balance sheet (audited)
The following table shows the Group’s principal market risks, linked to the balance sheet assets and liabilities.
2019
£M
2018
£M
INTEREST RATE
DURATION OPTIONALITY
BASIS
CREDIT
SPREAD
FOREIGN
EXCHANGE
ASSETS
Financial assets at amortised cost
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Financial assets at fair value through profit
or loss
Loans and advances to customers
Derivative financial instruments
Other financial assets
Financial instruments at fair value through
other comprehensive income
Financial assets available for sale
Other assets
Total assets
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit
or loss
Customer deposits
Derivative financial instruments
Other liabilities
Total liabilities
73,095
10,296
1,018
253
366
14
4,328
–
1,629
90,999
64,000
9,591
8,916
4
273
3,194
85,978
32,748
6,573
693
362
262
–
–
1,562
1,256
43,456
28,904
4,973
3,088
15
361
2,929
40,270
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 179
Repricing periods of assets and liabilities by asset/liability category
The following table shows the repricing periods of the Group’s assets and liabilities as assessed by the Group. This repricing takes account
of behavioural assumptions where material and the Group’s policy to hedge capital in accordance with a benchmark term agreed by ALCO
in order to reduce variability in net interest income.
2019 (unaudited)
ASSETS
Financial assets at amortised cost
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Financial assets at fair value through profit or loss
Loans and advances to customers
Derivative financial assets
Financial assets at fair value through other
comprehensive income
Other assets
Total assets
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit or loss
Customer deposits
Derivative financial instruments
Other liabilities
Equity
Total liabilities and equity
Notional value of derivatives managing
interest rate sensitivity
Total interest rate gap
Interest rate gap
OVERNIGHT
£M
3 MONTHS
OR LESS
£M
3 TO 12
MONTHS
£M
1 TO 5
YEARS
£M
OVER
5 YEARS
£M
NON-
INTEREST
BEARING
£M
7,475
8,254
333
–
–
684
–
16,746
10,353
301
2,844
4
–
1,176
230
14,908
(2,253)
(415)
(415)
10,245
1,968
685
21
366
1,099
107
14,491
17,720
5,599
5,922
–
273
48
240
29,802
16,185
874
459
13,884
12
–
87
–
410
80
14,473
12,524
300
150
–
–
143
719
13,836
40,122
62
–
145
–
836
426
41,591
23,401
1,228
–
–
–
760
3,832
29,221
1,241
–
–
–
–
1,299
–
2,540
2
2,163
–
–
–
–
–
2,165
(800)
(163)
296
(13,149)
(779)
(483)
17
392
(91)
128
–
–
–
–
–
1,030
1,158
–
–
–
–
–
1,067
–
1,067
–
91
–
TOTAL
£M
73,095
10,296
1,018
253
366
4,328
1,643
90,999
64,000
9,591
8,916
4
273
3,194
5,021
90,999
–
–
–
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 180
FINANCIAL
RISK
2018 (unaudited)
ASSETS
Financial assets at amortised cost
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Financial assets at fair value through profit or loss
Loans and advances to customers
Financial assets available for sale
Other assets
Total assets
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit or loss
Customer deposits
Other liabilities
Equity
Total liabilities and equity
Notional value of derivatives managing
interest rate sensitivity
Total interest rate gap
Interest rate gap
Model risk
OVERNIGHT
£M
3 MONTHS
OR LESS
£M
3 TO 12
MONTHS
£M
1 TO 5
YEARS
£M
OVER
5 YEARS
£M
NON-
INTEREST
BEARING
£M
8,389
6,374
835
362
189
–
16,149
11,495
–
3,121
15
1,003
86
15,720
206
635
635
4,778
10
1
–
393
–
5,182
1,281
3,698
–
–
47
155
5,181
(2,203)
(2,202)
(1,567)
6,299
30
–
–
–
–
6,329
3,465
–
1
–
142
466
4,074
(596)
1,659
92
12,997
159
–
–
300
–
13,456
12,662
475
–
–
760
2,479
16,376
2,572
(348)
(256)
433
–
–
–
680
–
1,113
1
800
–
–
–
–
801
21
333
77
(152)
–
–
–
–
1,379
1,227
–
–
–
–
1,304
–
1,304
–
(77)
–
TOTAL
£M
32,744
6,573
836
362
1,562
1,379
43,456
28,904
4,973
3,122
15
3,256
3,186
43,456
–
–
–
The Group’s definition of a model is a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical
theories, techniques, and assumptions to process input data into quantitative estimates.
This extends to calculation methods or systems, calculation mechanisms, and frameworks or systems where qualitative judgement
is applied to generate quantitative results (e.g. where adjustments are made to address known model limitations).
A model meeting this definition might be used for analysing business strategies, informing business decisions, identifying and measuring
risks, valuing exposures, conducting stress testing, assessing adequacy of capital, measuring compliance with internal limits, maintaining
the formal control apparatus of the Group, or meeting financial or regulatory reporting requirements and issuing public disclosures.
The use of models invariably presents model risk, which has the potential for adverse consequences from decisions based on incorrect
or misused model outputs and reports. Model risk increases with greater model complexity, higher uncertainty around inputs and
assumptions, broader use, and larger potential impact. If left unmitigated, model risk can lead to poor decision making, misreporting or a
failure to identify risks, which in turn could result in financial and reputational losses, as well as having a detrimental impact on customers.
Exposures
To determine the level of model risk exposure, all models are classified according to materiality. Model materiality assessments are required
to enable senior management to prioritise and understand model risk.
The Group’s model materiality criteria utilise a risk-based approach and set quantitative and qualitative thresholds focusing on coverage
and impact, with clear consideration given to the risks associated with the models, i.e. criteria such as purpose or strategic importance.
A model’s assessed materiality level determines its approval path through governance and the degree, frequency and depth of review and
validation expected.
Within the combined Group model inventory, as at 30 September 2019, there are 339 live and to be implemented models, covering a range
of model risk disciplines. As a result of the wide scope and breadth of coverage, there is exposure to model risk across a number of the
Group’s principal risk categories.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 181
Measurement
Risk appetite
Model RAS is reported regularly to both the MGC and the Board.
Mitigation
The Group has a model risk policy framework in place to manage
and mitigate model risk, which encompasses the end to end
model life cycle. The Model Risk Policy Standard defines roles and
responsibilities in terms of model risk management. Specifically, it
sets out that the model owner has the responsibility of attesting to
the compliance to the Model Risk Policy Standard requirements on
an annual basis, including that the model is implemented correctly
in an appropriate system, or advise exemptions.
A suitably qualified Independent Model Validation function
conducts model validations prior to model implementation, both
when a model is changed and on a periodic basis. The function
assists with identifying model deficiency and raises mitigating
actions and additional risk control.
Furthermore, IA assesses the overall effectiveness of the model
risk management framework.
Monitoring
MGC is the primary model approval authority and body responsible
for overseeing model risk of the Group’s most material models.
The model risk policy dictates that model risk must be reported
at least annually to the MGC. This extends to model monitoring
and analysis on work to mitigate previously identified deficiencies,
including regular updates on action management.
Pension risk
The Group operates a defined benefit pension scheme, the
Yorkshire and Clydesdale Bank Pension Scheme (the Scheme).
Clydesdale Bank PLC (the Bank) is the Scheme’s principal employer
and there are no other participating employers. The Scheme was
closed to future accrual on 1 August 2017 for most members
(a small number of members remain on a defined benefit accruals
basis subject to certain conditions).
Defined benefit pension schemes provide a promise to pay
members a pre-determined level of income at retirement which
is independent of the contributions, investments and returns (the
scheme assets) used to fund these benefit promises (the scheme
liabilities). The operation of a pension scheme gives rise to several
risks, e.g. movements in equity valuations, changes in bond yields,
life expectancy of scheme members, movements in interest and
inflation rates and changes in legislation. The Group also supports
a Defined Contribution Scheme however the nature of this type
of scheme places the investment and liability risk to the member
rather than the Group.
Pension risk is the risk that, at any point in time, the value of the
scheme assets is not enough to meet the current or expected
future value of the scheme liabilities. This risk will continue to exist
until the scheme is formally wound up, either if all the liabilities are
transferred to a third party (for example an insurer) or once all
individual member benefits have been honoured.
The Group’s pension risk appetite is a component of the
Group-wide RAS framework for the management of balance sheet
risks and is considered in the context of potential capital impacts
as a result of volatility in the Scheme’s valuations.
Assets
The Trustee governs investments according to a Statement of
Investment Principles (SIP). This is reviewed and agreed by the
Trustee Board on a regular basis, with the Bank consulted on any
proposed changes. The SIP is drafted in accordance with the
requirements of Section 35 of the Pensions Act 1995 (as amended
by the Pensions Act 2004 and regulations made under it). This sets
out the Scheme objectives and the journey plan to meet
these objectives.
This results in an appropriate mix of return seeking assets as well
as liability matching assets to better match future pension
obligations. The main market risks within the asset portfolio are
interest rates and equities. The split of Scheme assets is shown
within note 3.12 to the Group’s consolidated financial statements.
The fair value of the assets was £3.96bn as at 30 September 2019
(2018: £2.12bn).
Liabilities
The retirement benefit obligations are a series of future cash flows
with relatively long duration and are responsive to movements on
many of the inputs including interest rates. On an IAS 19 basis
these cash flows are primarily sensitive to changes in the
expected long-term price inflation rates (RPI/CPI), the life
expectancy of members and the discount rate (linked to yields
on AA corporate bonds):
— an increase in long-term expected inflation corresponds
to an increase in liabilities;
— an increase in life expectancy corresponds to an increase
in liabilities; and
— a decrease in the discount rate corresponds to an increase
in liabilities.
Exposure
The Group’s defined benefit pension scheme affects its regulatory
capital in two ways:
— CET1 capital – while an IAS 19 surplus will increase the Group’s
balance sheet assets and reserves, any such amount is not
recognised for the purposes of determining CET1 capital.
However, an IAS 19 deficit, which increases balance sheet
liabilities and reduces reserves, is recognised for regulatory
capital purposes, and so will decrease CET1 capital.
— Pillar 2A capital – the Group is also required to determine the
level of capital required to be held under Pillar 2A for pension
obligation risk as part of the annual ICAAP process. This
requirement forms part of the Group’s regulatory Total Capital
Requirement (TCR).
Within the Scheme itself, risk arises because the assets are
exposed to market valuation movements, within and between asset
classes, while the liabilities are more sensitive to interest rate and
inflation rate changes, and changes in other actuarial assumptions
which may not be borne out in experience, for example life
expectancy.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 182
FINANCIAL
RISK
Mitigation
Financial risks arising from climate change
The Trustee and Group have a common view of the Scheme’s
long-term strategic aims, encapsulated by an agreed de-risking
journey plan. Within the journey plan, several core principles have
been established, including a long-term self-sufficiency funding
target (i.e. the point in time when the Scheme would no longer
need to call on the Bank for additional funding) with assumptions
as to how this target is expected to be managed, monitored and
met. Potential actions to address deviations in the actual funding
level relative to the journey plan have also been considered.
Several other activities have been implemented by the Group
and Trustee with the specific aim of reducing risk in the Scheme,
including equity options which reduce the downside risk of a fall
in equity values, increasing the levels of inflation and interest rate
hedging and several member benefit reforms, culminating in
closure to future accrual for most members.
In addition, the Group has signed a contingent security
arrangement to give the Trustee a degree of protection against the
risk of the Group defaulting on its obligations under the Recovery
Plan and to provide an additional amount to partially mitigate
adverse changes impacting the Scheme’s assets or liabilities.
The Bank and the Trustee continue to explore other cost-effective
options to further reduce risk within the Scheme.
Monitoring
Information on the Scheme’s current valuations, asset holdings and
discount and inflation rate assumptions are presented monthly to
ALCO. The impact of the Scheme on the Group is also subject to
risk oversight from Financial Risk who subsequently report to the
Executive Risk Committee. In addition, semi-annual pension risk
updates are provided to the Executive and Board Risk Committees.
Performance of the Scheme’s asset portfolio against the various
risk metrics is independently monitored by the Scheme investment
adviser, Willis Towers Watson, and reported to the Investment Sub
Committee (ISC), which includes Group representation, and Trustee
Board on a quarterly basis.
The Group has established targets relating to CO2 emissions that
arise from its own operations. Progress will be monitored through
the Group’s annual CO2 disclosures (see page 38 of the Strategic
report). The Group has also signed up to the United Nations
Environment Programme’s Principles for Responsible Banking.
2019 has seen an unprecedented focus on climate change,
with progress at governmental and regulatory levels, along with a
broad range of publications and, importantly, increasing demands
from society for governments, firms and individuals to all play their
part in addressing the longer-term risks from climate change.
The financial risks from climate change can be categorised as:
— physical risks arising from climate and weather-related events,
such as heatwaves, droughts, floods, storms and sea level rise.
They can potentially result in large financial losses, impairing
asset values and the creditworthiness of borrowers; and
— transition risks that can arise from the process of adjustment
towards a low-carbon economy. Changes in policy, technology
and sentiment could prompt a reassessment of the value of a
large range of assets and create credit exposures for banks and
other lenders as costs and opportunities become apparent.
The Group has an established process to apply Environmental,
Social and Governance (ESG) criteria to lending decisions. This
includes sectors that are not within the Group’s risk appetite and
those where additional scrutiny is required before a credit decision
can be made. The policy framework has also been enhanced to
reflect the need for more forward thinking relating to transition
risks. The Group recognises the need to enhance capability for
assessing and modelling the impact of physical risks over the
long-term horizon over which increased risks may arise. The
Group’s governance framework has been amended to ensure
specific reference to climate-related risks is provided at the
Group’s Credit Risk and Executive Risk Committees. This work
will be overseen by the Board.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 183
REGULATORY, COMPLIANCE
AND CONDUCT RISK
Effectively addressing legacy issues
and building a platform for growth
With the significant milestone of the FCA deadline on PPI
complaints now reached, the Group remains focused on
addressing any remaining legacy conduct issues while seeking
to ensure that current and future customer products and
services meet conduct standards and regulators’ expectations.
Regulatory and compliance risk
Regulatory and compliance risk is the risk of failing to understand
and comply with relevant laws and regulatory requirements;
failing to identify, monitor and respond to changes in the regulatory
environment; not keeping regulators informed of relevant issues;
not responding effectively to information requests or regulator
review findings; not meeting regulatory deadlines or obstructing
the regulator. It is also the risk of failure to comply with the wider
set of rules, regulations, codes of practice and laws relevant to
the Group.
Risk appetite
The Group has no appetite for actions which result in breaches of
regulation or for inaction to address systemic process and control
failures leading to material non-compliance. Notwithstanding
the complexity and volume of the regulatory agenda, the Group
will ensure that all mandatory requirements are prioritised with
sufficient resources to implement within required timescales in a
customer-focused manner. The Group will have an open dialogue
with colleagues and regulators, escalating all issues they would
reasonably expect to be made aware of.
— continual assessment of evolving regulatory requirements,
including regulatory business plans and thematic reviews;
— consideration of regulatory requirements in the context
of product and proposition development and associated
appropriate governance;
— oversight of regulatory and compliance risks and issues
in relevant governance bodies;
— ongoing review and tracking of known regulatory and
compliance issues and remediation actions being taken; and
— a risk-based assurance framework has been designed to
monitor compliance with regulation and assess customer
outcomes.
Monitoring
Regulatory and compliance risk is considered by all three lines of
defence as part of their oversight and assurance activities. A risk
assurance plan, approved by the Board Risk Committee on an
annual basis, independently assesses the control framework
underpinning compliance with laws and regulations.
Conduct risk
Conduct risk is the risk of undertaking business in a way which is
contrary to the interests of customers, resulting in the delivery of
inappropriate customer outcomes, customer detriment, regulatory
censure, redress costs and/or reputational damage.
Exposures
Risk appetite
The Group remains exposed to regulatory and compliance risk
as a result of significant ongoing and new regulatory change.
The Group is committed to acting in the interests of its customers,
and has no appetite for conduct risk.
Measurement
Exposures
Regulatory and compliance risks are measured against a defined
set of Board approved risk appetite metrics relating to regulatory
breaches, and past due regulatory implementations and actions.
Thresholds are set and form part of the Board approved RAS.
Mitigation
The following controls and procedures help to mitigate regulatory
and compliance risk:
— a clearly defined regulatory and compliance policy statement
(with supporting policy standards) and RAS signed off by
the Board;
— ongoing development, maintenance and reporting of risk
appetite measures for regulatory and compliance risk to the
Executive Risk Committee and the Board;
— maintenance of proactive and co-ordinated engagement
with the Group’s key regulators;
With the FCA’s deadline on PPI complaints now passed, there is
a significant reduction in the uncertainty around determining the
quantum of conduct risk-related liabilities, with note 3.16 reflecting
the Group’s current position in relation to redress provisions for PPI,
interest rate hedging products (IRHPs) tailored business loans
(TBLs), and other smaller historic conduct matters. Nonetheless,
a degree of uncertainty remains in the final amount required to
settle the Group’s potential liabilities for these matters. The Group
will continue to reassess the adequacy of provisions for these
matters and the assumptions underlying the calculations at each
reporting date based upon experience and other relevant factors
at that time.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 184
Measurement
REGULATORY, COMPLIANCE
AND CONDUCT RISK
Conduct risks are measured against a defined set of Board
approved risk appetite metrics, including measures on the quality
of advised and non-advised sales, the volume of complaints and
the quality of complaint handling. Thresholds are set and form
part of the Board approved RAS.
Mitigation
The following controls and procedures help to mitigate
conduct risk:
— clearly defined conduct risk policy statement (with supporting
policy standards) and RAS signed off by the Board;
— ongoing development, maintenance and reporting of risk
appetite measures for conduct to the Executive Risk Committee
and the Board;
— consideration of conduct risk in the context of product
and proposition development and associated appropriate
governance;
— regular management review of end to end conduct reporting,
centred on core product areas and aligned to relevant
businesses;
— oversight of conduct risks and issues in relevant
governance bodies;
— analysis of customer experience oriented data, complaint
handling quality and volumes and root causes of complaints
discussed in the relevant governance bodies, with actions
agreed and tracked by senior stakeholders;
— continuing development and nurture of a customer-centric
culture aligned to the Group’s Purpose;
— ongoing review and tracking of known conduct issues
and remediation actions being taken; and
— a risk-based assurance framework designed to monitor
compliance with regulation and assess customer outcomes.
Monitoring
All three lines of defence consider conduct risk as part of their
oversight and assurance activities. A risk assurance plan, approved
by the Board Risk Committee on an annual basis, independently
assesses the control framework underpinning the Group’s conduct
risk management to ensure customers are treated fairly and
products are designed and sold to meet their needs. The Group
also works to ensure that customer expectations are met and
complaints are dealt with effectively and fairly.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 185
OPERATIONAL
RISK
Proactive operational risk management
with enhanced risk frameworks
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events.
It is a core component of the RMF and is embedded in day-to-day
business activities focused on enabling operational efficiencies.
Requirements and responsibilities are set out in the operational risk
policy statement and supporting operational risk framework policy
standard that seeks to identify, assess, mitigate, monitor, and
report the operational risks, events and issues that could impact
the achievement of business objectives or impact core business
processes.
Business units are responsible for the day-to-day management of
operational risk, with oversight from the risk management function,
and independent assurance activities undertaken by IA.
Risk appetite
The Group is prepared to tolerate a level of operational risk
exposure within agreed thresholds and limits. A level of resilience
risk from internal and external events is tolerated, however,
immediate steps are taken to minimise customer disruption
through recovery within defined timelines. Operational risks arise
from day-to-day business activities, which may result in direct or
indirect losses and could adversely impact the Group’s financial
performance, levels of customer care or reputation. The Group
strives to deliver operational efficiency in the implementation
of its objectives and accepts that a level of loss may arise from
operational failure. Implementing key controls and monitoring
ensures that operational risks are managed, and losses remain
within acceptable limits.
Exposures
The Group’s exposure to operational risk is impacted through the need to engage with innovative, dynamic third parties; deliver new
products and services; and make effective use of reliable data in a changing external environment to deliver on the Group’s strategic
objectives. Alongside ongoing risk and control monitoring, operational risk oversight is focused on the following key areas:
RISK CATEGORY
Change risk(1)
Third-party risk
The risks associated with a failure to execute and deliver change that could result in an inability to meet
our strategic objectives, including failing to meet our customer, regulator, colleague, or shareholders’
expectations, at a Group level and local management level.
How this risk is managed – the Group maintains a centralised view of change to ensure that the risks
of individual changes are managed effectively and that change is prioritised to minimise the overall
risks to the organisation in line with risk appetite.
The risks associated with ensuring the Group’s outsourced and offshoring arrangements are controlled
effectively, including the risk of failure to service existing and new customers; the potential cessation
of specific activities; the risk of personally identifiable information or Group sensitive data being
exposed or exploited; and the risk of financial, reputational and regulatory censure if the third party
enters into any illegal or unethical activities.
How this risk is managed – the Group continues to strengthen its third-party management framework
and oversight, and ensures that the procurement of service providers adheres to these requirements.
Ongoing performance management and assurance is undertaken to ensure that supplier relationships
are controlled effectively.
(1) Execution risk, as a result of integration and transformation activity, is captured within strategic and enterprise risk, further information on which can be
found on p190.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 186
Measurement
OPERATIONAL
RISK
Material operational risk events are identified, reviewed and escalated in line with criteria set out in the RMF. Root cause analysis
is undertaken and action plans are implemented.
Losses may result from both internal and external events, and are categorised using risk categories aligned to Basel II. The Basel II
categories are used to ensure that data can be reported externally and compared with other industry data. Due to the nature of risk events,
losses can take time to crystallise and therefore may be restated for prior or subsequent financial years.
Operational risk losses by Basel category (losses greater than or equal to £5,000) excluding PPI
The majority of net losses are recorded against two Basel categories, ‘External Fraud’ and ‘Execution, Delivery and Process Management’.
External fraud accounts for the highest volume of losses at 83.0%. The higher volume of low value events in this category is in line with
industry experience and relates mainly to card and online fraud. ‘Execution, Delivery and Process Management’ volumes are typical and
reflect the daily volume of transactions and customer interactions.
Business disruption and system failures
Clients, products and business practices
Damage to physical assets
Employee practices and workplace safety
Execution, delivery and process management
External fraud
Internal fraud
% OF TOTAL VOLUME
% OF TOTAL LOSSES
2019
0.5%
2.8%
0.3%
0.0%
13.0%
83.0%
0.0%
2018
1.5%
15.6%
1.9%
0.8%
26.6%
52.9%
0.0%
2019
2.2%
6.4%
1.0%
0.0%
14.4%
76.1%
0.0%
2018
0.4%
52.1%
0.8%
0.2%
12.4%
34.0%
0.0%
Mitigation
Stress testing
In delivering to its strategic objectives, the Group strives to deliver
operational efficiency and accepts that a level of loss may arise
from operational failure. Implementing key controls and monitoring
ensures that operational risks are managed, and losses remain
within acceptable limits.
Monitoring
The Group has identified, assessed and is currently monitoring
all key operational risks across the above noted Basel II categories,
including undertaking an assessment of control effectiveness,
monitoring trends in key risk indicators and escalating events,
in accordance with policy requirements. Risk management
performs oversight of the Group’s business planning process,
including analysis of industry trends or forward-looking threats
that could lead to material impact on our ability to deliver on the
strategic objectives or result in a significant impact on assessment
of operational risk capital. It also performs ongoing oversight of the
Group’s management of operational risk, including Risk and Control
Assessment, Issues and Risk Events.
The Group develops and maintains a suite of operational risk
scenarios using internal and external data. These scenarios provide
insights into the stresses the business could be subject to given
extreme circumstances. Scenarios cover all material operational
risks including execution of change, failures to core processes or
contagion risk from a third party. Scenarios are owned by senior
management custodians with review and challenge provided by
the Risk function, Executive Risk Committee and Board Risk
Committee, as part of the ICAAP process. Management actions
are agreed and monitored, and linked with business resilience and
continuity testing where appropriate.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 187
TECHNOLOGY
RISK
Enabling integrated and timely responses for the
continual protection of business critical technologies.
The Group continues to enhance and invest in its control
environment recognising the changing cyber landscape and
the increased focus on digital capabilities.
Technology risk is defined as the risk of loss resulting from
inadequate or failed information technology processes through
strategy, design, build or run components and internally or
externally provided services.
Risk appetite
Technology risks are measured against a set of defined RAS
metrics and reported to Executive and Board Committees.
Exposures
The Group’s exposure to technology risk is materially impacted
by the need to embrace new technology. Technology risk
is comprised of the following risk categories:
RISK CATEGORY
Cyber and information
security risk
Physical security risk
IT resilience risk
Data risk
The risks arising from inadequate internal and external information and cybersecurity, where failures
impact the confidentiality, integrity and availability of electronic data through our systems and
processes. This more broadly considers the risks and controls associated with cybersecurity where
the Group has recognised significant escalation of external cyber threats, regulatory penalty and
resilience need.
How this risk is managed – The Group continues to enhance and invest in the control environment,
recognising the changing cyber landscape and the increased focus on digital capabilities, as well as
the changing risk profile of the business. All three lines of defence possess skilled resource in this
discipline to protect the Group.
The risk to the safety and protection of colleagues, customers and physical assets arising from
unauthorised access to buildings, theft, robbery, intimidation, blackmail, sabotage, terrorism and other
physical security risks.
How this risk is managed – Physical and personal security standards are managed by the Group’s
Chief Information Security and Resilience Officer (CISRO). Controls are in place to protect the Group’s
physical assets, as well as the security of colleagues and customers.
IT resilience is the ability of the Group to quickly adapt to disruptions while maintaining continuous
operations on key and critical processes, safeguarding technology and all associated assets in the
face of adverse events, shocks and chronic or incremental changes. IT resilience risk includes the
risks associated with technology, suppliers, property and staff. The Group recognises the significant
regulatory focus on resilience as the market becomes more reliant on mobile and online banking and
developments in cloud solutions, artificial intelligence and machine learning.
How this risk is managed – IT resilience sits within the resilience framework with underlying risk
metrics reported to Executive Committees and Board. The Group is well placed to respond to new
regulations and standards in resilience and develops technology with resilience inbuilt as a principle.
A programme of continuous ongoing monitoring and disaster recovery testing helps to minimise the
likelihood of system failure, however, in preparation for an outage, the Group also maintains and tests
critical end-to-end business recovery and contingency plans.
Data underpins decision making at all levels of the organisation. Poor quality data can lead to loss,
customer disruption, non-compliance with GDPR (for example, in relation to data minimisation, data
accuracy and the Group’s ability to respond adequately when data subject rights are exercised) and
unnecessary rework. Data therefore needs to be controlled to the appropriate standards throughout
its life cycle and be made available for re-use where appropriate.
How this risk is managed – The Group has a data management framework governing the creation,
storage, distribution, usage and retirement of data, which is aligned with GDPR requirements.
Quality is attested to by each business area against three attributes: completeness, accuracy
and appropriateness. Oversight is well established within all three lines of defence.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 188
RISK CATEGORY
Privacy risk
Payment risk
TECHNOLOGY
RISK
Privacy risk may result from non-compliance with data privacy, legal and regulatory obligations, either
through lack of awareness, incorrect assessment, or inadequate compliance. The risk is crystallised
when personal data is put at risk, or individuals’ data rights are compromised, due to process or
cultural failure in the Group’s role as data controller. When crystallised, privacy risk can result in harm
to customers, significant financial impacts, operational disruption, litigation, damage to reputation,
loss of trust and/or regulatory censure.
How this risk is managed – The Group continues to enhance its privacy risk framework to ensure
privacy by design and by default and ensure data subject rights are managed efficiently and in line
with GDPR. The Group has created a Data Protection Office within Risk to independently oversee
compliance reporting to the Board Risk Committee and relevant governance forums. A culture of
compliance is encouraged through a robust data privacy policy and enhanced staff training to those
areas handling and processing data on the Group’s behalf.
Significant development has occurred within Open Banking and Payment Services Regulation which
will continue over the next 12–18 months. There is the risk that financial transactions are not conducted
per the instructions and parameters of our customers’ payment,trading, clearing, settlement schemes
or business requirements. This includes payment delays, inaccuracies, duplicates, failures or rejections
as well as system-based restrictions and errors.
How this risk is managed – The payment risk framework outlines key scheme rules, regulations and
compliance requirements alongside the risk-based approach to assurance oversight, control testing
and change management to ensure that payment risk is managed within appetite, and impact to
customers across the Group is minimised. All three lines of defence are actively involved in changes
being made in this dynamically changing environment. As such, the Group continues to invest in its
payment services capability and the Payment Risk team is a vital component of the Risk function.
Measurement
The Group has a number of technology risk KRIs which cover the
key risk areas outlined above. In addition, there is a suite of Board
approved RAS metrics which is monitored and reported monthly,
with breaches escalated to the Board. All technology risks are also
assessed using the operational risk framework and are monitored
and challenged by the Risk function in line with functional and
corporate governance.
Mitigation
Through organisational design and management focus,
considerable investment has been made within these areas by
the Group. Technology expertise exists in all three lines of defence.
Technology risk policies, frameworks, thematic assurance reviews
and oversight routines ensure that technology risk is identified,
measured, monitored and reported on in the first line of defence
and overseen and assured by the second and third lines
of defence.
Monitoring
Business units are responsible for the day-to-day management
of technology risk, with oversight from the Risk Management
function, and independent assurance activities undertaken
by Internal Audit. The Group conducts a series of planned
independent assurances, deep dives, change assurance
activities and continuous monitoring.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 189
FINANCIAL
CRIME RISK
A strengthened and robust financial crime framework
The Group continues to invest in its systems and controls
to prevent, detect, screen and report financial crime.
Financial crime risk is the risk that the Group’s products and
services will be used to facilitate financial crime against the Group,
its customers or third parties.
It also includes risks associated with external or internal acts
intended to defraud, misappropriate, and circumvent policy,
funds, information, regulations and property. The Group adopts
a risk-based approach to mitigation and maintains an overarching
financial crime policy with four policy standards aligned to each
material financial crime risk. These are:
Sanctions – The Group has no appetite for non-compliance with
the legal and regulatory obligations relating to sanctions and
embargoes. To reflect the Group’s risk appetite and to protect the
Group from financial and reputational damage, including regulatory
censure, fines and enforcement action, the Sanctions and
Embargoes Policy articulates a set of minimum standards and
requirements which must be complied with.
Anti-money laundering – The Group applies a risk-based approach
customer model which sets out the types of customer it has no
risk appetite to onboard, as well as customers with whom the
Group is prohibited from entering into or maintaining a customer
relationship. All other customers shall be subject to controls
commensurate with their risk.
Anti-bribery and corruption – The Group does not tolerate the
direct or indirect offer, payment, solicitation or acceptance of
bribes in any form. The Group has in place risk assessments,
policies and guidelines on interacting with customers, suppliers
and agents, including specific policies for gifts and hospitality.
Senior managers across the business are required to complete
an evaluation of risk areas as part of the risk assessment process.
Fraud – The Group accepts that, in order to conduct business in
a commercially viable manner, it is willing to sustain fraud losses
within an agreed set of parameters. The application of fraud risk
management considers customer impacts, industry trends and
financial impacts of fraud which, on occasion, provide conflicting
priorities. Emerging risks are identified and assessed with action
taken to mitigate them. An agreed loss plan is set and performance
against this is overseen by the policy owner and reported through
the appropriate governance committees. With regard to internal
fraud, the Group recognises the risk of internal fraud but has no
appetite for it. There is a control framework in place to mitigate
that risk.
Risk appetite
Financial crime risk is measured against a defined suite of metrics
within the Group RAS.
Exposures
Financial crime risk is inherent in doing business in the financial
services industry and may arise from failure to:
— meet legal and regulatory requirements; and
— maintain effective systems and controls to prevent the risk
that the Group might be used for further financial crime.
The Group continues to review the external environment for
any change in regulatory or legislative direction, taking action
as appropriate.
Measurement
All financial crime standards are reflected in the Group policy
and standards and financial crime prevention manual, the content
of which is provided by financial crime risk and updated as
appropriate. Financial crime related risk appetite metrics are
monitored and reported to the Board on a monthly basis.
Mitigation
The Group adopts a risk-based approach to financial crime.
Risk assessments against the four financial crime policy standards
take place on an annual basis. Over and above these assessments,
regular oversight of higher risk activities takes place as part of
the formal oversight plan and embedded activity takes place
throughout the year. Key performance metrics relative to critical
financial crime systems are kept under review to ensure ongoing
effectiveness. Training completion and compliance is subject to
annual oversight.
Monitoring
The financial crime risk team is responsible for the control
framework, strategy, governance, standard setting, oversight,
training and reporting to the competent authorities, governance
committees and Board.
Screening customers for sanctions or politically exposed persons
and transaction monitoring is carried out by the financial crime
risk team. Sanctions screening for payments is carried out by the
payments team in the first line. Critical financial crime systems
oversight is independently tested by IA.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 190
STRATEGIC AND
ENTERPRISE RISK
Robust strategy development
and monitoring
Measurement
The Group’s RAS represents a ‘risk envelope’ against which chosen
strategies and financial plans are assessed and within which
chosen strategies must operate. The RAS, and associated risk
appetite framework, is therefore a key means of controlling
strategic risk. The risk appetite framework comprises an extensive
system of measures, thresholds and other controls, which together
ensure that the Group operates within the Board’s approved
appetite for strategic risk.
Mitigation
The Group will maintain a register of sectors that give rise to
heightened levels of environmental/climate, social and governance
related risks. The Group will maintain an approach to these risks
where sectors can be prohibited or where additional due diligence
is required before exposures may be approved. In assessing
sectors, the Group will consider the potential impact from transition
risks arising from changing legislation and societal views.
Providing a significantly more accurate understanding of the
Group’s risks through enhanced risk data to track risk levels,
concentrations and take better risk-based decisions should also
mitigate strategic and enterprise risk. Resultant increased capital
availability or generation should raise the Group’s ability to invest,
widening the Group’s strategic options and helping to mitigate
strategic and enterprise risk.
The Risk function undertakes regular risk oversight activity, with
workstreams focused solely on the execution risk of delivering
integration, placing customers’ interests at the centre of all aspects
of change.
Monitoring
A range of financial and non-financial metrics, including RoTE,
lending growth, customer acquisition, NIM, and others, are key
performance indicators used to monitor performance relative to
strategic objectives. They are monitored against the Financial Plan
by the Group’s Board and Executive Leadership Team, who react
to deviations from targets and modify strategy accordingly.
Furthermore, a number of macroeconomic Tier 1 RAS Early Warning
Indicators (EWIs) were established during 2019. While the Group
is unable to influence these metrics explicitly, they are included
in order to provide sight of possible portfolio deterioration ahead
of specific internal focused metrics.
Strategy is delivered within a well-defined risk appetite
and RMF with continual monitoring in place.
Strategic and enterprise risk is the risk of significant loss, loss of
earnings or damage arising from decisions or actions that impact
the long-term interests of the Group’s stakeholders or from an
inability to adapt to external developments. Strategic risk can arise
if the Group designs or implements an inappropriate strategic plan,
designs an appropriate plan but fails to implement it or implements
the strategic plan as intended, failing to take account of a change
in external circumstance.
This includes the potential for increased execution risk as a
result of integration and transformation activity, alongside the
requirement to maintain focus on the core operations of the
business. There is the risk that this significant programme of
change results in increased costs, delayed benefit realisation
and customer harm.
Strategic risk also includes an inability to respond effectively to
cultural, structural and regulatory change; failure to establish and
execute a compelling digital strategy or increase organisational
capability in support of this; being an inefficient, high cost,
uninspiring or uncompetitive provider of product and service;
or failing to respond to climate change risks in our direct and
indirect operations.
Enterprise risk includes managing and implementing effective
governance, reporting and maintaining external relations to
promote the brand and support the Group’s ability to successfully
achieve strategic goals.
Risk appetite
The risk position for strategic and enterprise risk, referenced in the
Group’s RAS, takes account of the fact that the Group will need to
take an acceptable level of risk to successfully grow the business
and will also need to implement transformational changes to the
operating model and supporting frameworks to achieve this. There
is, however, a requirement to pursue these goals in a controlled
and prudent manner given the potential downside in financial,
reputational, conduct and broader risk implications.
The risks and constraints to growth opportunities will be fully
evaluated via the Strategic and Financial Plan and RAS setting to
ensure that there is no detrimental impact to the broader strategy.
Exposures
The Group operates in an increasingly competitive environment,
with rapidly evolving technology and uncertain political and
regulatory agendas. In addition, the Group is competing with peer
and challenger banks, including some with innovative business
models and low-cost bases, such as fast-growing peer-to-peer
lenders and crowd funders.
This uncertainty has been exacerbated by the recent share price
volatility and its resultant impact on the brand, potentially triggering
increased reputation risk. The creation of divisions is enabling
enhanced and dedicated focus on customer segments, however,
reflective of the generally negative outlook the RAS settings have
either been held at existing levels or tightened to reflect the
expectations of a tougher competitive and economic environment.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 191
PEOPLE
RISK
Supporting our colleagues to build a successful,
customer-centric business
Continued embedding of the people framework ensures overall
people risk is maintained within risk appetite during this period
of significant change.
People risk is defined as the risk of not having sufficiently skilled
and motivated colleagues who are clear on their responsibilities
and accountabilities and who behave in an ethical way. This could
lead to inappropriate decision making that is detrimental to
customers, other colleagues or our shareholders and could
ultimately lead to regulatory sanction.
Our drive to foster a culture which engages and encourages our
people to deliver customer-focused outcomes with a clear set of
supporting Values and Behaviours is an important step in mitigating
people risk.
Risk appetite
While the organisational structure changes being implemented
to support the integration of Virgin Money Holdings (UK) PLC will
drive an inherent increase in people risk, the combined Group will
provide a catalyst for cultural transformation, which aims to create
a high performing, purpose driven, customer-centric organisation,
where colleagues have accountability and responsibility, alongside
appropriate reward structures.
The Group will not accept a material increase in risk as a result
of colleagues not conducting themselves in the manner expected,
nor will the Group act in a manner that may affect the health and
well-being of colleagues. The Group will not take intentional action
that may impact on its ambition to build an inclusive culture and
will continue to embed activities that support the required
cultural change.
Exposures
People risk is inherent in the day-to-day operation of the business
and is controlled through a set of Values, Behaviours and Policies.
Measurement
The Group has a range of Tier 1 and Tier 2 RAS metrics in place
which help to measure and report people risk.
The Group’s operational controls are designed to mitigate the risks
associated throughout each element of the colleague life cycle.
Group-wide systems provide tools and online guidance to all
colleagues to support them in discharging their accountabilities.
Mitigation
People risk is mitigated in three core ways:
— Managing people risk across the Group: The changing internal
and external environment raises challenges relative to the
Group’s ability to manage people risk, as part of the overall
business strategy. The transformation of the banking industry
is changing the demand for skills, particularly in relation to
technology, information security, serving customers digitally
and responding to market developments. The Group’s operating
controls are effective in managing these risks and there is
a focus on the Group’s ability to plan and predict resource
needs during this period of cost challenges and increased use
of technology. The Group’s integration evolution will have
implications for colleagues and will create an increased level
of people risk during periods of uncertainty. Therefore, material
structural changes will follow organisational design principles,
the Senior Manager and Certification Framework and have
appropriate governance.
— Managing the people management framework: Controls are
deployed effectively by people leaders and senior management
in the day-to-day management of people risk. People risk
indicators are constantly reviewed to determine if any systemic
issues exist and to agree appropriate remediation. These
include health and well-being, succession and conduct.
— The role of the HR function: HR partners support the Executive
Leadership Team and provide broader support to all colleagues
regarding all matters impacting the colleague life cycle which
runs from recruitment to leaving the Group. The Group has
a three-tier model incorporating: ourPeople (web-based);
HR Services, supported by specialist teams like Reward;
Organisational Development; Payroll; Case Management; and
full business partnering to the Executive Leadership Team.
Monitoring
People risks including culture are monitored and reported through
Executive and Board Governance Committees. IA is piloting
independent deep dives in specific areas of the business, to
complement existing reporting and measure alignment between
actual and intended culture.
Stress testing
The people risks associated with a stressed scenario are
automatically captured and analysed through the Group’s suite
of operational risk scenarios. These scenarios consider both
the colleagues needed to maintain business-as-usual services
to customers as well as the key subject matter experts needed
to keep critical functions operating while under duress.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATIONRISK REPORTVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 192
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019RISK REPORT 193
FINANCIAL
STATEMENTS
Financial assets and liabilities at fair value through profit or loss
Loans and advances to customers
Impairment provisions on credit exposures
Independent auditor’s report to the members of Virgin Money UK PLC (formerly CYBG PLC)
Consolidated financial statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated statement of cash flows
Section 1: Basis of preparation
Section 2: Results for the year
2.1 Segment information
2.2 Net interest income
2.3 Non-interest income
2.4 Operating and administrative expenses before impairment losses
2.5 Taxation
2.6
Earnings per share
Section 3: Assets and liabilities
3.1
3.2
3.3 Securitisation and covered bond programmes
3.4 Cash and balances with central banks
3.5
3.6 Derivative financial instruments
3.7
3.8
3.9 Property, plant and equipment
3.10
Intangible assets and goodwill
3.11 Deferred tax
3.12 Retirement benefit obligations
3.13 Customer deposits
3.14 Debt securities in issue
3.15 Due to other banks
3.16 Provisions for liabilities and charges
3.17 Other liabilities
3.18 Fair value of financial instruments
3.19 Acquisition of Virgin Money Holdings (UK) PLC
Section 4: Capital
Equity
4.1
Equity based compensation
4.2
Section 5: Other notes
5.1 Contingent liabilities and commitments
5.2 Notes to the statement of cash flows
5.3 Related party transactions
5.4
Financial assets at fair value through other comprehensive income
Financial assets available for sale
Transition to IFRS 9 ‘Financial Instruments’ from IAS 39 ‘Financial Instruments: Recognition and Measurement’
and the adoption of IFRS 15 ‘Revenue from Contracts with Customers’
5.5 Pillar 3 disclosures
5.6 Post balance sheet events
Company financial statements
Section 6: Notes to the Company financial statements
6.1 Company basis of preparation
6.2 Company investments in controlled entities
6.3 Company debt securities in issue
6.4 Company fair value of financial instruments
6.5 Company reserves
6.6 Company related party transactions
194
204
204
205
206
207
208
209
215
215
215
217
218
220
221
222
222
223
226
227
228
229
235
235
236
237
238
240
245
246
247
248
250
250
253
255
255
257
259
259
261
262
264
266
266
267
270
270
270
273
274
274
275
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 194
INDEPENDENT
AUDITOR’S REPORT
to the members of Virgin Money UK PLC
(formerly CYBG PLC)
Our opinion on the financial statements
In our opinion:
— the Virgin Money UK PLC Group financial statements and Parent company financial statements (the ‘financial statements’) give a true
and fair view of the state of the Group’s and of the Parent company’s affairs as at 30 September 2019 and of the Group’s loss for the
year then ended;
— the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’)
as adopted by the European Union;
— the Parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
as applied in accordance with the provisions of the Companies Act 2006; and
— the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
What we have audited
The financial statements comprise:
GROUP
Consolidated income statement for the year ended 30 September 2019
Consolidated statement of comprehensive income for the year ended
30 September 2019
PARENT COMPANY
Consolidated balance sheet as at 30 September 2019
Company balance sheet as at 30 September 2019
Consolidated statement of changes in equity for the year ended
30 September 2019
Company statement of changes in equity for the
year ended 30 September 2019
Consolidated statement of cash flows for the year ended 30 September 2019
Company statement of cash flows for the
year ended 30 September 2019
Related notes 1.1 to 5.6 to the financial statements
Related notes 6.1 to 6.6 to the financial statements
Certain required disclosures have been presented elsewhere in the Annual Report and Accounts, rather than in the notes to the
financial statements. These have been cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union
and, as regards the Parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the audit of the financial statements section of our report
below. We are independent of the Group and Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 195
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs(UK) require us to report
to you whether we have anything material to add or draw attention to:
— the disclosures in the Annual Report set out on page 28 to 29 that describe the principal risks and explain how they are being managed
or mitigated;
— the Directors’ confirmation set out on page 79 in the Annual Report that they have carried out a robust assessment of the principal risks
facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;
— the Directors’ statement set out on page 209 in the financial statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to
continue to do so over a period of at least 12 months from the date of approval of the financial statements;
— whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3)
is materially inconsistent with our knowledge obtained in the audit; or
— the Directors’ explanation set out on page 134 in the Annual Report as to how they have assessed the prospects of the entity, over what
period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable
expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
Overview of our audit approach
Key audit matters
— Provisions for Payment Protection Insurance.
— Impairment of loans.
— Revenue recognition – effective interest method accounting.
— Accounting for the acquisition of Virgin Money Holdings (UK) PLC.
Audit scope
— We performed an audit of the complete financial information of the Group and Company.
— All audit work performed for the purposes of the Group audit was undertaken by the primary team.
Materiality
— Overall Group materiality was £25m which represents 4.4% of underlying profit before tax.
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 our opinion thereon, and we do not provide a separate opinion on these matters.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 196
INDEPENDENT
AUDITOR’S REPORT
to the members of Virgin Money UK PLC
(formerly CYBG PLC)
Key observations communicated
to the Board’s Audit Committee
We communicated to Audit Committee that
the provision for PPI related claims as at
30 September 2019 as held by the Group
was within our independently determined
range of reasonable outcomes and was
compliant with the requirements of the
applicable accounting standards.
We noted that the Group’s disclosures
describe the uncertainties and risks
associated with determination of the
provision, and sensitivity of the provision
to changes in key assumptions.
The Directors’ best estimate for the
cost required to process the remaining
unprocessed PPI cases as at 30 September
2019 was determined via probability weighting
a number of likely scenarios. We noted to the
Audit Committee that while the risk in relation
to estimation uncertainty has reduced as
a result of the deadline now having passed,
the estimation process remains inherently
uncertain and required significant judgements
to be made by Directors.
We also noted to the Audit Committee the
upper end of our independently determined
range illustrated the risk that the costs
incurred by the Group could materially exceed
the Directors’ estimate, which is consistent
with the disclosures made within note 3.16 to
the financial statements.
Risk
Our response to the risk
Payment Protection Insurance
(PPI) Provision
The Group has recorded £379m in
relation to PPI redress. Please refer
to page 89 (Audit Committee report),
pages 248 and 249 (Provisions for
liabilities and charges note), pages 259
and 260 (Contingent liabilities and
commitments note).
The Group has a material provision
relating to its conduct towards its past
and present customers linked to its
historic practices of PPI sales.
The FCA deadline of 29 August 2019
(the ‘deadline’) for customers to lodge
PPI related complaints has now passed.
The Group received a significant number
of complaints and information requests
from claims management companies and
direct from consumers in the run up to
this deadline. As at 30 September 2019,
a large number of these complaints
remained unprocessed.
Significant judgements and assumptions
are required to be made by the Directors
in relation to the quality of the complaints
and information requests (‘IRs’) received,
the quantum of future redress payments
and the associated administration costs
that will be required. The most significant
assumption is in relation to the proportion
of IRs and complaints that will ultimately
require PPI redress payments, and costs
associated with doing so. Details of these
assumptions are reported in further detail
on page 249 in note 3.16.
We tested key controls operating
within the PPI case handling process
which supported the data used in the
determination of the key assumptions.
We found that we could rely on
these controls.
We examined the model used by the
Directors to determine a best estimate
of the provision for mis-sold PPI.
We assessed the appropriateness of key
PPI provision model assumptions which
included IR to complaint conversion,
uphold and average redress rates, as well
as case processing costs, with reference
to the Group’s historic experience and
comparisons to publicly available
information from across the industry.
We considered the results of the
sampling exercise undertaken by the
Directors in relation to the population
of IRs and claims received in the two
months before the deadline.
We tested the clerical accuracy of the
Directors’ provision calculations and
sensitivity analysis.
We determined an independent range
of reasonable future PPI cost outcomes
using the Group’s historical experience
of PPI claims and the sampling exercise
outcomes, and we compared this range
to the Directors’ estimate. In evaluating
the Directors’ provision assumptions,
we considered the Group’s historical
forecasting accuracy in this area and
we examined correspondence during the
year between the Group and the FCA,
and other regulatory pronouncements.
We compared the Directors’ assumptions
to our own expectations based on the
Group’s historical experience, current
trends and our industry knowledge.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS Key observations communicated
to the Board’s Audit Committee
We communicated that we were satisfied
that ECL provisions were reasonable and in
compliance with the requirements of IFRS 9.
We communicated to the Audit Committee
that our independent testing of models and
underlying modelling assumptions noted some
minor differences that were considered to be
immaterial in aggregate.
We also communicated that our challenge
in respect of the economic scenarios adopted
by the Directors, concluded that the resulting
position was considered to be within a
reasonable range of potential outcomes.
197
Risk
Our response to the risk
Impairment of loans
The Group adopted the new accounting
standard for financial instruments (IFRS 9)
from 1 October 2018, which introduced
new requirements for the classification
and measurement of financial assets
and liabilities and the recognition of
impairment of financial assets. Please
refer to pages 145 and 146 (Credit risk
report), pages 223 to 225 (Impairment
provisions on credit exposures).
At 30 September 2019, the Group
reported total gross loans of
£73,246 million and £362 million
of loan loss provisions.
Key judgements and estimates in respect
of the measurement of expected credit
losses (‘ECLs’) include the:
— allocation of assets to Stage 1, 2, or 3
using criteria in accordance with the
accounting standard;
— accounting interpretations and
modelling assumptions used to build
the models that calculate the ECLs;
— completeness and accuracy of data
used to calculate the ECLs;
— inputs and assumptions used to
estimate the impact of multiple
economic scenarios;
— completeness and valuation of post
model adjustments;
— measurements of individually
assessed provisions including the
assessment of multiple scenarios; and
— accuracy and adequacy of the
financial statement disclosures.
As IFRS 9 was adopted by the Group
on 1 October 2018, we performed audit
procedures on the opening balances
to gain assurance on the impact of
transition from IAS 39. This included
evaluating accounting interpretations
and disclosures, as well as the
calculation of the adjustment against
the requirements of IFRS 9.
We tested the design and operating
effectiveness of controls operating
within processes relevant to ECL
calculations. This included credit
monitoring, individual provisions
and production of journal entries.
We performed independent calculations
of the Group’s staging, to determine if
they were reasonable given the Group’s
lending portfolio, risk profile, credit
risk management practices and the
macroeconomic environment. We
considered trends in the economy and
industries to which the Group is exposed.
We challenged the criteria used to
allocate assets to Stage 1, 2 or 3 in
accordance with IFRS 9. We tested assets
in Stage 1, 2 and 3 to verify that they
were allocated to the appropriate Stage.
We tested the assumptions, inputs and
formulae used in a risk-based sample
of ECL models. This included assessing
the appropriateness of model design and
the calculations used, and recalculating
Probability of Default, Loss Given Default
and Exposure at Default for a sample
of individual loans within a sample
of models.
To assess data quality, we tested data
used in the ECL calculation by reconciling
and performing sample tests for accuracy
of key data fields to source systems. To
test credit monitoring, we independently
recalculated risk ratings for a sample of
performing and non-performing loans and
compared to the Group’s determinations.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 198
INDEPENDENT
AUDITOR’S REPORT
to the members of Virgin Money UK PLC
(formerly CYBG PLC)
Risk
Our response to the risk
Key observations communicated
to the Board’s Audit Committee
Impairment of loans (continued)
We assessed the economic scenario base
case and alternative economic scenarios
adopted by the Directors with economics
specialists. We challenged the probability
weighting ascribed to the scenarios and
compared them to other scenarios from
a variety of external sources, as well as
EY internally developed forecasts.
With the assistance of our Economics
specialists, we assessed whether
forecast macroeconomic variables, such
as GDP, unemployment, interest rates
and House Price Index, were appropriate
loan loss provision drivers.
We assessed the completeness and
appropriateness of the Directors’ post
model adjustments and recalculated
a sample. Based on current economic
conditions and market circumstances,
we considered the need for sector or
systemic adjustments. We assessed
the appropriateness of the scenarios
used and the calculation of the overlay
adopted in response to Brexit related
economic uncertainty.
With the support of our internal valuation
specialists, we recalculated ECL
provisions for a sample of individually
assessed loans including comparing to
alternative scenarios and challenging
probability weights assigned.
We also assessed a sample of individual
loans classified as performing loans
within higher risk sectors, such as
construction, retail, automotive,
commercial real estate, shipping and
oil and gas where no specific provision
was held.
We assessed the adequacy and
appropriateness of the disclosures made
within the financial statements, including
those related to the transition from IAS
39 to IFRS 9, for compliance with the
accounting standards.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS Key observations communicated
to the Board’s Audit Committee
We communicated to the Audit Committee
that the models, assumptions and calculations
informing the EIR calculation as at
30 September 2019 were reasonable and that
these resulted in EIR adjustments to interest
income which were appropriately derived.
We also communicated our observations on
the Directors’ key assumptions. We noted the
potential future risks to the EIR adjustments
related to potential changes in customer
behaviour as a result of wider current
economic, market and regulatory pressures,
and that we considered the modelling
adjustments recorded by the Directors
in respect of these risks to be within
a reasonable range of outcomes.
We also noted that the unwind of the
fair value adjustments recorded by the
Directors were reasonable in comparison
to the customer behaviour assumptions
used within the Group’s EIR models.
199
Risk
Our response to the risk
We assessed the Directors’ EIR
accounting policy and the revised
estimation methodology adopted by
the Group during the year for compliance
with the accounting standard.
We gained an understanding of the key
processes, controls, assumptions and
judgements used within the Directors’
EIR models.
We also assessed the Directors’ inclusion
or exclusion of key streams of income
and expenditure within the Group’s EIR
models. We compared the Directors’
forecasts of customer behaviours
and balance attrition rates to recent
experience and historical trends within
the lending portfolios.
With respect to the amortisation of the
fair value adjustments relating to the
acquired portfolios, we assessed the key
assumptions adopted by the Directors for
consistency and appropriateness against
the assumptions used in the Group’s
EIR models.
We developed an independent
assessment of the reasonable range
of forecast future cash flows outcomes
using the Group’s historical experience
and our understanding of the industry,
and assessed the Directors’ modelled
EIR outcomes against this range.
We performed data integrity testing
on the key sources of information used
within the EIR calculations.
We assessed the accuracy of the
disclosures made within the financial
statements regarding the key estimates
made within the EIR models, and their
sensitivity to reasonable alternative
assumptions.
Revenue recognition –
effective interest method
The Group records interest income on its
mortgage and credit card portfolio under
the effective interest rate (‘EIR’) method.
Please refer to in note 2.2 on pages 215
and 216.
Following the acquisition of Virgin Money
Holdings (UK) PLC on 15 October 2018,
EIR accounting on the Group’s credit card
portfolio increased in significance. As set
out in note 2.2 on page 216, during the
year the Group revised its estimation of
EIR income, and the associated balance
sheet amounts, across its mortgage and
credit cards portfolios.
The fair value adjustments recorded
on acquired portfolios are amortised
over the projected behavioural lives
of the financial instruments. As a result,
the unwind of the fair value adjustment
recorded on acquisition is naturally
connected to the EIR calculation and its
key assumptions. This adds additional
complexity to the calculation of amounts
recognised in the income statement
under EIR accounting.
The EIR method spreads the income
statement recognition of income
and expense cash flows that are,
in substance, integral to the overall
yield of the financial instrument over
its modelled life. For both secured and
unsecured lending the Group utilises
models to predict future cash flows,
and recognise interest income under
the EIR accounting method.
EIR models are sensitive to judgements
about the expected behavioural lives and
future yields of the product portfolios to
which they relate. Due to the complexity
of calculations, the degree of judgement
exercised by the Directors in respect of
forecast future cash flows, the different
products for which fees are recognised,
and the sensitivity of the amounts
recognised in the financial statements
to key assumptions, this was considered
a key audit matter.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 200
INDEPENDENT
AUDITOR’S REPORT
to the members of Virgin Money UK PLC
(formerly CYBG PLC)
Key observations communicated
to the Board’s Audit Committee
We communicated to the Audit Committee
that the methodology, key judgements
and assumptions applied by the Directors
in determining the acquisition fair values
of Virgin Money Holdings (UK) PLC’s assets
and liabilities led to valuations that were
within acceptable ranges.
Our valuation assessments for intangible
assets related to the customer relationships
for certain business units and other intangible
assets noted minor differences that were
not material in the context of the financial
statements.
We noted that the required disclosures related
to the business combination had been made
appropriately.
Risk
Our response to the risk
We gained an understanding of the
Directors’ fair value modelling process
for material asset and liability balances
acquired in the business combination.
With the involvement of our valuation
and business modelling specialists,
we assessed the Directors’ valuation
models and the key assumptions used
within them, which were used to
determine the acquisition fair values
of the assets and liabilities acquired.
We challenged the completeness of
the Directors’ identification of intangible
assets, and valuation ascribed to
those assets.
We assessed the Directors’ disclosures
of the acquisition of Virgin Money
Holdings (UK) PLC for compliance with
the disclosure requirements of IFRS 3
and recalculated the resulting goodwill
recognised on acquisition.
Accounting for the acquisition of Virgin
Money Holdings (UK) PLC
As set out in note 3.19 on pages 253
and 254, on 15 October 2018, the Group
acquired Virgin Money Holdings (UK) PLC
which comprised £45bn of assets and
£43bn of liabilities. The transaction
resulted in the recognition of £11m
of goodwill.
Under IFRS 3, the assets and liabilities
acquired in a business combination are
recorded at fair value.
Significant judgement was required
in determining the fair values of assets
and liabilities as at the date of acquisition,
particularly:
— the future cash flow expectations
that formed the basis on which the
mortgage and credit card portfolio
fair values were determined;
— the appropriateness of the discount
rates used in the discounted cash flow
valuation models;
— key judgements regarding the
replacement funding costs assumed
within the Term Funding Scheme
valuation; and
— the Directors’ assessment of other
intangible assets.
In the prior year, our auditor’s report included a key audit matter in respect of SME lending impairment provisions assessed under the
previously applicable accounting standard IAS 39. In the current period, IAS 39 was superseded by IFRS 9 which has been identified
as a key audit matter as outlined in the table above.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit
and in forming our audit opinion.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 201
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our
audit procedures.
We determined materiality for the Group and Parent Company to be £25.0m (2018: £15.0m), which represents 4.4% of underlying profit
on ordinary activities before tax (consistent with our prior year approach, this is defined as the Group’s profit before tax adjusted to exclude
one-off items incurred during the year and those related to conduct provisions and restructuring), which equates to 0.5% of Group equity.
This measure of underlying profit before tax is consistent with the wider industry, and a results-based measure is the most commonly
used approach for listed and regulated entities. We observed that this measure is frequently referred to by users of the Group’s financial
statements. We selected underlying profit before tax, excluding Virgin Money pre-acquisition losses, as this better reflects the longer
term performance of the Group. This is also set out on page 52 in the Financial Results, in the Directors’ reconciliation of statutory to
proforma results.
Performance materiality
Performance materiality is the application of materiality at the individual account or balance level. It is set at an amount to reduce to an
appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that
performance materiality was 75% (2018: 75%) of our planning materiality, namely £18.8m (2018: £11.3m). We set performance materiality
at this percentage due to our previous experience as auditors of the Group, from which we concluded that there is a lower expectation
of material financial statement inaccuracies due to the effective control environment and only minor audit differences resulting from our
prior and current year work. Our approach is consistent with the prior year.
Reporting threshold
This is the amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £1.3m (2018: £0.8m),
which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on
qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other
relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report set out on pages 1 to 192, including the Strategic report set
out on pages 2 to 52, the Financial results set out on pages 40 to 52, Governance set out on pages 53 to 136, the Risk report set out on
pages 137 to 192, and Additional information set out on pages 277 to 288 other than the financial statements and our auditor’s report
thereon. The Directors are responsible for the other information.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this
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 the other information, we are required
to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the
following conditions:
— fair, balanced and understandable set out on page 136 – the statement given by the Directors that they consider the Annual Report and
financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to
assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
— Audit Committee reporting set out on pages 86 to 92 – the section describing the work of the Audit Committee does not appropriately
address matters communicated by us to the Audit Committee is materially inconsistent with our knowledge obtained in the audit; or
— Directors’ statement of compliance with the UK Corporate Governance Code set out on page 67 – the parts of the Directors’ statement
required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions
specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 202
INDEPENDENT
AUDITOR’S REPORT
to the members of Virgin Money UK PLC
(formerly CYBG PLC)
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
— the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
— the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the Parent company and its environment obtained in the course of the
audit, we have not identified material misstatements in the Strategic report or the Directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if,
in our opinion:
— adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
— the Parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with
the accounting records and returns; or
— certain disclosures of Directors’ remuneration specified by law are not made; or
— we have not received all the information and explanations we require for our audit.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement set out on page 136, 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 and Parent company’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless 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.
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.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 203
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
The objectives of our audit, in respect of fraud, are: to identify and assess the risks of material misstatement of the financial statements
due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through
designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity
and management. Our audit approach in respect of irregularities, including fraud, was as follows:
— we obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most
significant were the regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA);
— we understood how the Group complies with these legal and regulatory frameworks by making enquiries of management, internal audit,
and those responsible for legal and compliance matters. We also reviewed correspondence between the Group and UK regulatory
bodies; reviewed minutes of the Board and Executive Risk Committee; and gained an understanding of the Group’s approach to
governance, demonstrated by the Board’s approval of the Group’s governance framework and the Board’s review of the Group’s risk
management framework (RMF) and internal control processes;
— we assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur,
by considering the controls that the Group has established to address risks identified by the entity, or that otherwise seek to prevent,
deter or detect fraud. We also considered performance and incentive plan targets and their potential to influence management to
manage earnings or influence the perceptions of investors and stakeholders;
— based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations identified
in the paragraphs above. Our procedures involved inquiries of legal counsel, executive management, internal audit, and focused testing,
as referred to in the Key Audit Matters section above; and
— the Group operates in the banking industry which is a highly regulated environment. As such, the Senior Statutory Auditor considered
the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which
included the use of specialists where appropriate.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters we are required to address:
— we were appointed as Virgin Money UK PLC’s external auditor and signed an engagement letter on 14 January 2016, prior to Virgin
Money UK PLC (formerly CYBG PLC) becoming the holding company of the Group on its Demerger and IPO in February 2016. The period
of total uninterrupted engagement as auditors of Virgin Money UK PLC including previous renewals and reappointments, is four years,
covering the years ending 30 September 2016 to 30 September 2019;
— the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Company and we remain
independent of the Group and the Company in conducting the audit; and
— the audit opinion is consistent with the additional report to the Audit Committee.
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.
Steven Robb (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP,
Statutory Auditor
Leeds
27 November 2019
Notes
1. The maintenance and integrity of the Virgin Money UK PLC website is the responsibility of the Directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial
statements since they were initially presented on the website.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 204
CONSOLIDATED
INCOME STATEMENT
FOR THE YEAR ENDED 30 SEPTEMBER
Interest income
Other similar interest
Interest expense and similar charges
Net interest income
Gains less losses on financial instruments at fair value
Other operating income
Non-interest income
Total operating income
Operating and administrative expenses before impairment losses
Operating profit/(loss) before impairment losses
Impairment losses on credit exposures
Loss on ordinary activities before tax
Tax credit
Loss for the year
Attributable to:
Ordinary shareholders
Other equity holders
Non-controlling interests
Loss for the year
Basic loss per share (pence)
Diluted loss per share (pence)
NOTE
2.2
2.3
2.4
3.2
2.5
2.6
2.6
2019
£M
2,420
13
(919)
1,514
(17)
252
235
1,749
(1,729)
20
(252)
(232)
38
(194)
(268)
41
33
(194)
(17.9)
(17.9)
2018
£M
1,098
15
(262)
851
(3)
159
156
1,007
(1,130)
(123)
(41)
(164)
19
(145)
(181)
36
–
(145)
(19.7)
(19.7)
All material items dealt with in arriving at the loss before tax for the above years relate to continuing activities.
The notes on pages 209 to 266 form an integral part of these financial statements.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
205
FOR THE YEAR ENDED 30 SEPTEMBER
Loss for the year
ITEMS THAT MAY BE RECLASSIFIED TO THE INCOME STATEMENT
Change in cash flow hedge reserve
Gains/(losses) during the year
Transfers to the income statement
Taxation thereon – deferred tax (charge)/credit
Taxation thereon – current tax credit
Change in FVOCI reserve
Gains during the year
Transfers to the income statement
Taxation thereon – deferred tax charge
Total items that may be reclassified to the income statement
ITEMS THAT WILL NOT BE RECLASSIFIED TO THE INCOME STATEMENT
Change in asset revaluation reserve
Taxation thereon – deferred tax (charge)/credit
Remeasurement of defined benefit pension plans
Taxation thereon – deferred tax (charge)/credit
Taxation thereon – current tax credit
Total items that will not be reclassified to the income statement
Other comprehensive income/(losses), net of tax
Total comprehensive losses for the year, net of tax
Attributable to:
Ordinary shareholders
Other equity holders
Non-controlling interests
Total comprehensive losses for the year, net of tax
The notes on pages 209 to 266 form an integral part of these financial statements.
NOTE
2019
£M
(194)
2018
£M
(145)
3.9
3.12
73
(57)
(9)
6
13
13
(4)
(2)
7
20
–
(1)
110
(56)
7
61
60
80
(114)
(188)
41
33
(114)
(58)
9
11
–
(38)
–
–
–
–
(38)
–
1
(9)
3
–
(6)
(5)
(43)
(188)
(224)
36
–
(188)
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 206
CONSOLIDATED
BALANCE SHEET
AS AT 30 SEPTEMBER
ASSETS
Financial assets at amortised cost
Loans and advances to customers
Cash and balances with central banks
Due from other banks
Financial assets at fair value through profit or loss
Loans and advances to customers
Derivative financial instruments
Other financial assets
Financial assets at fair value through other comprehensive income(1)
Financial assets available for sale(1)
Property, plant and equipment
Intangible assets and goodwill
Current tax assets
Deferred tax assets
Defined benefit pension assets
Other assets
Total assets
LIABILITIES
Financial liabilities at amortised cost
Customer deposits
Debt securities in issue
Due to other banks
Financial liabilities at fair value through profit or loss
Customer deposits
Derivative financial instruments
Deferred tax liabilities
Provisions for liabilities and charges
Other liabilities
Total liabilities
EQUITY
Share capital and share premium
Other equity instruments
Capital reorganisation reserve
Merger reserve
Other reserves
Retained earnings
Total equity
Total liabilities and equity
NOTE
3.1
3.4
3.5
3.6
3.5
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.5
3.6
3.11
3.16
3.17
4.1
4.1
4.1
4.1
4.1
4.1
2019
£M
2018(2)
£M
73,095
10,296
1,018
253
366
14
4,328
–
145
516
13
322
396
237
90,999
64,000
9,591
8,916
4
273
201
459
2,534
85,978
146
915
(839)
2,128
10
2,661
5,021
90,999
32,748
6,573
693
362
262
–
–
1,562
88
412
–
206
212
338
43,456
28,904
4,973
3,088
15
361
77
331
2,521
40,270
89
450
(839)
633
(20)
2,873
3,186
43,456
(1) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.
(2) The comparative year has been restated in line with the current year presentation. Refer to note 1.10.
The notes on pages 209 to 266 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 27 November 2019 and were signed on its behalf by:
David Duffy
Chief Executive Officer
Ian Smith
Group Chief Financial Officer
Virgin Money UK PLC, Registered number: 09595911
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS
207
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
SHARE
CAPITAL
AND
SHARE
PREMIUM
£M
4.1.1
CAPITAL
REORG’
RESERVE
£M
4.1.3
MERGER
RESERVE
£M
4.1.4
NOTE
OTHER RESERVES
OWN
SHARES
HELD
£M
4.1.5
DEFERRED
SHARES
RESERVE
£M
4.1.5
EQUITY
BASED
COMP’
RESERVE
£M
4.1.5
ASSET
REVAL
RESERVE
£M
4.1.5
AVAILABLE
FOR SALE
RESERVE(1)
£M
4.1.5
FVOCI
RESERVE(1)
£M
4.1.5
CASH
FLOW
HEDGE
RESERVE
£M
4.1.5
RETAINED
EARNINGS
£M
NON
CONTROL-
LING
INTEREST
£M
4.1.6
–
–
–
–
–
1
–
89
–
89
–
–
–
88
–
(839)
–
633
–
OTHER
EQUITY
INSTRU-
MENTS
£M
4.1.2
450
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(839)
–
633
–
450
–
(839)
–
–
633
–
–
450
–
–
–
–
–
54
– 1,495
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
23
–
–
–
–
–
–
–
–
–
–
As at 1 October 2017
Loss for the year
Other comprehensive
income/(losses),
net of tax
Total comprehensive
income/(losses) for
the year
Dividends paid to
ordinary shareholders
AT1 distribution paid
(net of tax)
Transfer from equity based
compensation reserve
Ordinary shares issued
Equity based
compensation expensed
As at 30 September 2018
Changes on adoption
of IFRS 9 and IFRS 15
(note 5.4)
As at 1 October 2018
Loss for the year
Other comprehensive
(losses)/income
net of tax
Total comprehensive
(losses)/income for
the year
Acquisition of Virgin
Money Holdings (UK) PLC
Dividends paid to ordinary
shareholders
AT1 distribution paid
(net of tax)
Distributions to
non-controlling interests
(net of tax)
Transfer from equity based
compensation reserve
Equity based
compensation expensed
Settlement of Virgin
Money Holdings (UK) PLC
share awards
AT1 issuance
Capital note redemption
As at 30 September 2019
8
–
–
–
–
–
(7)
–
9
10
–
10
–
1
–
1
1
–
–
–
–
–
2
–
2
–
–
(1)
–
(1)
–
–
–
–
(8)
4
–
–
–
6
–
–
–
–
–
–
–
–
–
1
7
–
–
–
–
–
–
–
–
7
(7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1) 3,055
(145)
–
(38)
(6)
(38)
(151)
–
–
–
–
(9)
(29)
7
–
–
–
(39) 2,873
–
(18)
(39) 2,855
(194)
–
13
61
13
(133)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
TOTAL
EQUITY
£M
3,402
(145)
(43)
(188)
(9)
(29)
–
1
9
3,186
(21)
3,165
(194)
80
(114)
–
–
–
–
–
–
–
422
1,989
(45)
(33)
(26)
8
–
–
–
–
–
–
(45)
(33)
(26)
–
4
–
–
–
–
–
–
–
–
–
–
4
4
–
7
7
–
–
–
–
–
–
3
–
–
146
–
–
–
–
–
–
(839) 2,128
–
465
–
915
4
–
–
(1)
(4)
–
–
19
–
–
–
11
–
–
–
1
–
34
(26) 2,661
–
–
(422)
4
465
(388)
– 5,021
(1) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.
The notes on pages 209 to 266 form an integral part of these financial statements.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS
208
CONSOLIDATED STATEMENT
OF CASH FLOWS
FOR THE YEAR ENDED 30 SEPTEMBER
OPERATING ACTIVITIES
Loss on ordinary activities before tax
Adjustments for:
Non-cash or non-operating items included in loss before tax
Changes in operating assets
Changes in operating liabilities
Interest received
Interest paid
Tax paid
Net cash provided by/(used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Interest received
Cash acquired on acquisition of Virgin Money Holdings (UK) PLC
Proceeds from maturity of financial assets at FVOCI
Proceeds from maturity of available for sale investments
Proceeds from sale of financial assets at FVOCI
Proceeds from sale of available for sale investments
Purchase of financial assets at FVOCI
Purchase of available for sale investments
Proceeds from sale of 50% (less one share) consideration in UTM
Proceeds from sale of property, plant and equipment
Purchase of property, plant and equipment
Purchase and development of intangible assets
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Interest received
Interest paid
Proceeds from issuance of other equity instruments
Repayment of AT1 classified as non-controlling interest
Redemption and principal repayment on RMBS and covered bonds
Issuance of RMBS and covered bonds
Issuance of medium-term notes/subordinated debt
Amounts drawn down under the TFS
Amounts repaid under the TFS
Ordinary dividends paid
AT1 distributions
Distributions to non-controlling interests
Net cash (used in)/provided by financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Reconciliation of movements to liabilities from cash flows arising
from financing activities
At 1 October 2018
CASH FLOWS:
Issuances
Redemptions
Repayment
NON-CASH FLOWS:
Acquisition of TFS and debt securities in issue
Fair value adjustments and associated unwind on acquired TFS and debt securities in issue
Movement in accrued interest
Unrealised foreign exchange movements
Unamortised costs
Other movements
At 30 September 2019
The notes on pages 209 to 266 form an integral part of these financial statements.
NOTE
5.2
5.2
5.2
5.2
TERM
FUNDING
SCHEME
£M
2,254
–
–
(1,295)
6,389
(48)
8
–
–
–
7,308
2019
£M
(232)
(1,035)
(2,211)
2,635
2,320
(745)
(8)
724
27
4,106
659
–
352
–
(1,647)
–
45
3
(20)
(130)
3,395
–
(81)
247
(160)
(2,003)
2,227
642
–
(1,295)
(45)
(41)
(33)
(542)
3,577
6,542
10,119
DEBT
SECURITIES
IN ISSUE
£M
4,973
2,869
(2,003)
–
3,548
8
7
45
6
138
9,591
2018
£M
(164)
(715)
(1,059)
(122)
1,108
(173)
–
(1,125)
12
–
–
245
–
822
–
(593)
–
9
(22)
(144)
329
1
(94)
–
–
(1,372)
1,049
497
1,250
(900)
(9)
(36)
–
386
(410)
6,952
6,542
TOTAL
£M
7,227
2,869
(2,003)
(1,295)
9,937
(40)
15
45
6
138
16,899
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 209
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
Section 1: Basis of preparation
Overview
This section sets out the Group’s accounting policies that relate to the consolidated financial statements as a whole. Where an accounting
policy is specific to one note, the policy is described in the note to which it relates. This section also shows new accounting standards,
amendments and interpretations which are relevant to the Group, and whether they are effective in 2019 or later years. We explain how
these changes are expected to impact the financial position and performance of the Group.
1.1 General information
The Company is a public company limited by shares, incorporated in the United Kingdom under the Companies Act and registered
in England and Wales.
The consolidated financial statements comprise those of the Company and its controlled entities, together the ‘Group’.
1.2 Basis of accounting
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and in accordance with
the provisions of the Companies Act 2006.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of land and buildings,
investment properties, and certain other financial assets and liabilities at fair value through profit or loss and other comprehensive income.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
1.3 Presentation of risk, offsetting and maturity disclosures
Certain disclosures required under IFRS 7 ‘Financial instruments: disclosures’ and IAS 1 ‘Presentation of financial statements’ have been
included within the audited sections of the Risk report. Where information is marked as audited, it is incorporated into these financial
statements by this cross reference and it is covered by the Independent auditor’s report.
1.4 Going concern
The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in
the Strategic report. In addition, the Risk report includes the Group’s risk management objectives and the Group’s objectives, policies and
processes for managing its capital.
In assessing the Group’s going concern position as at 30 September 2019, the Directors have considered a number of factors, including the
current balance sheet position, the principal and emerging risks which could impact the performance of the Group, the Group’s strategic
and financial plan and the impact of the acquisition of Virgin Money Holdings (UK) PLC. The assessment concluded that, for the foreseeable
future, the Group has sufficient capital to support its operations; has a funding and liquidity base which is strong, robust and well managed
with future capacity; and has expectations that performance will continue to improve as the Group’s strategy is executed.
As a result of the assessment, the Directors have a reasonable expectation that the Company and the Group have adequate resources
to continue in operational existence for the foreseeable future and therefore believe that the Group is well placed to manage its risks
successfully in line with its business model and strategic aims. Accordingly, they continue to adopt the going concern basis in preparing
the consolidated financial statements.
1.5 Basis of consolidation
Controlled entities are all entities (including structured entities) to which the Company is exposed, or has rights, to variable returns from
its involvement with the entity and has the ability to affect those returns through its power over the entity. An assessment of control
is performed on an ongoing basis.
Controlled entities are consolidated from the date on which control is established by the Group until the date that control ceases.
The acquisition method of accounting is used to account for business combinations other than those under common control.
A non‑controlling interest is recognised by the Group in respect of any portion of the total assets less total liabilities of an acquired entity
or entities that is not owned by the Group. Post‑acquisition, income received and expenses incurred by the entity or entities acquired are
included in the consolidated income statement on a line‑by‑line basis in accordance with the accounting policies set out herein. Balances
and transactions between entities within the Group and any unrealised gains and losses arising from those transactions are eliminated
in full upon consolidation.
The Group’s interests in joint venture entities are accounted for using the equity method and then assessed for impairment in the relevant
companies financial statements.
The consolidated financial statements have been prepared using uniform accounting policies.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 210
Section 1: Basis of preparation continued
1.6
Foreign currency
Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates, the ‘functional currency’. The consolidated financial statements are presented in pounds sterling
(GBP), which is also the Group’s presentation currency, rounded to the nearest million pounds sterling (£m) unless otherwise stated.
Transactions and balances
The Group records an asset, liability, expense or revenue arising from a transaction using the closing exchange rate between the functional
and foreign currency on the transaction date. At each subsequent reporting date, the Group translates foreign currency monetary items
at the closing rate. Foreign exchange differences arising on translation or settlement of monetary items are recognised in the income
statement during the year in which the gains or losses arise.
Foreign currency non‑monetary items measured at historical cost are translated at the date of the transaction, with those measured
at fair value translated at the date when the fair value is determined. Foreign exchange differences are recognised directly in equity for
non‑monetary items where any component of associated gains or losses is recognised directly in equity. Foreign exchange differences
arising from non‑monetary items, whereby the associated gains or losses are recognised in the income statement, are also recognised
in the income statement.
1.7
Financial assets and liabilities
Recognition and derecognition
A financial asset or a financial liability is recognised on the balance sheet when the Group becomes party to the contractual provisions
of the instrument. Purchases and sales of financial assets classified within fair value through profit or loss or fair value through other
comprehensive income are recognised on trade date.
The Group derecognises a financial asset when the contractual cash flows from the asset expire or it transfers the right to receive
contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred.
Financial liabilities are derecognised when the Group has discharged its obligation to the contract, or the contract is cancelled or expires.
Classification and measurement
The Group measures a financial asset or liability on initial recognition at its fair value, plus or minus transaction costs that are directly
attributable to the acquisition or issue of the financial asset or the financial liability (with the exception of financial assets or liabilities
at fair value through profit or loss, where transaction costs are recognised directly in the income statement as they are incurred).
Financial assets
Subsequent accounting for a financial asset is determined by the classification of the asset depending on the underlying business model
and contractual cash flow characteristics. This results in classification within one of the following categories:
i. Amortised cost
A financial asset is measured at amortised cost when (1) the asset is held within a business model whose objective is achieved by
collecting contractual cash flows; and (2) the contractual terms give rise to cash flows on specified dates which are solely payments
of principal and interest on the principal amount outstanding.
ii. Fair value through other comprehensive income
A financial asset is measured at fair value through other comprehensive income (FVOCI) when (1) the asset is held within a business model
whose objective is achieved by both collecting contractual cash flows and selling financial assets; and (2) the contractual terms give rise to
cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding, unless the financial
asset is designated at fair value through profit or loss on initial recognition.
iii. Fair value through profit or loss
A financial asset is measured at fair value through profit or loss (FVTPL) if it (1) does not fall into one of the business models described
above; (2) is specifically designated as FVTPL on initial recognition in order to eliminate or significantly reduce a measurement mismatch;
or (3) is classified as held for trading.
A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling in the near term, forms part of a
portfolio of financial instruments that are managed together and for which there is evidence of short‑term profit taking, or it is a derivative
not in a qualifying hedge relationship.
Financial liabilities
All financial liabilities are measured at amortised cost, except for financial liabilities at fair value through profit or loss. Such liabilities
include derivatives (other than derivatives that are financial guarantee contracts or are designated and effective hedging instruments),
and liabilities designated at fair value through profit or loss on initial recognition.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 211
Offsetting
This can only occur, and the net amount be presented on the balance sheet, when the Group currently has a legally enforceable right to
set off the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
1.8 Critical accounting estimates and judgements
The preparation of financial statements requires the use of certain critical accounting estimates and judgements that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosed amount of contingent liabilities. Assumptions made at each balance
sheet date are based on best estimates at that date. Although the Group has internal control systems in place to ensure that estimates
can be reliably measured, actual amounts may differ from those estimates. The Group considers the most significant use of accounting
estimates and judgements relate to the following areas:
— impairment provisions on credit exposures (note 3.2);
— effective interest rate (note 2.2);
— deferred tax (note 3.11);
— PPI redress provision and other conduct related matters (note 3.16); and
— retirement benefit obligations (note 3.12).
The valuation of the Group’s portfolio of loans and advances held at fair value through profit or loss is no longer considered a critical
accounting estimate. While unobservable inputs such as the future expectation of credit losses will continue to impact the value of
the portfolio, the balance has reduced to a level such that these are no longer considered to be critical to the Group’s results.
1.9 New accounting standards and interpretations
The Group has adopted a number of International Accounting Standards Board (IASB) pronouncements in the current financial year.
IFRS 9 ‘Financial Instruments’
IFRS 9 ‘Financial Instruments’ was issued in July 2014 and effective for financial periods beginning on or after 1 January 2018. IFRS 9
replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’ in accounting for financial instruments and introduces changes
to the classification and measurement of financial instruments and the impairment of financial assets. IFRS 9 also introduces new
requirements for hedge accounting but includes an accounting policy choice for entities to continue to follow the hedge accounting
requirements under IAS 39 until the IASB has an agreed strategy for macro hedge accounting. Consequently, the Group has decided to
exercise the available accounting policy option and has chosen not to adopt the hedge accounting requirements of IFRS 9 at this time.
There is no change to the Group’s policy on financial liabilities, which are measured at amortised cost, except for trading liabilities and
other financial liabilities designated at fair value through profit or loss.
Financial assets are classified under IFRS 9 using a two‑step process: (i) a business model assessment, and (ii) an assessment of whether
the contractual terms of the financial asset give rise to cash flows which are consistent with that of solely payments of principal
and interest.
The accounting policies for loans and advances to customers (note 3.1), impairment provisions on credit exposures (note 3.2) and financial
assets at fair value through profit or loss (note 3.5), have been revised, and an accounting policy for the new category of financial assets
‘financial assets at fair value through other comprehensive income’ introduced (note 3.7).
The accounting policy for financial assets available for sale (note 3.8) is no longer relevant as this financial asset category has been
removed with the introduction of IFRS 9. All accounting policies for financial assets under IAS 39 that were applicable for the Group
up to and including 30 September 2018 have not been replicated in this report but can be found in the Group’s 2018 Annual Report
and Accounts.
On transition and as permitted by IFRS 9, the Group has not restated comparative figures, with the impact of adopting IFRS 9 adjusted
through retained earnings. Further detail on the transitional impact of IFRS 9 can be found in note 5.4.
IFRS 15 ‘Revenues from Contracts with Customers’
IFRS 15 ‘Revenue from Contracts with Customers’ was issued in May 2014 and effective for financial periods beginning on or after 1 January
2018. IFRS 15 replaces IAS 11 ‘Construction Contracts’ and IAS 18 ‘Revenue’ as the accounting standard on revenue recognition.
IFRS 15 requires revenue to be reflected as a transfer of goods or services to customers in an amount that recognises the consideration
to which the Group expects to be entitled. This is satisfied by following a principles based five‑step model for revenue recognition.
The majority of the Group’s revenue is interest income generated from financial instruments, with the recognition criteria covered in IFRS 9
and not as part of IFRS 15. Interest income generated from lease contracts is also out of scope for IFRS 15. Fees and commissions together
with certain elements of non‑interest income are in scope of IFRS 15, with the Group’s existing accounting policy materially consistent with
the expectations under IFRS 15.
On transition and as permitted by IFRS 15, the Group has not restated comparative figures, with the impact of adopting IFRS 15 adjusted
through retained earnings. Further detail on the transitional impact of IFRS 15 can be found in note 5.4.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 212
Section 1: Basis of preparation continued
1.9 New accounting standards and interpretations continued
Other accounting standards and interpretations
Except where otherwise stated, the following IASB pronouncements did not have a material impact on the Group’s consolidated
financial statements:
— amendments to IFRS 2: ‘Classification and Measurement of Share‑based Payment Transactions’ issued in June 2016 and effective
for financial years beginning on or after 1 January 2018. The amendments provide guidance on the effects of vesting and non‑vesting
conditions on the measurement of cash‑settled share‑based payments; classification of share‑based payments with a net settlement
feature for withholding tax obligations; and accounting for modifications to a share‑based payment that change the classification from
cash‑settled to equity‑settled;
— ‘Annual Improvements to IFRS Standards 2014-2016 Cycle’, issued December 2016 and effective for financial years beginning on or after
1 January 2018. The amendment relates to IAS 28: ‘Investments in Associates and Joint Ventures’ and the measurement of an associate
or joint venture at fair value;
— IFRIC interpretation 22: ‘Foreign Currency Transactions and Advance Consideration’, issued December 2016 and effective for financial
years beginning on or after 1 January 2018. The new interpretation provides requirements on which exchange rate to use in reporting
foreign currency transactions (such as revenue transactions) when payment is made or received in advance; and
— amendments to IFRS 9: ‘Prepayment Features with Negative Compensation’ issued in October 2017 and effective for financial years
beginning on or after 1 January 2019. The amendments allow companies to measure particular prepayable financial assets with negative
compensation at amortised cost or fair value through other comprehensive income if a specified condition is met, instead of these being
measured at fair value through profit or loss. The Group early adopted this amendment with effect from 1 October 2018 in line with the
adoption of IFRS 9.
New accounting standards and interpretations not yet adopted
IFRS 16 ‘Leases’ was issued in January 2016 and is effective for financial years beginning on or after 1 January 2019. A separate update
on the Group’s implementation of this new standard can be found at the end of this section.
There are a number of other standards, interpretations and amendments that have not been applied by the Group in preparing these
financial statements as they are either not available for adoption in the EU or are not mandatory for the Group as at 30 September 2019.
The pronouncements, while relevant to the Group, are not anticipated to have a material impact and include:
— IFRIC interpretation 23: ‘Uncertainty over Income Tax Treatments’, issued June 2017 and effective for financial years beginning on or
after 1 January 2019. The new interpretation applies to any situation in which there is uncertainty as to whether an income tax treatment
is acceptable under tax law and is not limited to actual ongoing disputes;
— ‘Annual Improvements to IFRS Standards 2015-2017 Cycle’(1), issued December 2017 and effective for financial years beginning on
or after 1 January 2019. The IASB has made amendments to the following standards: IFRS 3 ‘Business Combinations’; IFRS 11 ‘Joint
arrangements’; IAS 12 ‘Income Taxes’; and IAS 32 ‘Borrowing Costs’. The amendment clarifies that the income tax consequences of
distributions on financial instruments classified as equity should be recognised alongside the past transactions or events that generated
the distributable profits. The Group has assessed that, on adoption of this amendment, the taxation impacts of distributions relating
to Additional Tier 1 (AT1) securities would be recognised within ‘Tax expense’ in the income statement. Currently these taxation impacts
are recognised directly in ‘Retained earnings’ within equity. As the amendment impacts only the presentation of taxation impacts but
not their calculation, adoption will not result in any change to the Group’s net assets but will result in an increase in ‘Profit for the year
attributable to equity owners’ compared to existing practice. If the Group had applied the amendment in these financial statements, the
Profit for the year attributable to equity owners would have been £15m (2018: £7m) higher than that disclosed in the income statement,
with an equivalent reduction in ‘Tax expense’;
— amendment to IAS 19: ‘Plan amendment, curtailment or settlement’(1) issued in February 2018 and effective prospectively for financial
years beginning on or after 1 January 2019. The amendments clarify that after a plan event companies should use these updated
assumptions to measure current service cost and net interest for the remainder of the reporting period;
— amendments to references to the ‘Conceptual Framework in IFRS Standards’(1), issued in March 2018 and effective for financial
years beginning on or after 1 January 2020. The amendments were issued following the IASB’s publication of a revised version
of its Conceptual Framework for Financial Reporting and updates the references in IFRS standards to previous versions of the
Conceptual Framework;
— amendment to IAS 28: ‘Long‑term Interests in Associates and Joint Ventures’ issued in October 2017 and effective for financial years
beginning on or after 1 January 2019. The amendment clarifies that an entity applies IFRS 9 to long‑term interests in an associate or joint
venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture
(long‑term interests);
(1) Not yet endorsed by the EU.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 213
— amendments to IAS 1: ‘Presentation of Financial Statements’ and IAS 8: ‘Accounting Policies, Changes in Accounting Estimates and
Errors’(1) issued in October 2018 and effective prospectively for financial years beginning on or after 1 January 2020. The amendments
provide clarification on the definition of ‘material’;
— amendments to IFRS 3: ‘Business Combinations’(1) issued in October 2018 and effective prospectively for financial years beginning on
or after 1 January 2020. The amendment assists in the determination of whether an acquired set of activities and assets meets the test
of being classed as a business; and
— Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)(1) issued in September 2019 and effective for financial years
beginning on or after 1 January 2020. The amendments provide temporary reliefs which enable hedge accounting to continue during
the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk‑free interest rate
(an RFR). The Group is working through the implications of the amendment ahead of implementation from 1 October 2020.
Update on IFRS 16: ‘Leases’
IFRS 16 ‘Leases’ was issued in January 2016 and replaces IAS 17 ‘Leases’, IFRIC 4 ‘Determining whether an Arrangement contains a Lease’,
SIC-15 ‘Operating Leases‑Incentives’ and SIC-27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’. IFRS 16
is effective for annual periods beginning on or after 1 January 2019 and was EU endorsed on 31 October 2017. The Group will apply the
standard from 1 October 2019.
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and will result in most leases for
lessees being brought on to the balance sheet under a single lease model, removing the distinction between finance and operating leases.
It requires a lessee to recognise a ‘right‑of‑use’ asset and a lease liability. Lessor accounting remains largely unchanged.
The right‑of‑use 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 restore the underlying asset,
less any lease incentives received.
The right‑of‑use asset is subsequently depreciated using the straight line method from the commencement date to the earlier of the end of
the useful life of the right‑of‑use asset or the end of the lease term. In addition, the right‑of‑use asset is periodically reduced by impairment
losses, if any, and adjusted for certain remeasurements of the lease liability.
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 incremental borrowing rate is used for the
discount rate.
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease
payments arising from a change in an index or rate, if there is a change in amount expected to be payable under a residual value guarantee,
or if there is a change in the assessment of whether a purchase, extension or termination option will be exercised.
When a lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right‑to‑use asset
or is recorded in the income statement if the carrying amount of the right‑of‑use asset has been reduced to zero.
Transition approach and use of practical expedients
The Group will elect to apply the practical expedient to grandfather the assessment of which transactions are leases. It will apply IFRS 16
only to contracts that were previously identified as leases by IAS 17. Contracts that were not identified as leases under IAS 17 and IFRIC 4
will not be reassessed. Therefore, the definition of a lease under IFRS 16 will only be applied to contracts entered into or changed on or
after 1 October 2019.
The Group will also elect to apply the recognition exemptions for short‑term leases (with a remaining lease term of less than 12 months)
and low value leases. Lease payments associated with these leases will be recognised as an expense on a straight line basis over the term
of the lease.
The Group will apply IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is
recognised in retained earnings as at 1 October 2019 and comparatives are not restated.
Under the modified approach, at transition, lease liabilities will be measured at the present value of the remaining lease payments,
discounted at the Group’s incremental borrowing rate as at 1 October 2019.
For the purposes of applying the modified retrospective approach, the Group will elect to:
— measure the right‑of‑use asset at an amount equal to the lease liability at the date of initial application adjusted by the amount of any
prepaid or accrued lease payments;
— apply the exemption not to recognise right‑of‑use assets and liabilities for leases with less than 12 months of lease term; and
— apply the practical expedient to rely on its assessment whether the lease was onerous under IAS 37 and therefore adjust the right‑of‑use
asset at the date of initial application by the onerous lease provision rather than conduct an impairment test.
(1) Not yet endorsed by the EU.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 214
Section 1: Basis of preparation continued
1.9 New accounting standards and interpretations continued
Key accounting judgements
The Group undertook a technical assessment of IFRS 16. The two key accounting judgements in relation to IFRS 16 are the determination
of the discount rates and lease term.
When measuring the lease liability, lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be
readily determined, the incremental borrowing rate is used for the discount rate. Under the modified retrospective approach, the Group
will use its incremental borrowing rate at the date of initial application as the discount rate. Judgement will be required to determine an
appropriate incremental borrowing rate.
When determining lease term, an assessment is required of whether an extension or termination option will be exercised. This is reassessed
if there is a significant event or significant change in circumstances within the Group’s control. Judgement is required when making this
assessment.
Impact of transition to IFRS 16
On transition to IFRS 16, the Group estimates it will recognise right‑of‑use assets of approximately £196m and lease liabilities of approximately
£207m, with no material impact to retained earnings. The Group will not restate comparative periods.
The Group continues to refine, monitor and validate certain elements of the IFRS 16 model and related controls ahead of full reporting
of IFRS 16 impacts later in 2020.
The standard is not expected to have any significant impact on lessor accounting by the Group.
1.10 Prior period comparatives
The prior period comparatives in the balance sheet have been restated in line with the current year presentation. £34m of derivative
collateral in relation to clearing houses has been reclassified between other liabilities and due to other banks and £143m has been
reclassified between other assets and due from other banks. In addition, certain line items within assets and liabilities which are not
material have been aggregated with other similar line items.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 215
Section 2: Results for the year
2.1 Segment information
The Group’s operating segments are operating units engaged in providing different products or services and whose operating results
and overall performance are regularly reviewed by the Group’s Chief Operating Decision Maker, the Executive Leadership Team.
Following the acquisition of Virgin Money Holdings (UK) PLC and up until 30 September 2019, the business has been assessed and
reported to the Group’s Chief Operating Decision Maker as a single segment, with decisions being made on the performance of the Group
on that basis.
With effect from 1 October 2019, the business has been aligned to a three operating segments model: Business, Personal and Mortgages.
Reporting on this segmental basis will be included in the 2020 Interim Results.
Summary income statement
Net interest income
Non-interest income
Total operating income
Operating and administrative expenses
Impairment losses on credit exposures
Segment loss before tax
Average interest earning assets
2019
£M
1,514
235
1,749
(1,729)
(252)
(232)
2018
£M
851
156
1,007
(1,130)
(41)
(164)
86,362
39,417
The Group has no operations outside the UK and therefore no secondary geographical area information is presented. The Group is not
reliant on a single customer. Liabilities are managed on a centralised basis.
2.2 Net interest income
Accounting policy
Interest income is reflected in the income statement using the effective interest method which discounts the estimated future cash
payments or receipts over the expected life of the financial instrument to the gross carrying amount of the non-credit impaired financial
asset. Interest expense is reflected in the income statement using the same effective interest method on the amortised cost of the
financial liability.
When calculating the effective interest rate, cash flows are estimated considering all contractual terms of the financial instrument
(e.g. prepayment, call and similar options) excluding future credit losses. The calculation includes all amounts paid or received that are an
integral part of the effective interest rate such as transaction costs and all other premiums or discounts. Where it is not possible to reliably
estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the contractual cash flows over
the full contractual term of the financial instrument (or group of financial instruments) are used.
Loan origination and commitment fees are recognised within the effective interest rate calculation. Non-utilisation of a commitment fee
is recognised as revenue upon expiry of the agreed commitment period. Loan related administration and service fees are recognised as
revenue over the period of service.
Interest income on financial assets in impairment Stages 1 and 2 is recognised on the unwind of the discount from the initial recognition
of the expected credit loss (ECL) using the original effective rate of interest. Once a financial asset or group of similar financial assets has
been categorised as credit-impaired (Stage 3), interest income is recognised on the net carrying value (after the ECL allowance) using the
asset’s original effective interest rate. The interest income for purchase or originated credit impaired financial assets is calculated using the
credit-adjusted effective interest rate applied to the amortised cost of the financial asset from initial recognition. The Group recognises and
presents the reversal of expected credit losses following the curing of a credit impaired financial asset as a reversal of impairment losses.
Interest income and interest expense on hedged assets and liabilities and financial assets and liabilities designated as fair value through
profit or loss are also recognised as part of net interest income.
Interest income and expense on derivatives economically hedging interest bearing financial assets or liabilities (but not designated
as hedging instruments) and other financial assets and liabilities held at fair value through profit or loss (either mandatory or by election)
are also recognised within net interest income. With effect from 1 October 2018, IAS 1 ‘Presentation of financial statements’ prohibits
the inclusion of such interest within ‘Interest income’. Therefore interest income or expense on these items is now presented within
‘Other similar interest’. Comparatives have been restated.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 216
Section 2: Results for the year continued
2.2 Net interest income continued
Accounting policy (continued)
Critical accounting estimates and judgements
Effective interest rate (EIR)
Following the acquisition of Virgin Money Holdings (UK) PLC, the Group considered the application of EIR in relation to its reported amounts
of assets, liabilities, revenues and expenses. The Group has concluded that sufficient judgement is now exercised on EIR for it to be
included within its disclosures on critical accounting estimates and judgements.
The EIR is determined at initial recognition based upon management’s best estimate of the future cash flows of the financial instrument.
In the event these estimates are revised at a later date, a present value adjustment to the carrying value of the EIR asset may be
recognised in profit or loss. Such adjustments can introduce income statement volatility and consequently the EIR method introduces
a source of estimation uncertainty. Management considers that material risk of adjustments exists in relation to the application of EIR
to the Group’s mortgage and credit card portfolios.
Mortgages
The main accounting judgement when assessing the cash flows within the Group’s secured lending EIR model is the product life (including
assumptions based on observed historic customer behaviour when in a standard variable rate (SVR) period) and the early repayment
charge income receivable. The Group currently assumes that 83% of customers will have fully repaid or re-mortgaged within two months
of reverting to SVR. If this were to increase to 90%, the loans and advances to customers balance would reduce by £20m with the
adjustment recognised in net interest income.
Credit cards
The Group measures credit card EIR by modelling expected cash flows based on assumptions of future customer behaviour, which is
supported by observed experience. Key behavioural assumptions include an estimation of utilisation of available credit, transaction and
repayment activity and the retention of the customer balance after the end of a promotional period.
The EIR of new business written in the current year is 5.26% while that on acquired portfolios nearing the end of their promotional periods
is 8.22% (this excludes those which were out of their promotional periods at the date of acquisition and therefore do not form part of the
EIR modelling). Revisions to the estimates of future cash flows (compared to the original assumptions) that would have resulted in the EIR
across all cohorts being reduced by 25bps, would lead to a £16m decrease in the loans and advances to customers balance. This present
value adjustment would be recognised in interest income.
The Group holds an appropriate level of model risk reserve across both asset classes to mitigate the risk of estimation uncertainty.
INTEREST INCOME
Loans and advances to customers
Loans and advances to other banks
Financial assets at fair value through other comprehensive income
Financial assets available for sale
Other interest income
Total interest income
OTHER SIMILAR INTEREST
Financial assets at fair value through profit or loss
Financial liabilities at fair value through profit or loss
Derivatives economically hedging interest bearing assets
Total other similar interest
LESS: INTEREST EXPENSE AND SIMILAR CHARGES
Customer deposits
Debt securities in issue
Due to other banks
Other interest expense
Total interest expense and similar charges
Net interest income
2019
£M
2,320
72
27
–
1
2,420
21
–
(8)
13
(580)
(185)
(144)
(10)
(919)
1,514
2018
£M
1,057
26
–
12
3
1,098
29
(1)
(13)
15
(148)
(94)
(18)
(2)
(262)
851
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 217
2.3 Non-interest income
Accounting policy
Gains less losses on financial instruments at fair value
This includes fair value gains and losses from three distinct activities:
— derivatives classified as held for trading – the full change in fair value of trading derivatives is recognised inclusive of interest income and
expense arising on those derivatives except when economically hedging other assets and liabilities at fair value as outlined in note 2.2;
— other financial assets and liabilities designated at fair value through profit or loss – these relate principally to the Group’s fixed interest
rate loan portfolio and related term deposits (note 3.5), which were designated at inception as fair value through profit or loss. The fair
value of these loans is derived from the future loan cash flows using appropriate discount rates and includes adjustments for credit risk
and credit losses. The valuation technique used is reflective of current market practice; and
— hedged assets, liabilities and derivatives designated in hedge relationships – fair value movements are recognised on both the hedged
item and hedging derivative in a fair value hedge relationship, the net of which represents hedge ineffectiveness, and hedge
ineffectiveness on cash flow hedge relationships (note 3.6).
Fees and commissions
Fees and commissions receivable which are not an integral part of the effective interest rate are recognised as income as the Group fulfils
its performance obligations. The Group’s principal performance obligations arising from contracts with customers are in respect of current
accounts, debit cards and credit cards. The Group provides the service and consequently generates the fees monthly; the fees are
recognised in income on this basis. Costs incurred to generate fee and commission income are charged to fees and commissions expense
as they are incurred.
Income from insurance, protection and investments
This includes management fees generated from the sale of and management of funds, Stocks and Shares Individual Savings Accounts
(‘ISAs’) and pensions to retail investors. The contractual performance obligations to investors are aligned to the obligations required of
UK authorised fund managers.
In return for providing these continuous services, a management charge (expressed on an annualised basis to customers) is levied on
investors’ funds under management. This charge is accrued by the products via adjustment to the closing unit prices of investors’ holdings
on a daily basis.
GAINS LESS LOSSES ON FINANCIAL INSTRUMENTS AT FAIR VALUE
Held for trading derivatives
Financial assets and liabilities at fair value(1)
Ineffectiveness arising from fair value hedges (note 3.6)
Ineffectiveness arising from cash flow hedges (note 3.6)
OTHER OPERATING INCOME
Net fee and commission income
Margin on foreign exchange derivative brokerage
Gain on sale of financial assets at fair value through other comprehensive income
Gain on sale of Virgin Money Unit Trust Managers Limited(2)
Share of joint venture results
Other income
Total non-interest income
Non-interest income includes the following fee and commission income disaggregated by income type:
Current account and debit card fees
Credit cards
Insurance, protection and investments
Non-banking and other fees(3)
Total fee and commission income
Total fee and commission expense
Net fee and commission income
2019
£M
16
3
(22)
(14)
(17)
195
19
3
35
(1)
1
252
235
2019
£M
117
42
37
31
227
(32)
195
2018
£M
16
(13)
–
(6)
(3)
141
18
–
–
–
–
159
156
2018
£M
114
13
13
32
172
(31)
141
(1) A credit risk gain on other assets and liabilities at fair value of £2m has been recognised in the current year (2018: £3m gain).
(2) The Group ceased generating management fees directly from the sale and management of funds products from 31 July 2019 when it sold 50% (less one
share) of its shareholding in Virgin Money Unit Trust Managers Limited (UTM) to Aberdeen Standard Investments. A gain on sale of £35m was recorded
on the partial disposal. Consequently, UTM became a joint venture and is accounted for under the equity method from the date of disposal.
(3) Non-banking and other fees include mortgages, invoice and asset finance and ATM fees.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 218
Section 2: Results for the year continued
2.4 Operating and administrative expenses before impairment losses
Accounting policy
Personnel expenses primarily consist of wages and salaries, accrued bonus and social security costs arising from services rendered
by employees during the financial year.
The Group recognises bonus costs where it has a present obligation that can be reliably measured. Bonus costs are recognised over
the relevant service period required to entitle the employee to the reward.
The Group’s accounting policies on pension expenses and equity based compensation are included in notes 3.12 and 4.2 respectively.
Personnel expenses
Depreciation and amortisation expense (notes 3.9, 3.10)
Other operating and administration expenses
Total operating and administrative expenses
Personnel expenses comprise the following items:
Salaries, wages and non-cash benefits and social security costs
Defined contribution pension expense
Defined benefit pension expense (note 3.12)
Equity based compensation (note 4.2)
Other personnel expenses
Personnel expenses
2019
£M
421
108
1,200
1,729
2019
£M
256
47
9
4
105
421
2018
£M
223
89
818
1,130
2018
£M
139
33
2
9
40
223
On 26 October 2018, the High Court delivered a judgement confirming that defined benefit schemes should equalise pension benefits for
men and women in relation to GMP and concluded on the methods that were appropriate. The estimated increase in the Scheme liabilities
at the date of the judgement was £11m, which was based on a number of assumptions and the actual impact may be different. This has
been reflected as a past service cost within the defined benefit pension expense above, and in the closing net accounting surplus of the
Scheme (note 3.12).
The average number of FTE employees of the Group during the year was made up as follows:
Managers
Clerical staff
2019
NUMBER
2,989
5,714
8,703
2018
NUMBER
2,161
3,608
5,769
The average monthly number of employees was 9,787 (2018: 6,461).
All staff are contracted employees of the Group and its subsidiary undertakings. The average figures above do not include contractors.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 219
Other items of significance to the Group which are included within operating and administrative expenses are:
Restructuring costs
Consent solicitation
Legacy restructuring and separation
Virgin Money Holdings (UK) PLC transaction costs
SME transformation
Intangible asset write-off
PPI redress expense (note 3.16)
Other conduct expenses (note 3.16)
Operating lease charges
2019
£M
154
18
5
11
30
127
415
18
35
2018
£M
–
–
46
37
16
–
352
44
26
Restructuring costs represents the Group’s integration costs as it embarks upon a three year programme to fully integrate both banks.
The legacy restructuring and separation costs relate to the Sustain programme and demerger from NAB, both of which completed in the
current period.
Incidental to the integration programme, a £127m charge was recognised in the year following a review of the Group’s software estate,
which identified a number of core assets (including £70m in relation to the Virgin Money Digital Bank asset) that are no longer of value
to the Group’s future strategy and therefore required to be written down.
Auditor’s remuneration included within other operating and administrative expenses:
Fees payable to the Company’s auditor for the audit of the Company’s financial statements
Fees payable to the Company’s auditor for the audit of the Company’s subsidiaries(1)
Total audit fees
Audit related assurance services
Other assurance services
Total non-audit fees
Fees payable to the Company’s auditor in respect of associated pension schemes
Total fees payable to the Company’s auditor
2019
£’000
21
2,967
2,988
436
289
725
88
3,801
2018
£’000
21
1,593
1,614
120
700
820
84
2,518
(1) Includes the audit of the Group’s structured entities, and the audit of Virgin Money Holdings (UK) PLC subsidiaries for the year ending 31 December 2019.
Non-audit services of £725k (2018: £820k) performed by the auditor during the year included the review of the Interim Financial Report;
PRA Written Auditor Reporting; agreed upon procedures under the Conduct Indemnity arrangement with NAB; comfort letters for the
global medium-term note programme and AT1 issuance; and client money reviews. The decrease in the year is principally due to reporting
accountant procedures in relation to the acquisition of Virgin Money Holdings (UK) PLC.
In addition to the above, out of pocket expenses of £161k (2018: £49k) were borne by the Group, principally related to reimbursement
of travel expenses incurred by staff when performing the above services.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 220
Section 2: Results for the year continued
2.5 Taxation
Accounting policy
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except
to the extent that it is related to items recognised directly in equity, in which case the tax is also recognised in equity.
Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively
enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are
recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial
statements. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet
date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
CURRENT TAX
Current year
Adjustment in respect of prior years
DEFERRED TAX (NOTE 3.11)
Current year
Adjustment in respect of prior years
Tax credit for the year
2019
£M
20
(5)
15
(56)
3
(53)
(38)
2018
£M
8
8
16
(1)
(34)
(35)
(19)
The tax assessed for the year differs from that arising from applying the standard rate of corporation tax in the UK of 19%. A reconciliation
from the credit implied by the standard rate to the actual tax credit is as follows:
Loss on ordinary activities before tax
Tax credit based on the standard rate of corporation tax in the UK of 19% (2018: 19%)
Effects of:
Disallowable expenses
Conduct indemnity adjustment
Deferred tax assets recognised
Non-taxable gain on partial disposal of UTM (note 2.3)
Bank levy
Impact of rate changes
Adjustments in respect of prior years
Tax credit for the year
2019
£M
(232)
(44)
50
10
(49)
(7)
1
3
(2)
(38)
2018
£M
(164)
(31)
42
(5)
(8)
–
–
9
(26)
(19)
Disallowable expenses represent, in the main, conduct charges that are not deductible in computing taxable profits, and non-deductible
transaction costs predominantly in relation to the acquisition of Virgin Money Holdings (UK) PLC.
The increase in the conduct indemnity adjustment reflects a change in anticipated quantum and timing of the use of historic
indemnified losses, following the acquisition of Virgin Money Holdings (UK) PLC.
Deferred tax assets recognised represent previously unrecognised historic losses that are now brought onto the balance sheet
in accordance with the Group’s established methodology.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 221
2.6 Earnings per share (EPS)
Accounting policy
Basic earnings per share
Basic earnings per share is calculated by taking the profit attributable to ordinary shareholders of the parent company, deducting the
weighted-average of the Group’s holdings of its own shares, and then dividing this by the weighted-average number of ordinary shares
outstanding during the period.
Diluted earnings per share
This requires the weighted-average number of ordinary shares in issue to be adjusted to assume conversion of all dilutive potential ordinary
shares. These arise from awards made under equity based compensation schemes. Share awards with performance conditions attaching
to them are not considered to be dilutive unless these conditions have been met at the reporting date.
The Group presents basic and diluted loss per share data in relation to the ordinary shares of Virgin Money UK PLC.
Loss attributable to ordinary shareholders
Tax relief on AT1 distribution attributable to ordinary equity holders
Tax relief on non-controlling interest distributions attributable to ordinary equity holders
Loss attributable to ordinary equity holders for the purposes of basic and diluted EPS
Weighted-average number of ordinary shares in issue
– Basic
– Diluted
Basic loss per share (pence)
Diluted loss per share (pence)
2019
£M
(268)
8
7
(253)
2018
£M
(181)
7
–
(174)
2019
NUMBER OF
SHARES
(MILLION)
2018
NUMBER OF
SHARES
(MILLION)
1,414
1,414
(17.9)
(17.9)
885
885
(19.7)
(19.7)
Basic earnings per share has been calculated after deducting 1m (2018: Nil) ordinary shares representing the weighted-average of the
Group’s holdings of its own shares. The calculation of the diluted earnings per share excludes conditional awards of over 1m (2018: 1m)
ordinary shares made under equity based compensation schemes. These are considered anti-dilutive due to the Group making a loss
in both the current and the prior year.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 222
Section 3: Assets and liabilities
3.1
Loans and advances to customers
Accounting policy
Loans and advances to customers arise when the Group provides money directly to a customer and includes mortgages, term lending,
overdrafts, credit card lending, lease finance and invoice financing. They are recognised initially at fair value and are subsequently
measured at amortised cost, using the effective interest method, adjusted for expected credit losses (note 3.2). They are derecognised
when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.
Leases entered into by the Group as lessor, where the Group transfers substantially all the risks and rewards of ownership to the lessee,
are classified as finance leases. The leased asset is not held on the Group balance sheet; instead, a finance lease is recognised
representing the minimum lease payments receivable under the terms of the lease, discounted at the rate of interest implicit in the lease.
Interest income is recognised in interest receivable, allocated to accounting periods to reflect a constant periodic rate of return.
In certain limited circumstances, the Group has elected to apply the fair value through profit or loss measurement option to some debt
instruments that would otherwise be classified at amortised cost (note 3.5).
Gross loans and advances to customers
Impairment provisions on credit exposures (note 3.2)
Fair value hedge adjustment
2019
£M
73,246
(362)
211
73,095
2018(1)
£M
32,943
(195)
–
32,748
(1) The prior year comparative has been restated in line with the current year presentation (note 1.10).
The Group has a portfolio of fair valued business loans of £253m (2018: £362m) which are classified separately as financial assets
at fair value through profit or loss on the balance sheet (note 3.5). Combined with the above, this is equivalent to total loans and advances
of £73,348m (2018: £33,110m).
The fair value hedge adjustment represents an offset to the fair value movement on derivatives designated in hedge relationships
to manage the interest rate risk inherent in the Group’s fixed rate mortgage portfolio.
The Group has transferred a proportion of mortgages to the securitisation and covered bond programmes (note 3.3).
Lease finance
The Group leases a variety of assets to third parties under finance lease arrangements, including vehicles and general plant and machinery.
The cost of assets acquired by the Group during the year for the purpose of letting under finance leases and hire purchase contracts
amounted to £38m (2018: £20m) and £408m (2018: £399m) respectively.
Finance lease and hire purchase receivables
GROSS INVESTMENT IN FINANCE LEASE AND HIRE PURCHASE RECEIVABLES
Due within 1 year
Due within 1 to 5 years
Due after more than 5 years
Unearned income
Net investment in finance lease and hire purchase receivables
2019
£M
276
386
23
685
(36)
649
2018
£M
269
376
15
660
(32)
628
The total receivables from finance leases and hire purchase contracts were £60m (2018: £32m) and £589m (2018: £596m) respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 223
3.2
Impairment provisions on credit exposures
Accounting policy
At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial
guarantees not measured at fair value through profit or loss, for impairment. The impairment loss allowance is calculated using an expected
credit loss (ECL) methodology. The overarching objective is to calculate an impairment loss allowance that reflects: (i) an unbiased and
probability weighted amount; (ii) the time value of money which discounts the impairment loss; and (iii) reasonable and supportable
information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future
economic conditions.
ECL methodology
The ECL methodology is based upon the combination of probability of default (PD), loss given default (LGD) and exposure at default (EAD)
estimates that consider a range of factors which have a direct bearing on credit risk and consequently the required level of impairment
loss provisioning.
The future cash flows used within the ECL calculation are estimated based on the contractual cash flows of the assets, adjusted for the
probability of default occurring and taking account of historical loss experience. In addition, the Group uses reasonable and supportable
forecasts of future economic conditions to estimate the ECL allowance. The use of such judgements and reasonable estimates is
considered by management to be an essential part of the process which does not impact reliability. The methodology and assumptions
are reviewed regularly and updated as necessary.
The ECL assessment is performed on either a collective or individual basis as follows:
Collectively assessed: these assets are assessed and provided for on a group or a pooled basis due to the existence of shared risk
characteristics. Financial assets with shared risk characteristics are assessed in the sense that assets with similar characteristics at a given
point in time will tend to display a similar PD profile but only for as long as they retain those similar characteristics. In particular, movement
between stages will tend to occur when individual assets have deteriorated, rather than because a proportion of a pool is presumed to
have deteriorated.
Individually assessed: these assets are assessed and provided for at the financial instrument level, with the assessment (which is governed
by the Group’s Credit Policy) taking into consideration a range of likely potential outcomes relating to each customer and their associated
financial assets.
It is not possible for an asset to have both an individual and a collectively assessed ECL provision. Regardless of the calculation basis, the
Group generates an allowance at the individual financial instrument level.
Significant increase in credit risk assessment
The impairment loss allowance is calculated as either a 12-month or lifetime ECL depending on whether the financial asset has exhibited
a significant increase in credit risk (SICR) since origination or has otherwise become credit impaired as at the reporting date.
The Group uses a PD threshold curve (distinct for each portfolio) to assess for a SICR and also utilises the 30 days past due and 90 days
past due backstops for recognising SICR and credit impairment effectively.
The Group has not made use of the low credit risk option under IFRS 9 for loans and advances at amortised cost.
Impairment staging
Financial assets where a 12-month ECL is recognised are classified as Stage 1; financial assets which are considered to have experienced
a SICR are classified as Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are classified
as Stage 3. The Group adopts the backstop position that a financial asset has experienced a SICR (and therefore falls into Stage 2) when
it reaches 30 days past due, and that a financial asset becomes credit impaired (and therefore falls into Stage 3) when it reaches 90 days
past due.
In addition to the above stages, purchase or originated credit-impaired (POCI) financial assets are those which are assessed as being credit
impaired upon initial recognition. Once a financial asset is classified as POCI, it remains there until de-recognition irrespective of its credit
quality. POCI financial assets are disclosed separately from those financial assets in Stage 3. The Group regards the date of acquisition
as the origination date for purchased portfolios.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 224
Section 3: Assets and liabilities continued
3.2
Impairment provisions on credit exposures continued
Accounting policy continued
Financial assets can move between stages when the relevant staging criteria are no longer satisfied. If the level of impairment loss reduces
in a subsequent period, the previously recognised impairment loss allowance is reversed and recognised in the income statement.
Write-offs and recoveries
When there is no reasonable expectation of recovery for a loan, it is written off against the related provision. Such loans are written off after
all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts
previously written off decrease the amount of the impairment charge in the income statement.
The Group’s impairment policy for debt instruments at fair value through other comprehensive income is included in note 3.7. The impact
of the ECL methodology on the Group’s cash and balances with central banks and due from other banks balances is immaterial.
Critical accounting estimates and judgements
The use of an ECL methodology under IFRS 9 requires the Group to apply estimates and exercise judgement when calculating an
impairment allowance for credit exposures. The most significant of these are detailed below.
Accounting estimates
Asset lifetimes
The calculation of the ECL allowance is also dependent on the expected life of the Group’s portfolios. The Group assumes the remaining
contract term as the maximum period to consider credit losses wherever possible. For the Group’s credit card and overdraft portfolios,
behavioural factors such as observed retention rates and other portfolio level assumptions are taken into consideration in determining
the estimated asset life.
Shortening the Group’s credit card portfolio lifetime assumption by three months would equate to an ECL decrease of £1m.
Economic scenarios
The Group relies on three economic scenarios over a five-year forecast period when calculating the ECL allowance: base case, mild upside
and severe downside. These contain a number of key economic assumptions such as unemployment rates, base rates and inflation, which
ensure that non-linear relationships between different forward-looking scenarios and their associated credit losses do not materially impact
the ECL calculation. The base case used by the Group for IFRS 9 modelling is also used for the Group’s internal planning purposes.
The Group sources forward-looking scenarios and a range of macroeconomic conditions over the forecast period from a third-party
provider. The Group considers that the resulting ‘mild upside’ and ‘severe downside’ scenarios provide a balance in reaching an ECL
calculation that is free from bias and addresses concerns around the potential for non-linearity of the ECL calculation. The Group applied
the following weightings to the chosen scenarios:
Mild upside
Base case
Severe downside
30 SEPTEMBER
2019
20%
60%
20%
1 OCTOBER
2018
25%
60%
15%
The scenario weightings are considered and debated by an internal review panel and then recommended and approved for use in the
IFRS 9 models by ALCO. The slight increase in the weightings towards the mild upside scenario on adoption of IFRS 9 reflected the relative
conservatism in the Group’s base case, which was closer to the chosen downside scenario. The weightings applied at 30 September 2019
were revised to reflect a general deterioration in future economic outlook relative to the base case.
The calculation of the Group’s impairment provision is sensitive to changes in the chosen weightings, with the effect on the closing
impairment allowance of £362m as a result of applying a 100% weighting separately to each scenario producing the following: Base case –
an ECL reduction of £11m; Mild upside – an ECL reduction of £27m; and Severe downside – an ECL increase of £65m.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 225
Accounting judgements
Significant increase in credit risk
Considerable management judgement is required in determining the point at which a SICR has occurred, as this is the point at which a
12-month ECL is replaced by a lifetime ECL. Management has developed a series of triggers that indicate where a SICR has occurred when
assessing exposures for the risk of default occurring at each reporting date compared to the risk at origination. There is no single factor
that influences this decision, rather a combination of different criteria that enable management to make an assessment based on the
quantitative and qualitative information available. This includes the impact of forward-looking macroeconomic factors but excludes the
existence of any collateral implications.
Indicators of a significant increase in credit risk include deterioration of the residual lifetime PD by set thresholds which are unique to each
product portfolio, non-default forbearance programmes, and watch list status. The Group adopts the backstop position that a significant
increase in credit risk will have taken place when the financial asset reaches 30 days past due.
Changes to these set thresholds can impact staging, driving accounts into higher stages. If a further 10% of the business population
in Stage 1 were to move Stage leading to an increase in ECL held by approximately £13m. In contrast, if a further 10% of the credit card
population in Stage 1 were to experience a non-default related forbearance issue and migrate to Stage 2, the level of ECL held would
increase by £52m. In mortgages this would increase by £7m. Introducing a PD stress, which increased PDs upwards by 20% for all
portfolios, would result in an overall increase in ECLs of £54m.
Definition of default
The PD of a credit exposure is a key input to the measurement of the ECL allowance. Default occurs when there is evidence that a
customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due. The Group utilises the
90 days past due backstop for default purposes.
Post Model Adjustments (PMAs)
The ECL provision is further impacted by management judgements in the form of PMAs, which were also a feature of impairment
provisioning under IAS 39. These are judgements that increase the collectively assessed modelled output where management consider
that not all of the risks identified in a particular product segment have been, or are capable of being, accurately reflected within those
models. This can be the case when modelled inputs are not sufficiently sensitive to sudden changes in economic conditions e.g. Brexit.
PMAs can also be applied when assessing potential recoveries on individually assessed provisions where factors such as customer and
economic specific conditions need to be considered.
Movement in impairment provisions on credit exposures
Opening balance at 30 September
IAS 39 restatement
IFRS 9 adoption
Charge for the year
Amounts written off
Recoveries of amounts written off in previous years
Other
Closing balance
2019
£M
195
(195)
224
252
(142)
28
–
362
Following the adoption of IFRS 9 on 1 October 2018, the Group impairment provision is classified by stage allocation as follows:
Stage 1
Stage 2
Stage 3
POCI
The transitional stage allocation on adoption date of 1 October 2018 is presented in the Risk report on page 145.
2019
£M
79
168
118
(3)
362
2018
£M
210
–
–
41
(68)
13
(1)
195
2018
£M
–
–
–
–
–
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 226
Section 3: Assets and liabilities continued
3.3 Securitisation and covered bond programmes
Accounting policy
The Group sponsors the formation of structured entities, primarily for the purpose of facilitation of asset securitisation and covered bond
transactions, the full details of which can be found in note 6.2 to the Company financial statements. The Group has no shareholding in
these entities, but is exposed, or has rights, to variable returns and has the ability to affect those returns. The entities are consolidated
in the Group’s financial statements in accordance with note 1.5.
Securitisation
The Group has securitised a portion of its retail mortgage loan portfolio under both master trust (Lanark & Lannraig) and standalone
(Gosforth) securitisation programmes. The securitised mortgage loans have been assigned at principal value to bankruptcy remote
structured entities. The securitised debt holders have no recourse to the Group other than the principal and interest (including fees)
generated from the securitised mortgage loan portfolio.
The externally held securitised notes in issue are included within debt securities in issue (note 3.14). There are a number of notes held
internally by the Group which are used as collateral for repurchases and similar transactions or for credit enhancement purposes.
Covered bond
A subset of the Group’s retail mortgage loan portfolio has been ring-fenced and assigned to bankruptcy remote limited liability partnerships,
Clydesdale Covered Bond No 2 LLP and Eagle Place LLP, to provide a guarantee for the obligations payable on the covered bonds issued
by the Group.
The covered bond partnerships are consolidated with the mortgage loans retained on the consolidated balance sheet and the covered
bonds issued included within debt securities in issue (note 3.14). The covered bond holders have dual recourse: firstly, to the bond issuer
on an unsecured basis; and secondly, to the appropriate LLP under the Covered Bond Guarantee secured against the mortgage loans.
Under both the securitisation and covered bond programmes, the mortgage loans do not qualify for balance sheet derecognition because
the Group remains exposed to the majority of the risks and rewards of the mortgage loan portfolio, principally the associated credit risk.
The Group continues to service the mortgage loans in return for an administration fee and is also entitled to any residual income after all
payment obligations due under the terms of the programmes and senior programme expenses have been met. In the mortgage originator
a deemed loan liability is recognised for the proceeds of the funding transaction.
Significant restrictions
Where the Group uses its financial assets to raise finance through securitisations and the sale of securities subject to repurchase
agreements, the assets become encumbered and are not available for transfer around the Group.
The assets and liabilities in relation to securitisation and covered bonds in issue at 30 September are as follows:
SECURITISATION PROGRAMMES
Lanark Master Issuer
Lannraig Master Issuer
Gosforth 2014-1
Gosforth 2015-1
Gosforth 2016-1
Gosforth 2016-2
Gosforth 2017-1
Gosforth 2018-1
Less held by the Group
COVERED BOND PROGRAMMES
Clydesdale Covered Bond No 2 LLP
Eagle Place LLP
2019
LOANS AND
ADVANCES
SECURITISED
£M
5,009
1,032
372
707
1,142
701
934
1,353
11,250
1,253
2,622
3,875
2018
LOANS AND
ADVANCES
SECURITISED
£M
5,479
933
–
–
–
–
–
–
6,412
1,389
–
1,389
NOTES
IN ISSUE
£M
4,597
838
385
630
1,048
579
852
1,267
10,196
(5,154)
5,042
776
1,126
1,902
NOTES
IN ISSUE
£M
4,536
899
–
–
–
–
–
–
5,435
(2,486)
2,949
732
–
732
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 227
The fair values of financial assets and associated liabilities relating to the securitisation programmes where the counterparty to
the liabilities has recourse only to the financial assets were £11,329m and £5,085m respectively (2018: £6,284m and £2,948m).
There were no events during the year that resulted in any Group transferred financial assets being derecognised.
The Group has contractual and non-contractual arrangements which may require it to provide financial support as follows:
Securitisation programmes
The Group provides credit support to the structured entities via reserve funds, which are partly funded through subordinated debt
arrangements and by holding junior notes. Exposures totalled £100m in subordinated debt (2018: £23m) and £1,722m in junior notes
held (2018: £971m). The Group has a beneficial interest in the securitised mortgage portfolio held by the structured entities of £1,467m
(2018: £1,074m).
Looking forward through future reporting periods there are a number of date-based options on the notes issued by the structured entities
which could be actioned by them as issuer. These could require the Group, as sponsor, to provide additional liquidity support.
Covered bond programmes
The nominal level of over-collateralisation was £699m (2018: £860m) in Clydesdale Covered Bond No 2 LLP and £1,490m in Eagle Place
LLP. From time-to-time the obligations of the Group to provide over-collateralisation may increase due to the formal requirements of
the programme.
Under all programmes, the Group has an obligation to repurchase mortgage exposures if certain mortgage loans no longer meet the
programme criteria.
3.4 Cash and balances with central banks
Accounting policy
Cash and balances with central banks are measured at amortised cost, using the effective interest method, adjusted for expected credit
losses, and are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and
rewards of ownership. These balances are generally of a short-term nature, and repayable on demand or within a short timescale, generally
three months.
Cash assets
Balances with central banks (including EU payment systems)
Less mandatory deposits with central banks(1)
Included in cash and cash equivalents (note 5.2)
(1) Mandatory deposits are not available for use in the Group’s day-to-day business and are non-interest bearing.
2019
£M
1,574
8,722
10,296
(183)
10,113
2018
£M
1,656
4,917
6,573
(75)
6,498
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 228
Section 3: Assets and liabilities continued
3.5 Financial assets and liabilities at fair value through profit or loss
Accounting policy
Financial assets and liabilities are designated at fair value through profit or loss, with gains and losses recognised in the income statement
as they arise (note 2.3), when this reduces measurement or recognition inconsistencies (e.g. an accounting mismatch) or where the
performance is evaluated on a fair value basis in accordance with risk management and investment strategies.
The Group’s unlisted securities and other financial assets which were held under IAS 39 as ‘available for sale’ have been classified as FVTPL
on adoption of IFRS 9, with the business model they are held under assessed as neither to hold and collect contractual cash flows nor to
hold and collect contractual cash flows and to sell.
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Loans and advances
Other financial assets(1)
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Customer deposits – term deposits
(1) Included within other financial assets is £8m (2018: £Nil) of unlisted securities.
2019
£M
253
14
267
4
2018
£M
362
–
362
15
Loans and advances
Included in financial assets at fair value through profit or loss is a historical portfolio of loans (sales ceased in 2012). Interest rate risk
associated with these loans is managed using interest rate derivative contracts and the loans are recorded at fair value to avoid an
accounting mismatch. The maximum credit exposure of the loans is £253m (2018: £362m) including accrued interest receivable of £1m
(2018: £2m). The cumulative loss in the fair value of the loans attributable to changes in credit risk amounts to £4m (2018: £8m) and
the change for the current year is a decrease of £4m (2018: decrease of £3m), of which £2m (2018: £3m) has been recognised in the
income statement.
Other financial assets
This represents deferred consideration receivable and consists of the rights to future income.
Note 5.4 provides the transitional disclosures for IFRS 9.
Refer to note 3.18 for further information on the valuation methodology applied to financial assets held at fair value through profit or loss
and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk report.
Customer deposits – term deposits
Included in other financial liabilities at fair value through profit or loss are fixed rate deposits, the interest rate risk on which is hedged using
interest rate derivative contracts. The deposits are recorded at fair value to avoid an accounting mismatch.
The change in fair value attributable to changes in the Group’s credit risk is £Nil (2018: £Nil). The Group is contractually obligated to pay
£Nil (2018: £0.3m) less than the carrying amount at maturity to the deposit holder.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS
229
3.6 Derivative financial instruments
Accounting policy
The Group uses derivative financial instruments to manage exposure to interest rate and foreign currency risk. Interest rate risk arises
when there is a mismatch between fixed interest rate and floating interest rates, and different repricing characteristics between assets
and liabilities. Currency risk arises when assets and liabilities are not denominated in the functional currency of the entity. Derivatives are
recognised on the balance sheet at fair value on trade date and are measured at fair value throughout the life of the contract. Derivatives
are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The notional amount of a derivative
contract is not recorded on the balance sheet but is disclosed as part of this note.
Netting
Derivative assets and liabilities are offset against collateral received and paid respectively, and the net amount reported in the due to
and from other banks in the balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there
is an intention to settle on a net basis. Amounts offset on the balance sheet represent the Group’s centrally cleared derivative financial
instruments and collateral paid to/from central clearing houses, which meet the criteria for offsetting under IAS 32.
Hedge accounting
The Group elects to apply hedge accounting for the majority of its risk management activity that uses derivatives. This results in greater
alignment in the timing of recognition of gains and losses on hedged items and hedging instruments and therefore reduces income
statement volatility. The Group does not have a trading book, however, derivatives that do not meet the hedging criteria, or for which
hedge accounting is not applied, are classified as held for trading.
IFRS 9 replaces IAS 39 for annual periods beginning on or after 1 January 2018. The Group has elected, as a policy choice permitted under
IFRS 9, to continue to apply hedge accounting in accordance with IAS 39. The method of recognising the fair value gain or loss on a
derivative depends on whether it is designated as a hedging instrument and the nature of the item being hedged. Certain derivatives are
designated as either hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly probable forecast
transaction (a cash flow hedge); or hedges of the fair value of recognised assets or liabilities or firm commitments (a fair value hedge).
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity.
Specifically, the separate component of equity (note 4.1) is adjusted to the lesser of the cumulative gain or loss on the hedging instrument,
and the cumulative change in fair value of the expected future cash flows on the hedged item from the inception of the hedge. Any
remaining gain or loss on the hedging instrument is recognised in the income statement. The carrying value of the hedged item is not
adjusted. Amounts accumulated in equity are transferred to the income statement in the period in which the hedged item affects profit
or loss.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain
or loss remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the
income statement.
Fair value hedge
The carrying value of the hedged item on initial designation is adjusted for the fair value attributable to the hedged risk. Subsequently,
changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together
with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. This movement in the fair value
of the hedged item is made as an adjustment to the carrying value of the hedged asset or liability.
Where the hedged item is derecognised from the balance sheet, the adjustment to the carrying amount of the asset or liability is
immediately transferred to the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the
criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the income statement over the
remaining life of the asset or liability.
Hedge effectiveness
The Group documents, at the inception of a transaction, the relationship between hedging instruments and the hedged items, and the
Group’s risk management objective and strategy for undertaking these hedge transactions. The documentation covers how effectiveness
will be measured throughout the life of the hedge relationship and its assessment, both at hedge inception and on an ongoing basis,
of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows
of hedged items. A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk
during the period for which the hedge is designated are expected to offset in a range of 80% to 125%.
Derivatives held for trading
Changes in value of held for trading derivatives are immediately recognised in the income statement (note 2.3).
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 230
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments continued
The tables below analyse derivatives between those designated as hedging instruments and those classified as held for trading:
FAIR VALUE OF DERIVATIVE FINANCIAL ASSETS
Designated as hedging instruments
Designated as held for trading
FAIR VALUE OF DERIVATIVE FINANCIAL LIABILITIES
Designated as hedging instruments
Designated as held for trading
2019
£M
315
51
366
191
82
273
2018
£M
203
59
262
259
102
361
Cash collateral on derivatives placed with banks totalled £55m (2018: £306m). Cash collateral received on derivatives totalled £149m
(2018: £37m). These amounts are included within due from and due to other banks respectively. Collateral placed with clearing houses,
which did not meet offsetting criteria, totalled £55m (30 September 2018: £143m) and is included within other assets. Similarly, collateral
received from clearing houses is included in other liabilities and totalled £Nil (30 September 2018: £34m).
The derivative financial instruments held by the Group are further analysed below. The notional contract amount is the amount from which
the cash flows are derived and does not represent the principal amounts at risk relating to these contracts.
Total derivative contracts
DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS
Cash flow hedges
Interest rate swaps (gross)
Less: net settled interest rate swaps(1)
Interest rate swaps (net)(2)
Cross currency swaps(2)
Fair value hedges
Interest rate swaps (gross)
Less: net settled interest rate swaps(1)
Interest rate swaps (net)(2)
Cross currency swaps(2)
Total derivatives designated as hedging instruments
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange(2)
Cross currency swaps(2)
Options(2)
Interest rate related contracts
Interest rate swaps (gross)
Less: net settled interest rate swaps(1)
Interest rate swaps (net)(2)
Swaptions(2)
Options(2)
Commodity related contracts
Equity related contracts
Total derivatives designated as held for trading
(1) Presented within other assets.
(2) Presented within derivative financial instruments.
2019
2018
NOTIONAL
CONTRACT
AMOUNT
£M
FAIR VALUE
OF ASSETS
£M
FAIR VALUE
OF LIABILITIES
£M
NOTIONAL
CONTRACT
AMOUNT
£M
FAIR VALUE
OF ASSETS
£M
FAIR VALUE
OF LIABILITIES
£M
25,023
(14,513)
10,510
1,446
11,956
25,492
(23,872)
1,620
808
2,428
14,384
728
1,123
2
1,853
1,159
(363)
796
11
465
1,272
55
3
3,183
105
(47)
58
162
220
146
(60)
86
9
95
315
16
11
–
27
24
(5)
19
–
2
21
2
1
51
121
(75)
46
–
46
526
(389)
137
8
145
191
15
9
–
24
53
(2)
51
2
3
56
2
–
82
24,570
–
24,570
690
25,260
2,180
–
2,180
–
2,180
27,440
1,788
455
11
2,254
811
–
811
33
501
1,345
53
3,652
88
–
88
70
158
45
–
45
–
45
203
26
10
–
36
15
–
15
–
1
16
7
59
111
–
111
–
111
148
–
148
–
148
259
23
10
–
33
59
–
59
–
3
62
7
102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 231
Hedge accounting
The hedging strategy of the Group is divided into micro hedges, where the hedged item is a distinctly identifiable asset or liability,
and portfolio hedges, where the hedged item is a homogenous portfolio of assets and liabilities.
In some hedge accounting relationships, the Group designates risk components of hedged items as follows:
— benchmark interest rate risk as a component of interest rate risk, such as the LIBOR component;
— exchange rate risk for foreign currency financial assets and financial liabilities; and
— components of cash flows of hedged items, for example certain interest payments for part of the life of an instrument.
Other risks such as credit risk and liquidity risk are managed by the Group but are not included in the hedge accounting relationship.
Changes in the designated risk component usually account for the largest portion of the overall change in fair value or cash flows of
the hedged item.
Portfolio fair value hedges
The Group applies macro fair value hedging to its fixed rate mortgages and fixed rate customer deposits. The Group determines hedged
items by identifying portfolios of homogeneous loans or deposits based on their contractual maturity and other risk characteristics.
Loans or deposits within the identified portfolios are allocated to repricing time buckets based on expected, rather than contractual,
repricing dates. The hedging instruments are designated appropriately to those repricing time buckets. Hedge effectiveness is measured
on a monthly basis, by comparing fair value movements of the designated proportion of the bucketed loans due to the hedged risk,
against the fair value movements of the derivatives, to ensure that they are within an 80% to 125% range.
The aggregated fair value changes in the hedged loans and deposits are recognised on the Group’s balance sheet as an asset and liability
respectively. At the end of every month, in order to minimise the ineffectiveness from early repayments and accommodate new exposures,
the Group voluntarily de-designates the hedge relationships and redesignates them as new hedges. At de-designation, the fair value
hedge accounting adjustments are amortised on a straight line basis over the original hedged life. The Group has elected to commence
amortisation at the date of de-designation.
Micro fair value hedges
The Group uses this hedging strategy on GBP and foreign currency denominated fixed rate assets held at fair value through other
comprehensive income (or available-for-sale fixed rate assets in the year to 30 September 2018) and GBP and foreign currency
denominated fixed rate debt issuances by the Group.
Portfolio cash flow hedges
The Group applies macro cash flow hedge accounting to a portion of its floating rate financial assets and liabilities. The hedged cash flows
are a group of forecast transactions that result in cash flow variability from resetting of interest rates, reinvestment of financial assets,
or refinancing and rollovers of financial liabilities. This cash flow variability can arise on recognised assets or liabilities or highly probable
forecast transactions. The hedged items are designated as the gross asset or liability positions allocated to time buckets based on
projected repricing and interest profiles. The Group aims to maintain a position where the principal amount of the hedged items are greater
than or equal to the notional amount of the corresponding interest rate swaps used as the hedging instruments. The hedge accounting
relationship is reassessed on a monthly basis with the composition of hedging instruments and hedged items changing frequently in line
with the underlying risk exposures. If necessary, the hedge relationships are de-designated and redesignated based on the effectiveness
test results.
Micro cash flow hedges
Floating rate issuances that are denominated in currencies other than the functional currency of the Group are designated in cash flow
hedges with cross currency swaps.
Hedge ineffectiveness
Hedge ineffectiveness can arise from:
— differences in timing of cash flows of hedged items and hedging instruments;
— changes in expected timings and amounts of forecast future cash flows;
— different interest rate curves applied to discount the hedged items and hedging instruments; and
— derivatives used as hedging instruments having a non-zero fair value at the time of designation.
Additionally, for portfolio fair value hedges of the Group’s fixed rate mortgage portfolio, ineffectiveness also arises from the difference
between forecast and actual prepayments (prepayment risk).
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 232
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments continued
The below table discloses the impact derivatives held in micro hedging relationships are expected to have on the timing and uncertainty
of future cash flows. All notional principal amounts and carrying values are presented gross, prior to any netting permitted for balance sheet
presentation as this reflects the derivative position used for risk management and the impact on future cash flows.
30 September 2019
CASH FLOW HEDGES
Foreign exchange risk
Cross currency swap
Notional principal (£m)
Average GBP/EUR rate
Average GBP/USD rate
3 MONTHS OR LESS
3 TO 12 MONTHS
1 TO 5 YEARS
TOTAL
107
1.3459
1.3263
445
1.3423
1.3228
894
1.3680
1.3089
1,446
n/a
n/a
Summary of hedging instruments in designated hedge relationships
In the below table, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships,
irrespective of whether or not there has been a change in hedge designation during the year.
30 September 2019
CASH FLOW HEDGES
Interest rate risk
Interest rate swaps(1)
Foreign exchange risk
Cross currency swaps
Total derivatives designated as cash flow hedges
FAIR VALUE HEDGES
Interest rate risk
Interest rate swaps(1)
Foreign exchange and interest rate risk
Cross currency swaps
Total derivatives designated as fair value hedges
NOTIONAL
CONTRACT
AMOUNT
£M
CARRYING AMOUNT
ASSETS
£M
LIABILITIES
£M
25,023
1,446
26,469
25,492
808
26,300
105
162
267
146
9
155
(121)
–
(121)
(526)
(8)
(534)
CHANGE IN FAIR VALUE OF HEDGING
INSTRUMENT IN THE YEAR USED FOR
INEFFECTIVENESS MEASUREMENT(2)
£M
–
59
59
(264)
1
(263)
(1) As shown in the total derivatives contracts table on page 230, for centrally cleared derivatives, where the IAS 32 ‘Financial Instruments: Presentation’
netting criteria is met, the derivative balances are offset within other assets. For all other derivatives, the derivative balances are presented within derivative
financial instruments.
(2) Changes in fair value of cash flow hedging instruments are recognised in other comprehensive income. Changes in fair value of fair value hedging
instruments are recognised in the income statement in non-interest income.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 233
Summary of hedged items in designated hedge relationships
In the below table, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships,
irrespective of whether or not there has been a change in hedge designation during the year.
30 September 2019
CASH FLOW HEDGES
Interest rate risk
Gross floating rate assets and gross floating
rate liabilities(1)
Foreign exchange risk
Floating rate currency issuances(2)
Total
FAIR VALUE HEDGES
Interest rate risk
Fixed rate mortgages(3)
Fixed rate customer deposits(4)
Fixed rate FVOCI debt instruments(5)
Fixed rate issuances(2)
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments(5)
Fixed rate currency issuances(2)
Total
CARRYING AMOUNT
OF HEDGED ITEMS
ASSETS
£M
LIABILITIES
£M
ACCUMULATED
AMOUNT OF
FAIR VALUE
ADJUSTMENTS
ON THE
HEDGED
ITEM(6)
£M
CHANGE IN FAIR
VALUE OF
HEDGED ITEM
IN THE YEAR
USED FOR
INEFFECTIVENESS
MEASUREMENT
£M
CASH FLOW HEDGE RESERVE
CONTINUING
HEDGES
£M
DISCONTINUED
HEDGES
£M
(15)
–
(15)
(20)
–
(20)
(14)
(59)
(73)
209
(9)
133
(92)
4
(4)
241
16,436
–
2,940
–
82
–
19,458
–
(4,769)
–
(2,368)
–
(530)
(7,667)
211
(10)
166
122
3
1
493
(1) Future highly probable cash flows arising from loans and advances to customers, due to customers and debt securities in issue.
(2) Hedged item is recorded in debt securities in issue.
(3) Hedged item and the cumulative fair value changes, are recorded in loans and advances to customers.
(4) Hedged item and the cumulative fair value changes, are recorded in due to customers.
(5) Hedged item is recorded in financial assets at fair value through other comprehensive income.
(6) Includes cumulative unamortised fair value hedge adjustments relating to hedges that have been discontinued and are being amortised to the income
statement over the remaining life of the asset or liability.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 234
Section 3: Assets and liabilities continued
3.6 Derivative financial instruments continued
Gains and losses from hedge accounting
30 September 2019
CASH FLOW HEDGES
Interest rate risk
Gross floating rate assets and gross floating rate liabilities
Foreign exchange risk
Floating rate currency issuances
Total (losses)/gains on cash flow hedges
FAIR VALUE HEDGES
Interest rate risk
Fixed rate mortgages
Fixed rate customer deposits
Fixed rate FVOCI debt instruments
Fixed rate issuances
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments
Fixed rate currency issuances
Total losses on fair value hedges
HEDGE
INEFFECTIVENESS
RECOGNISED
IN INCOME
STATEMENT(1)
£M
EFFECTIVE
PORTION
RECOGNISED
IN OTHER
COMPREHENSIVE
INCOME
£M
RECLASSIFIED INTO
INCOME STATEMENT AS
NET INTEREST
INCOME
£M
NON-INTEREST
INCOME
£M
14
59
73
–
–
–
–
(57)
(57)
(14)
–
(14)
(24)
4
(2)
(1)
–
1
(22)
(1) Recognised in gains less losses on financial assets at fair value.
The ineffectiveness arising from cash flow and fair value hedges for the prior year was:
Loss arising from cash flow hedges
Loss from cash flow hedges due to hedge ineffectiveness
(Loss)/gain arising from fair value hedges
Hedging instrument
Hedged item attributable to the hedged risk
Ineffectiveness arising from cash flow and fair value hedges
2019
£M
(14)
(14)
(263)
241
(22)
(36)
2018
£M
(6)
(6)
14
(14)
–
(6)
Below is a schedule indicating, as at 30 September 2018, the periods when the hedged cash flows are expected to occur and when they
are expected to affect profit or loss:
Within 1 year
Between 1 and 2 years
Between 2 and 3 years
Between 3 and 4 years
Between 4 and 5 years
Greater than 5 years
FORECAST
RECEIVABLE
CASH FLOWS
2018
£M
109
130
108
63
37
60
507
FORECAST
PAYABLE
CASH FLOWS
2018
£M
283
366
160
5
3
10
827
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 235
3.7 Financial assets at fair value through other comprehensive income
Accounting policy
Fair value through other comprehensive income (FVOCI) is a new financial asset classification category introduced by IFRS 9 ‘Financial
Instruments’. As permitted by IFRS 9, the Group has not restated its comparative financial statements, consequently no comparative
is presented as at 30 September 2018. The Group’s listed securities previously classified as ‘available for sale’ under IAS 39 (note 3.8)
have been assessed as meeting the criteria to be classified as FVOCI.
Interest income and impairment gains and losses on FVOCI assets are measured in the same manner as for assets measured at amortised
cost and are recognised in the income statement, with all other gains or losses recognised in other comprehensive income as a separate
component of equity in the period in which they arise. Gains and losses arising from changes in fair value are included as a separate
component of equity until sale when the cumulative gain or loss is transferred to the income statement. For all FVOCI assets, the gain
or loss is calculated with reference to the gross carrying amount
Debt instruments at FVOCI are subject to the same impairment criteria as amortised cost financial assets (note 3.2), with the expected
credit loss (ECL) element recognised directly in the income statement. As the financial asset is fair valued through other comprehensive
income, the change in its value includes the ECL element, with the remaining fair value change recognised in other comprehensive income.
Any reversal of the ECL is recorded in the income statement up to the value recognised previously.
The Group exercises the low credit risk option for debt instruments classified as FVOCI, recognising the high credit quality of the
instruments, accordingly a 12-month ECL is calculated on the assets.
Listed securities
Total financial assets at fair value through other comprehensive income
2019
£M
4,328
4,328
2018
£M
–
–
Refer to note 3.18 for further information on the valuation methodology applied to financial assets at FVOCI at 30 September 2019 and their
classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk report.
Note 5.4 provides the transitional disclosures for IFRS 9.
3.8 Financial assets available for sale
Accounting policy
The available for sale classification category for financial assets ceased to apply from 1 October 2018 on the adoption of IFRS 9.
The Group’s listed securities have been assessed as meeting the criteria to be classified as fair value through other comprehensive income
under IFRS 9 (note 3.7). Unlisted securities and other financial assets have been classified as fair value through profit or loss (note 3.5).
Listed securities
Unlisted securities
Other financial assets
Total financial assets available for sale
2019
£M
–
–
–
–
2018
£M
1,551
5
6
1,562
Refer to note 3.18 for further information on the valuation methodology applied to financial assets available for sale at 30 September 2018
and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk report.
Note 5.4 provides the transitional disclosures for IFRS 9.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS
236
Section 3: Assets and liabilities continued
3.9 Property, plant and equipment
Accounting policy
The Group’s freehold and long-term leasehold land and buildings are carried at their fair value as determined by the Directors, taking
account of advice received from independent valuers. Fair values are determined in accordance with guidance published by the Royal
Institution of Chartered Surveyors, including adjustments to observable market inputs reflecting any specific characteristics of the land
and buildings. Directors’ valuations are performed annually in July, with the independent valuations carried out on a three-year cycle
on an open market basis.
All other items of property, plant and equipment are carried at cost, less accumulated depreciation and impairment losses. Cost includes
expenditure that is directly attributable to acquisition of the asset. Impairment is assessed whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
With the exception of freehold and long-term leasehold land, all items of property, plant and equipment are depreciated or amortised using
the straight line method, at rates appropriate to their estimated useful life to the Group. The annual rates of depreciation or amortisation are:
Buildings
50 years
Leases (leasehold improvements)
the lower of the expected lease term or the asset’s remaining useful life
Fixtures and equipment
3–10 years
Residual values and useful lives of assets are reviewed at each reporting date. Depreciation is recognised within operating expenses
in the income statement.
COST OR VALUATION
At 1 October 2017
Additions
Disposals
At 30 September 2018
Acquisition of Virgin Money Holdings (UK) PLC
Additions
Disposals
At 30 September 2019
ACCUMULATED DEPRECIATION
At 1 October 2017
Charge for the year
Disposals
At 30 September 2018
Charge for the year (note 2.4)
Disposals
At 30 September 2019
Net book value
At 30 September 2019
At 30 September 2018
FREEHOLD LAND
AND BUILDINGS
£M
LONG-TERM
LEASEHOLD LAND
AND BUILDINGS
£M
BUILDING
IMPROVEMENTS
£M
FIXTURES
AND
EQUIPMENT
£M
5
–
(2)
3
36
–
(1)
38
1
–
–
1
3
–
4
34
2
3
–
–
3
3
–
–
6
–
–
–
–
–
–
–
6
3
143
9
(3)
149
11
12
(4)
168
88
10
(3)
95
11
(2)
104
64
54
102
13
(1)
114
15
8
–
137
78
8
(1)
85
11
–
96
41
29
TOTAL
£M
253
22
(6)
269
65
20
(5)
349
167
18
(4)
181
25
(2)
204
145
88
Valuations
A comparison of the carrying value between the revaluation basis and the historical cost basis, for freehold and long-term leasehold land
and buildings, is shown below:
Carrying value as included under the revaluation basis
Carrying value if the historical cost basis had been used
2019
£M
40
40
2018
£M
5
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS
237
3.10
Intangible assets and goodwill
Accounting policy
Capitalised software costs are stated at cost, less amortisation and any provision for impairment.
Identifiable and directly associated external and internal costs of acquiring and developing software are capitalised where the software
is controlled by the Group, and where it is probable that future economic benefits that exceed its cost will flow from its use over more than
one year. Costs associated with maintaining software are recognised as an expense as incurred. Capitalised software costs are amortised
on a straight line basis over their expected useful lives, usually between three and ten years. Impairment losses are recognised in the
income statement as incurred.
Goodwill arises on the acquisition of an entity and represents the excess of the fair value of the purchase consideration and direct costs
of making the acquisition over the fair value of the Group’s share of the net assets at the date of the acquisition. Goodwill is not subject
to amortisation and is tested for impairment on an annual basis.
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, which typically arises when the benefits associated with the software were substantially reduced
from what had originally been anticipated or the asset has been superseded by a subsequent investment. In such situations, an impairment
loss is recognised for the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of
an asset is the higher of its fair value less costs of disposal or its value in use.
Intangible assets which are fully amortised are reviewed annually to consider whether the assets remain in use.
COST
At 1 October 2017
Additions
At 30 September 2018
Acquisition of Virgin Money Holdings (UK) PLC
Additions
Write-off
At 30 September 2019
ACCUMULATED AMORTISATION
At 1 October 2017
Charge for the year
At 30 September 2018
Charge for the year (note 2.4)
Impairment (note 2.4)
Write-off
At 30 September 2019
NET BOOK VALUE
At 30 September 2019
At 30 September 2018
CAPITALISED
SOFTWARE
£M
GOODWILL
£M
CORE DEPOSIT
INTANGIBLE
£M
TOTAL
£M
589
144
733
172
130
(85)
950
250
71
321
82
115
(68)
450
500
412
–
–
–
11
–
–
11
–
–
–
–
–
–
–
11
–
–
–
–
6
–
–
6
–
–
–
1
–
–
1
5
–
589
144
733
189
130
(85)
967
250
71
321
83
115
(68)
451
516
412
£31m (2018: £1m) of the £130m (2018: £144m) software additions do not form part of internally generated software projects.
A £127m charge (comprising impairment of £115m and write-offs with a net book value of £12m) was recognised in the year following a
review of the Group’s software estate following the acquisition of Virgin Money Holdings (UK) PLC, which identified a number of core assets
(including £70m in relation to the Virgin Money Digital Bank asset) that are no longer of value to the Group’s future strategy and therefore
required to be written down (note 2.4).
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 238
Section 3: Assets and liabilities continued
3.11 Deferred tax
Accounting policy
Deferred tax assets and liabilities are recognised on temporary differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. A deferred tax asset is recognised for unused tax losses and unused tax credits
only if it is probable that future taxable amounts will arise against which those temporary differences and losses may be utilised.
Critical accounting estimates and judgements
The Group has deferred tax assets of £322m (2018: £206m), the principal components of which are tax losses, capital allowances and
acquisition accounting adjustments.
Tax losses carried forward of £146m (2018: £99m) have increased due to the recognition of historic losses and a re-evaluation of the rate
at which they are expected to unwind.
The Group has assessed the recoverability of these deferred tax assets at 30 September 2019 and considers it probable that sufficient
future taxable profits will be available against which the underlying deductible temporary differences can be utilised over the corporate
planning horizon.
At 30 September 2019, the Group had an unrecognised deferred tax asset of £114m (2018: £157m) representing trading losses with a
gross value of £668m (2018: £926m). Although there is no prescribed period after which losses expire, a deferred tax asset has not been
recognised in respect of these losses as the Directors have insufficient certainty over their recoverability in the foreseeable future.
Movement in net deferred tax asset
At 30 September
IFRS 9 adjustment recognised in equity (note 5.4)
At 1 October
Recognised in the income statement (note 2.5)
Recognised directly in equity
At 30 September
2019
£M
129
7
136
53
(68)
121
2018
£M
79
–
79
35
15
129
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 239
The Group has recognised deferred tax in relation to the following items:
DEFERRED TAX ASSETS
Tax losses carried forward
Capital allowances
Cash flow hedge reserve
Acquisition accounting adjustments
Transitional adjustment – IFRS 9
Transitional adjustment – available for sale reserve
Employee equity based compensation
Unamortised issue costs
Pension spreading
Other
DEFERRED TAX LIABILITIES
Defined benefit pension scheme surplus
Acquisition accounting adjustments
Gains on unlisted financial instruments at fair value through other comprehensive income
Intangible assets
Other
Net deferred tax asset
2019
£M
146
91
3
44
16
1
5
4
11
1
322
(139)
(51)
(6)
(4)
(1)
(201)
121
2018
£M
99
88
12
–
–
1
3
–
–
3
206
(74)
–
(3)
–
–
(77)
129
Payments to the pension scheme were greater than 210% of 2018 contributions and therefore in accordance with the legislation, tax relief
is spread over four years giving rise to the pension spreading deferred tax asset of £11m. The current and deferred tax impact of pension
contributions, and pension spreading, are reflected in the consolidated statement of comprehensive income.
The accounting adjustments relating to the acquisition of Virgin Money Holdings (UK) PLC (note 3.19) resulted in a net deferred tax liability
of £22m on the date of acquisition, which has subsequently unwound in line with the related unwind of the fair value adjustments to a net
deferred tax liability of £7m at 30 September 2019. The constituent parts of the net liability have been shown as deferred tax assets of
£44m and deferred tax liabilities of £51m as they are not expected to unwind at the same time.
In accordance with legislation, the tax relief on the IFRS 9 opening adjustment (note 5.4) is spread evenly over 10 years and will unwind
through entity corporation tax computations across the Group. The IFRS 9 deferred tax asset balance of £16m represents the combination
of the Group’s transitional position as presented in note 5.4 and the IFRS 9 transitional element remaining of the Virgin Money Holdings
(UK) PLC adoption of IFRS 9 on 1 January 2018.
The European Securities and Markets Authority (ESMA) issued a Public Statement relating to IAS 12 ‘Income Taxes’ in July 2019.
The publication covered considerations on the recognition of deferred tax assets arising from the carry-forward of unused tax losses.
As the Group’s deferred tax asset, including the element relating to tax losses carried forward, is material, the Group has assessed the
content of the ESMA Public Statement and will look to incorporate any potential further disclosure requirements arising from the statement
in the financial statements in future reporting periods.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 240
Section 3: Assets and liabilities continued
3.12 Retirement benefit obligations
Accounting policy
The Group makes contributions to both defined benefit and defined contribution pension schemes which entitle employees to benefits
on retirement or disability.
Defined contribution pension scheme
The Group recognises its obligation to make contributions to the scheme as an expense in the income statement as incurred. Prepaid
contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.
Defined benefit pension scheme
A liability or asset is recognised on the balance sheet in respect of the defined benefit scheme and is measured as the difference between
the present value of the defined benefit obligation less the fair value of the defined benefit scheme assets at the reporting date. The
present value of the defined benefit obligation for the scheme is discounted by high quality corporate bond rates that have maturity dates
approximating to the terms of the defined benefit obligation. Surpluses are only recognised to the extent that they are recoverable through
reduced contributions in the future or through refunds from the scheme. In assessing whether a surplus is recoverable, the Group considers
its current right to obtain a refund or a reduction in future contributions and does not anticipate any future acts by other parties that could
change the amount of the surplus that may be ultimately recovered.
Pension expense attributable to the Group’s defined benefit scheme comprises current service cost, net interest on the net defined benefit
obligation/asset, past service cost resulting from a scheme amendment or curtailment, gains or losses on settlement and administrative
costs incurred. Where actuarial remeasurements arise, the Group recognises such amounts directly in equity through the statement of
comprehensive income in the period in which they occur. Actuarial remeasurements arise from experience adjustments (the effects of
differences between previous actuarial assumptions and what has actually occurred) and changes in actuarial assumptions.
The following table summarises the present value of the defined benefit obligation and fair value of plan assets for the Scheme as at
30 September:
Active members’ defined benefit obligation
Deferred members’ defined benefit obligation
Pensioner and dependant members’ defined benefit obligations
Total defined benefit obligation
Fair value of Scheme assets
Net defined benefit pension asset
Post-retirement medical benefits obligations(1)
(1) Post-retirement medical benefits obligations are included within other liabilities (note 3.17).
2019
£M
(30)
(2,537)
(1,744)
(4,311)
4,707
396
(3)
2018
£M
(24)
(2,131)
(1,591)
(3,746)
3,958
212
(3)
The Group’s pension arrangements
The Group operates both defined benefit and defined contribution arrangements. The Group’s principal trading subsidiary, Clydesdale
Bank PLC, is the sponsoring employer in one funded defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme
(‘the Scheme’). The current version of the Scheme was established under trust on 30 September 2009 with the assets held in a trustee
administered fund. The Trustee is responsible for the operation and governance of the Scheme, including making decisions regarding the
Scheme’s funding and investment strategy.
The Scheme is subject to the funding legislation outlined in the Pensions Act 2004 which came into force on 30 December 2005. This,
together with documents issued by the Pensions Regulator, sets out the framework for funding defined benefit occupational pension plans
in the UK.
The Group has implemented a number of reforms to the Scheme to manage the obligation. It closed the Scheme to new members in 2004
and since April 2006 has determined benefits accruing on a career average revalued earnings basis. On 1 August 2017, the Scheme was
closed to future benefit accrual for the majority of current employees, with affected employees’ future pension benefits being provided
through the Group’s existing defined contribution scheme, ‘Total Pension’. The income statement charge for this is separately disclosed
in note 2.4.
The Group also provides post-retirement health care under a defined benefit scheme for pensioners and their dependant relatives for
which provision has been made on a basis consistent with the methodology applied to the defined benefit pension scheme. This is a closed
scheme and the provision will be utilised over the life of the remaining scheme members. The obligation in respect of this scheme was £3m
at 30 September 2019 (2018: £3m) and is included within other liabilities in note 3.17.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 241
Scheme valuations
There are a number of means of measuring liabilities in the defined benefit schemes, with the ultimate aim of the Trustee being that the
Scheme is 100% funded on an agreed self-sufficiency basis(1). The two bases used by the Group to value its obligations are (i) an IAS 19
accounting basis; and (ii) a Trustee’s Technical Provision basis.
(i) IAS 19 accounting basis
The valuations of the Scheme assets and obligations are calculated on an accounting basis in accordance with the applicable accounting
standard IAS 19 which provides the basis for the accounting framework and methodology for entries in the income statement, balance
sheet and capital reporting. The principal purpose of this valuation is to allow comparison of pension obligations between companies.
The obligation under an accounting valuation can be higher or lower than those under a Trustee’s Technical Provision valuation.
The rate used to discount the obligation on an IAS 19 basis is a key driver of any potential volatility and is based on yields on AA rated
high-quality corporate bonds, regardless of how the Trustee of the Scheme invests the assets. The accounting valuation under IAS 19 can
therefore move adversely because of low rates and narrowing credit spreads which are not fully matched by the Scheme assets. Inflation
is another key source of volatility and arises as a result of member benefits having an element of index linking, which causes the obligation
to increase in line with rises in long-term inflation assumptions. In practice however, over the long term, the relationship between interest
and inflation rates tends to be negatively correlated resulting in a degree of risk offset.
(ii) Trustee’s Technical Provision basis
This valuation basis reflects how much money the Trustee considers is required now in order to provide for the promised benefits as they
come up for payment in the future. The Trustee is responsible for ensuring that the calculation is conducted prudently on an actuarial basis,
taking into account factors including the Scheme’s investment strategy and the relative financial strength of the sponsoring employer.
A key aspect of this valuation is the investment strategy the Trustee proposes to follow as part of the policy for meeting the Scheme’s
obligations. Because there are no guarantees about investment returns over long periods, legislation requires the Trustee to consider
carefully how much of their expected future investment returns it would be prudent for them to account for in advance.
The last Scheme funding valuation was conducted in accordance with Scheme data and market conditions as at 30 September 2016 and
resulted in a reported deficit of £290m(2). The Group agreed to eliminate this deficit through making contributions as agreed in the recovery
plan dated 31 July 2017 and a revised schedule of contributions dated 31 January 2018. The following scheduled contributions of £184m
remain to be made over the period to March 2023:
— equal monthly contributions totalling £50m per annum until 31 March 2022; and
— £55m in the year to 31 March 2023.
The next triennial funding valuation is currently in progress and will be calculated with reference to the Scheme data and market conditions
as at 30 September 2019. The Group expects this valuation to be agreed with the Trustee of the Scheme by the end of 2020.
Scheme assets are not subject to the same valuation differences as Scheme obligations and are consistently valued at current market value.
(1) This is where the Scheme is essentially self-funded and does not need to call on the Group for any additional funding.
(2) The IAS 19 valuation as at 30 September 2016 reported a Scheme deficit of £75m.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 242
Section 3: Assets and liabilities continued
3.12 Retirement benefit obligations continued
IAS 19 position
The Scheme movements in the year are as follows:
Balance sheet surplus at 1 October
TOTAL EXPENSE
Current service cost
Past service cost
Interest (expense)/income
Administrative costs
Total (expense)/income recognised
in the consolidated income
statement
REMEASUREMENTS
Return on Scheme assets greater
than discount rate
Actuarial:
Loss – experience adjustments
Gain – demographic assumptions
Loss – financial assumptions
Remeasurement (losses)/gains
recognised in other
comprehensive income
CONTRIBUTIONS AND PAYMENTS
Employer contributions
Benefit payments
Transfer payments
Balance sheet surplus
at 30 September
2019
2018
PRESENT
VALUE OF
OBLIGATION
£M
(3,746)
FAIR VALUE
OF PLAN
ASSETS
£M
3,958
TOTAL
£M
212
CUMULATIVE
LOSS
IN OCI
£M
(704)
PRESENT
VALUE OF
OBLIGATION
£M
(3,974)
FAIR VALUE
OF PLAN
ASSETS
£M
4,181
TOTAL
£M
207
CUMULATIVE
LOSS IN OCI
£M
(695)
–
(11)
(100)
–
–
–
107
(5)
–
(11)
7
(5)
(1)
(2)
(104)
–
–
–
109
(6)
(111)
102
(9)
(107)
103
–
772
772
772
(9)
30
(683)
–
–
–
(9)
30
(683)
(9)
30
(683)
–
(35)
19
(20)
27
–
–
–
(1)
(2)
5
(6)
(4)
27
(35)
19
(20)
27
(35)
19
(20)
(662)
772
110
110
(36)
27
(9)
(9)
–
96
112
208
83
(96)
(112)
(125)
83
–
–
83
–
93
278
371
18
(93)
(278)
(353)
18
–
–
18
(4,311)
4,707
396
(3,746)
3,958
212
(594)
(704)
The past service cost included within the income statement charge for the current year of £11m relates to GMP equalisation, which is
detailed further below. In the prior year, the Group incurred a past service cost of £2m in relation to enhanced early retirement entitlements
on redundancy, which was fully offset in the income statement by a corresponding release from the restructuring provision.
The expected contributions and benefit payments for the year ending 30 September 2020 are £56m (2019: £77m) and £108m
(2019: £98m) respectively.
The Group and Trustee have entered into a contingent security arrangement (the ‘Security Arrangement’) (note 5.3).
GMP equalisation
On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits
for men and women in relation to GMP and concluded on the methods that were appropriate. The estimated increase in the Scheme
obligations at the date of the judgement was £11m which is based on a number of assumptions, therefore the actual impact may be different.
An allowance for GMP equalisation has been reflected in the income statement and in the closing net accounting surplus of the Scheme.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS
243
Maturity of Scheme liabilities
The estimated maturity period of Scheme obligations on an IAS 19 accounting basis is as follows:
Pension Scheme Liability Cash Flows (£m)
20
18
16
14
12
10
8
6
4
2
0
9
1
0
2
t
c
O
2
2
0
2
t
c
O
5
2
0
2
t
c
O
8
2
0
2
t
c
O
1
3
0
2
t
c
O
4
3
0
2
t
c
O
7
3
0
2
t
c
O
0
4
0
2
t
c
O
3
4
0
2
t
c
O
6
4
0
2
t
c
O
9
4
0
2
t
c
O
2
5
0
2
t
c
O
5
5
0
2
t
c
O
8
5
0
2
t
c
O
1
6
0
2
t
c
O
4
6
0
2
t
c
O
7
6
0
2
t
c
O
0
7
0
2
t
c
O
3
7
0
2
t
c
O
6
7
0
2
t
c
O
9
7
0
2
t
c
O
2
8
0
2
t
c
O
5
8
0
2
t
c
O
8
8
0
2
t
c
O
The discounted mean term of the defined benefit obligation at 30 September 2019 is 20 years (2018: 19 years).
Scheme assets
In order to meet the obligations of the Scheme, the Trustee invests in a diverse portfolio of assets, with the level and volatility of asset
returns being a key factor in the overall investment strategy. The investment portfolio is subject also to a range of risks typical of the types
of assets held, such as: equity risk; credit risk on bonds; currency risk; interest rate and inflation risk; and exposure to the property market.
The Trustee’s investment strategy (including physical assets and derivatives) seeks to reduce the Scheme’s exposure to these risks.
In managing interest rate and inflation risks, the investment strategy seeks to hold portfolios of matching assets (including derivatives)
that enable the Scheme’s assets to better match movements in the value of liabilities due to changes in interest rates and inflation.
As at 30 September 2019, both the interest rate and inflation rate hedge ratios were around 85% and 75% respectively (2018: 81% and 71%)
of the obligation when measured on a self-sufficiency basis. This strategy reflects the Scheme’s obligation profile and the Trustee’s and the
Group’s attitude to risk. The Trustee monitors the investment objectives and asset allocation policy on a regular basis.
The Trustee’s investment strategy involves two main categories of investments:
— matching assets – a range of investments that provide a match to changes in obligation values; and
— return seeking assets – a range of investments designed to provide specific, planned and consistent returns.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS
244
Section 3: Assets and liabilities continued
3.12 Retirement benefit obligations continued
The major categories of plan assets for the Scheme, stated at fair value, are as follows:
BONDS
Fixed government
Index linked government
Global sovereign
Corporate and other
EQUITIES(1)
Global equities
Emerging market equities
UK equities
OTHER
Secured income alternatives
Derivatives(2)
Repurchase agreements
Property
Alternative credit
Infrastructure
Cash
Equity options
2019
2018
QUOTED
£M
UNQUOTED
£M
TOTAL
£M
QUOTED(3)
UNQUOTED(3)
%
£M
£M
TOTAL
£M
%
569
1,757
20
531
2,877
–
–
–
–
–
–
–
–
–
–
–
5
5
–
–
1
305
306
503
50
32
585
358
219
(534)
129
409
352
1
–
934
569
1,757
21
836
3,183
503
50
32
585
358
219
(534)
129
409
352
1
5
939
478
1,539
23
412
2,452
–
–
–
–
–
–
–
–
–
–
–
4
4
68%
12%
20%
–
–
1
294
295
555
58
37
650
336
172
(836)
132
260
255
238
–
557
478
1,539
24
706
2,747
555
58
37
650
336
172
(836)
132
260
255
238
4
561
70%
16%
14%
Total Scheme assets
2,882
1,825
4,707
100%
2,456
1,502
3,958
100%
(1) Equity investments are classified as unquoted reflecting the nature of the funds in which the Scheme invests directly. The underlying investments within
those funds are, however, mostly quoted.
(2) Derivative financial instruments are used to modify the profile of the assets of the Scheme to better match the Scheme liabilities. Derivative holdings
may lead to increased or decreased exposures to the physical asset categories disclosed above.
(3) The split of plan assets between quoted and unquoted in the prior year has been restated to reflect their nature.
At 30 September 2019, the Scheme had employer-related investments within the meaning of Section 40 (2) of the Pensions Act 1995
totalling £2m (2018: nil).
Actuarial assumptions
The following assumptions were used in arriving at the IAS 19 defined benefit obligation:
FINANCIAL ASSUMPTIONS
Discount rate
Inflation (RPI)
Inflation (CPI)
Career average revalued earnings (CARE) revaluations:
Pre 31 March 2012 benefits (RPI)
Post 31 March 2012 benefits (CPI capped at 5% per annum)
Pension increases (capped at 2.5% per annum)
Pension increases (capped at 5% per annum)
Rate of increase for pensions in deferment
2019
% P.A.
1.77
3.20
2.20
3.20
2.20
2.10
3.07
2.20
2018
% P.A.
2.75
3.30
2.30
3.30
2.30
2.13
3.15
2.30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS
245
Demographic assumptions
POST-RETIREMENT MORTALITY:
Current pensioners at 60 – male
Current pensioners at 60 – female
Future pensioners at 60 – male
Future pensioners at 60 – female
2019
YEARS
28.0
29.6
29.1
30.8
2018
YEARS
28.2
29.8
29.3
31.0
Critical accounting estimates and judgements
The value of the Group’s defined benefit pension scheme requires management to make several assumptions. The key areas of estimation
uncertainty are:
— discount rate applied: this is set with reference to market yields at the end of the reporting period on high quality corporate bonds in the
currency and with a term consistent with the Scheme’s obligations. The average duration of the Scheme’s obligations is approximately
20 years. The market for bonds with a similar duration is illiquid and, as a result, significant management judgement is required to
determine an appropriate yield curve on which to base the discount rate;
— inflation assumptions: this is set with reference to market expectations of the RPI measure of inflation for a term consistent with the
Scheme’s obligations, based on data published by the BoE. Other measures of inflation (such as CPI, or inflation measures subject to
an annual cap) are derived from this assumption; and
— mortality assumptions: the cost of the benefits payable by the Scheme will also depend upon the life expectancy of the members. The
assumptions for mortality rates are based on standard mortality tables (as adjusted to reflect the characteristics of Scheme members)
which allow for future improvements in life expectancies.
The table below sets out the sensitivity and impact on the balance sheet surplus position of the Scheme, the defined benefit obligation
and pension cost to changes in the key actuarial assumptions:
Assumption change
Discount rate
Inflation
Life expectancy
BALANCE SHEET
SURPLUS
£M
OBLIGATION
£M
PENSION COST
£M
+0.25%
-0.25%
+0.25%
-0.25%
+1 year
-1 year
(6)
8
(9)
9
(169)
164
(205)
220
145
(137)
169
(164)
(5)
4
3
(2)
3
(3)
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, changes
in some of the assumptions may be correlated.
3.13 Customer deposits
Interest bearing demand deposits
Term deposits
Non-interest bearing demand deposits
Other wholesale deposits
Accrued interest payable
2019
£M
38,551
22,239
3,002
1
63,793
207
64,000
2018
£M
19,895
6,192
2,756
1
28,844
60
28,904
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 246
Section 3: Assets and liabilities continued
3.14 Debt securities in issue
Accounting policy
Debt securities comprise short and long-term debt issued by the Group including commercial paper, medium-term notes, term loans,
covered bonds and RMBS notes.
Debt securities are initially recognised at fair value, being the issue proceeds, net of transaction costs incurred. These instruments are
subsequently measured at amortised cost using the effective interest method resulting in premiums, discounts and associated issue costs
being recognised in the income statement over the life of the instrument.
The breakdown of debt securities in issue is shown below:
2019
Carrying value
Fair value hedge adjustments
Total debt securities
Accrued interest payable
2018
Carrying value
Fair value hedge adjustments
Total debt securities
Accrued interest payable
MEDIUM-TERM
NOTES
£M
1,838
47
1,885
12
1,897
MEDIUM-TERM
NOTES
£M
794
(1)
793
3
796
SUBORDINATED
DEBT
£M
722
–
722
9
731
SUBORDINATED
DEBT
£M
476
–
476
3
479
SECURITISATION
£M
5,040
2
5,042
9
5,051
COVERED BONDS
£M
1,828
74
1,902
10
1,912
SECURITISATION
£M
2,949
–
2,949
7
2,956
COVERED BONDS
£M
698
34
732
10
742
TOTAL
£M
9,428
123
9,551
40
9,591
TOTAL
£M
4,917
33
4,950
23
4,973
The acquisition of Virgin Money Holdings (UK) PLC on 15 October 2018 resulted in recognition of the following debt securities (excluding
accrued interest), which are included within the above balances as at 30 September 2019:
Fair value of acquired balances
MEDIUM-TERM
NOTES
£M
647
SUBORDINATED
DEBT
£M
–
SECURITISATION
£M
2,909
COVERED BONDS
£M
–
TOTAL
£M
3,556
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 247
The following tables provide a breakdown of the medium-term notes and subordinated debt by instrument as at 30 September:
Medium-term notes (excluding accrued interest)
CYBG 3.125% fixed-to-floating rate callable senior notes due 2025
CYBG 4% fixed rate reset callable senior notes due 2026
CYBG 3.375% fixed rate reset callable senior notes due 2025
CYBG 4% fixed rate reset callable senior notes due 2027
VM PLC 2.25% fixed rate senior notes due 2020
Subordinated debt (excluding accrued interest)
CYBG 5% fixed rate reset callable subordinated notes due 2026
CYBG 7.875% fixed rate reset callable subordinated notes due 2028
2019
£M
298
523
366
397
301
1,885
2019
£M
476
246
722
2018
£M
298
495
–
–
–
793
2018
£M
476
–
476
Details of securitisation and covered bond issuances are included in note 3.3.
During the year, the Group issued £400m of medium-term notes and £250m of subordinated notes. The Group also issued £1,102m
in Sterling and US Dollar denominations and redeemed £769m in Sterling denominations from the securitisation programmes, and issued
£1,132m in Sterling and Euro denominations from the Eagle Place covered bond programme.
3.15 Due to other banks
Accounting policy
Repurchase agreements
Securities sold subject to sale and repurchase agreements (‘repos’) are retained in their respective balance sheet categories. The associated
liabilities are included in amounts due to other banks based upon the counterparties to the transactions.
The difference between the sale and repurchase price of repos is treated as interest and accrued over the life of the agreements using
the effective interest method.
Secured loans
Securities sold under agreements to repurchase(2)
Transaction balances with other banks
Deposits from other banks
2019
£M
7,308
1,554
12
42
8,916
2018(1)
£M
2,254
802
29
3
3,088
(1) The prior year comparative has been restated in line with the current year presentation. £34m of derivative collateral in relation to clearing houses has been
reclassified between other liabilities and due to other banks (note 1.10).
(2) The underlying securities sold under agreements to repurchase have a carrying value of £2,324m (2018: £1,172m).
Secured loans comprise amounts drawn under the TFS (including accrued interest).
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS
248
Section 3: Assets and liabilities continued
3.16 Provisions for liabilities and charges
Accounting policy
Provisions for liabilities and charges are recognised when a legal or constructive obligation exists as a result of past events, it is probable
that an outflow of economic benefits will be necessary to settle the obligation, and the obligation can be reliably estimated. Provisions for
liabilities and charges are not discounted to the present value of their expected net future cash flows except where the time value of
money is considered material.
Critical accounting estimates and judgements
PPI redress provision and other conduct related matters
With the FCA’s deadline on PPI complaints now passed the level of uncertainty in determining the quantum of PPI related liability has
reduced. However, owing to the significant volumes received in the weeks preceding the time bar there continues to be significant
judgement required to determine the key assumptions used to estimate the quantum of the provision, including the level of conversion
rate if information requests convert into complaints, uphold rates (how many claims are, or may be, upheld in the customer’s favour), and
redress costs (the average payment made to customers). The provision, therefore, continues to be subject to inherent uncertainties as a
result of the subjective nature of the assumptions used in quantifying the overall estimated position at 30 September 2019, consequently
the provision calculated may be subject to change in the future if outcomes differ to those currently assumed. Sensitivity analysis indicating
the impact of reasonably possible changes in key assumptions on the PPI provision is presented within this note.
There are similar uncertainties and judgements for other conduct risk related matters, however the level of liability is materially lower.
PPI REDRESS PROVISION
Opening balance
Charge to the income statement (note 2.4)
Charge reimbursed under Conduct Indemnity
Utilised
Closing balance
CUSTOMER REDRESS AND OTHER PROVISIONS
Opening balance
Virgin Money Holdings (UK) PLC provision on acquisition
Charge to the income statement (note 2.4)
Utilised
Closing balance
RESTRUCTURING PROVISION
Opening balance
Virgin Money Holdings (UK) PLC provision on acquisition
Charge to the income statement
Utilised
Closing balance
2019
£M
275
415
–
(311)
379
41
11
18
(45)
25
15
2
64
(26)
55
2018
£M
422
352
148
(647)
275
109
–
44
(112)
41
23
–
15
(23)
15
Total provisions for liabilities and charges
459
331
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 249
PPI redress
In common with the wider UK retail banking sector, the Group has continued to deal with complaints and redress issues arising out of
historic sales of PPI. During the year, the Group reassessed the level of provision that was considered appropriate to meet current and
future expectations in relation to the mis-selling of PPI policies and concluded that a further charge of £415m was required due to the
significant volume of information requests received, mainly from claims management companies ahead of the August 2019 industry
deadline. It also incorporates a reassessment of the costs of processing cases and the impact of experience adjustments. The total
provision raised to date in respect of PPI is £3,055m (30 September 2018: £2,640m), with £379m of this remaining (30 September 2018:
£275m) for closing out the remaining stock of complaints and information requests including costs of administration.
To 30 September 2019, the Group has received 629,000 complaints (30 September 2018: 483,000) and has allowed for 86,000 further
complaints converted from information requests received prior to the time bar (30 September 2018: 83,000).
The overall provision is based on a number of assumptions derived from a combination of past experience, estimated future experience,
industry comparison and the exercise of judgement in the key areas identified. There remain risks and uncertainties in relation to these
assumptions and consequently in relation to the ultimate costs of redress and related costs, including: (i) the number of PPI claims arising
from the volume of information requests submitted prior to the time bar; (ii) the number of those claims that ultimately will be upheld;
(iii) the amount that will be paid in respect of those claims; and (iv) the costs of administration.
As such, the factors discussed above mean there is a risk that existing provisions for PPI customer redress may not cover all potential
costs. In light of this, the eventual costs of PPI redress and complaint handling may therefore differ materially from that estimated and
further provision could be required.
The table below sets out the key assumptions and the effect on the provision at 30 September 2019 of future, potential, changes in
key assumptions:
Assumptions
Number of expected complaints converted from the stock of information requests at 30 September 2019
Uphold rate on stock of complaints at 30 September 2019 and expected converted complaints from
information requests
Average redress costs(2)
CHANGE IN
ASSUMPTION
+/-5%
SENSITIVITY(1)
£44m
+/-1%
+/-1%
£5m
£2m
(1) There are inter-dependencies between several of the key assumptions which add to the complexity of the judgements the Group has to make. This means
that no single factor is likely to move independently of others, however, the sensitivities disclosed above assume all other assumptions remain unchanged.
(2) Sensitivity to a change in average redress across customer initiated complaints.
Customer redress and other provisions
Other provisions include amounts in respect of a number of non-PPI conduct related matters, legal proceedings, and claims arising in the
ordinary course of the Group’s business. Over the course of the year, the Group has raised further provisions of £18m in relation to non-PPI
conduct matters (note 2.4). The ultimate cost to the Group of these customer redress matters is driven by a number of factors relating to
offers of redress, compensation, offers of alternative products, consequential loss claims and administrative costs. The matters are at
varying stages of their life cycle and in certain circumstances, usually early in the life of a potential issue, elements of the potential exposure
are contingent. These factors could result in the total cost of review and redress varying materially from the Group’s estimate. The final
amount required to settle the Group’s potential liabilities in these matters is therefore uncertain and further provision could be required.
Conduct Indemnity Deed
The Group’s economic exposure to the impact of historic conduct related liabilities was mitigated by a Capped Indemnity of £1.7bn from
NAB. The full amount of the Capped Indemnity was drawn down in the year to 30 September 2018. Details of this matter can be found
in note 3.14 of the 2018 Annual Report and Accounts.
To the extent that tax relief is expected in relation to provisions for which reimbursement income is applicable, amounts may become
repayable to NAB. In the consolidated financial statements, deferred tax assets are only recognised in respect of the loss share proportion
(9.7%) of unused tax losses on Relevant Conduct Matters, on the basis that the Group does not obtain the economic benefit of the future
tax relief which is repayable to NAB.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 250
Section 3: Assets and liabilities continued
3.16 Provisions for liabilities and charges continued
Restructuring provision
Restructuring of the business is currently ongoing and a provision is held to cover redundancy payments, property vacation costs and
associated enablement costs. During the year £64m (2018: £15m) was provided for in accordance with the requirements of IAS 37. £26m
(2018: £23m) of the total provision was utilised in the year.
Included within the restructuring provision is an amount for committed rental expense on surplus lease space consistent with the expected
exposure on individual leases where the property is unoccupied. This element of the provision will be utilised over the remaining life of the
leases, or until the leases are assigned, and is measured at present values by discounting anticipated future cash flows.
3.17 Other liabilities
Notes in circulation
Accruals and deferred income
Other(2)
2019
£M
2,277
130
127
2,534
2018(1)
£M
2,254
125
142
2,521
(1) The prior year comparative has been restated in line with the current year presentation. £34m of derivative collateral in relation to clearing houses has been
reclassified between other liabilities and due to other banks (note 1.10).
(2) Other includes £3m (2018: £3m) of post retirement medical benefit obligations (note 3.12).
3.18 Fair value of financial instruments
Accounting policy
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the valuation date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. Where no
such active market exists for the particular asset or liability, the Group uses a valuation technique to arrive at the fair value, including the
use of transaction prices obtained in recent arm’s length transactions where possible, discounted cash flow analysis, option pricing models
and other valuation techniques commonly used by market participants. In doing so, fair value is estimated using a valuation technique that
makes maximum possible use of market inputs and that places minimal possible reliance upon entity-specific inputs.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, which represents the fair value
of the consideration paid or received, unless the fair value of that instrument is evidenced by comparison with other observable current
market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables
include only data from observable markets. When such evidence exists, the Group recognises profits or losses on the transaction date.
In certain limited circumstances, the Group applies the fair value measurement option to financial assets including loans and advances
where the inherent market risks (principally interest rate and option risk) are individually hedged using appropriate interest rate derivatives.
The loan is designated as being carried at fair value through profit or loss to offset the movements in the fair value of the derivative within
the income statement and therefore avoid an accounting mismatch. When a loan is held at fair value, a statistical-based calculation is used
to estimate expected losses attributable to adverse movements in credit risk on the assets held. This adjustment to the credit quality of
the asset is then applied to the carrying amount of the loan to arrive at fair value and recognised in the income statement.
Analysis of the fair value disclosures uses a hierarchy that reflects the significance of inputs used in measuring fair value. The level in
the fair value hierarchy within which a fair value measurement is categorised is determined on the basis of the lowest level input that
is significant to the fair value measurement in its entirety. The fair value hierarchy is as follows:
— Level 1 fair value measurements – quoted prices (unadjusted) in active markets for an identical financial asset or liability;
— Level 2 fair value measurements – inputs other than quoted prices within Level 1 that are observable for the financial asset or liability,
either directly (as prices) or indirectly (derived from prices); and
— Level 3 fair value measurements – inputs for the financial asset or liability that are not based on observable market data
(unobservable inputs).
For the purpose of reporting movements between levels of the fair value hierarchy, transfers are recognised at the beginning of the
reporting period in which they occur.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 251
(a) Fair value of financial instruments recognised on the balance sheet at amortised cost
The tables show a comparison of the carrying amounts of financial assets and liabilities measured at amortised cost, and their fair values,
where these are not approximately equal.
There are various limitations inherent in this fair value disclosure, particularly where prices are derived from unobservable inputs due to
some financial instruments not being traded in an active market. The methodologies and assumptions used in the fair value estimates are
therefore described in the notes to the tables. The difference between carrying value and fair value is relevant in a trading environment
but is not relevant to assets such as loans and advances.
FINANCIAL ASSETS
Loans and advances to customers(1)
FINANCIAL LIABILITIES
Due to other banks(2)
Customer deposits(2)
Debt securities in issue(3)
30 SEPTEMBER 2019
30 SEPTEMBER 2018
CARRYING VALUE
£M
FAIR VALUE
£M
CARRYING VALUE
£M
FAIR VALUE
£M
73,095
73,119
32,748
32,307
8,916
64,000
9,591
8,874
64,166
9,667
3,122
28,904
4,973
3,057
28,968
5,052
(1) Loans and advances to customers are categorised as Level 3 in the fair value hierarchy with the exception of £1,513m (2018: £1,110m) of overdrafts
which are categorised as Level 2.
(2) Categorised as Level 2 in the Fair Value Hierarchy.
(3) Categorised as Level 2 in the Fair Value Hierarchy with the exception of £2,606m of listed debt (2018: £1,279m) which is categorised as Level 1.
The Group’s fair values disclosed for financial instruments at amortised cost are based on the following methodologies and assumptions:
(a) Loans and advances to customers – The fair values of loans and advances are determined by firstly segregating them into portfolios
of similar characteristics. Contractual cash flows are then adjusted for expected credit losses and expectations of customer behaviour
based on observed historic data. The cash flows are then discounted using current market rates for instruments of similar terms and
maturity to arrive at an estimate of their fair value.
(b) Due to other banks – The fair value is determined from a discounted cash flow model using current market rates for instruments
of similar terms and maturity.
(c) Customer deposits – The fair value of deposits is determined using a replacement cost method which assumes alternative funding is
raised in the most advantageous market. The contractual cash flows have been discounted using a funding curve with credit spreads
reflecting the tenor of each deposit.
(d) Debt securities in issue – The fair value is taken directly from quoted market prices where available or determined from a discounted
cash flow model using current market rates for instruments of similar terms and maturity.
(b) Fair value of financial instruments recognised on the balance sheet at fair value
The following tables provide an analysis of financial instruments that are measured subsequent to initial recognition at fair value,
using the fair value hierarchy described above.
FINANCIAL ASSETS
Financial assets at fair value through
other comprehensive income(1)
AFS investments(1)
Financial assets at fair value through
profit or loss
Other financial assets
Derivative financial assets
Total financial assets at fair value
FINANCIAL LIABILITIES
Financial liabilities at fair value
Derivative financial liabilities
Total financial liabilities at fair value
FAIR VALUE MEASUREMENT AS AT
30 SEPTEMBER 2019
FAIR VALUE MEASUREMENT AS AT
30 SEPTEMBER 2018
LEVEL 1
£M
LEVEL 2
£M
LEVEL 3
£M
TOTAL
£M
LEVEL 1
£M
LEVEL 2
£M
LEVEL 3
£M
TOTAL
£M
4,328
–
–
–
–
4,328
–
–
–
–
–
253
–
366
619
4
273
277
–
–
–
14
–
14
–
–
–
4,328
–
253
14
366
4,961
4
273
277
–
1,551
–
–
–
1,551
–
–
–
–
–
362
–
262
624
15
361
376
–
11
–
–
–
11
–
–
–
–
1,562
362
–
262
2,186
15
361
376
(1) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS
252
Section 3: Assets and liabilities continued
3.18 Fair value of financial instruments continued
There were no transfers between Level 1 and 2 in the current or prior year.
The Group’s valuations for financial instruments that are measured subsequent to initial recognition at fair value are based on the following
methodologies and assumptions:
(a) Derivative financial assets and liabilities – The fair values of derivatives, including foreign exchange contracts, interest rate swaps,
interest rate and currency option contracts, and currency swaps, are obtained from discounted cash flow models or option pricing
models as appropriate.
(b) Fair value through other comprehensive income – The fair values of listed investments are based on quoted closing market prices(1).
(c) Financial assets and liabilities at fair value through profit or loss:
— Loans and advances to customers and term deposits (Level 2) – The fair values are derived from data or valuation techniques based
upon observable market data and non-observable inputs as appropriate to the nature and type of the underlying instrument.
— Financial assets at fair value through profit or loss (Equity investment, Level 3) – Primarily represents £6m of Visa Inc. preferred stock
received as partial consideration for the sale of the Group’s share in Visa Europe (note 2.3). The preferred stock is convertible into
Visa Inc. common stock or its equivalent at a future date, subject to potential reduction for certain litigation losses that may be
incurred by Visa Europe. The fair value of the preference shares has been calculated by taking the period end New York Stock
Exchange share price for Visa Inc. and discounting for illiquidity and clawback related to contingent litigation. For other unlisted equity
investments, the Group’s share of the net asset value or the transaction price respectively is considered the best representation
of the exit price and is the Group’s best estimate of fair value(1).
— Financial assets at fair value through profit or loss (Debt investment, Level 3) – Primarily represents £5m of deferred consideration
receivable and consists of the rights to future commission. The valuation is determined from a discounted cash flow model
incorporating estimated attrition rates and investment growth rates appropriate to the underlying funds under management(1).
For other unlisted debt investments, the transaction price is considered the best estimate of the exit price and is the Group’s best
estimate of fair value.
(1) These balances were disclosed under available for sale in 2018 and were reclassified as a result of IFRS 9 (note 1.9).
Level 3 movement analysis:
Balance at the beginning of the year
Transfer to Level 2(1)
Reclassification on adoption of IFRS 9(2)
Fair value gains/(losses) recognised(3)
In profit or loss – unrealised
In profit or loss – realised
In available for sale – unrealised
Purchases
Settlements
Balance at the end of the year
2019
FINANCIAL
ASSETS AT
FAIR VALUE
THROUGH PROFIT
OR LOSS
£M
–
–
11
FINANCIAL
ASSETS
AVAILABLE
FOR SALE
£M
11
–
(11)
FINANCIAL
LIABILITIES AT
FAIR VALUE
£M
–
–
–
2018
FINANCIAL
ASSETS AT
FAIR VALUE
THROUGH PROFIT
OR LOSS
£M
477
(477)
–
FINANCIAL
ASSETS
AVAILABLE
FOR SALE
£M
10
–
–
FINANCIAL
LIABILITIES AT
FAIR VALUE
£M
(26)
26
–
–
–
–
–
–
–
1
3
–
3
(4)
14
–
–
–
–
–
–
1
(1)
1
–
–
11
–
–
–
–
–
–
–
–
–
–
–
–
(1) The financial assets at fair value comprise a portfolio of loans which are no longer on sale. The continued run-off of these loans has resulted in the
unobservable credit risk inputs no longer being significant to their fair value. As such, in the prior year, the loans (and associated liabilities) were reclassified
to Level 2 in the fair value hierarchy. In accordance with the Group’s accounting policy, the transfer was deemed to have occurred at the beginning of the
reporting period.
(2) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.
(3) Net gains or losses were recorded in non-interest income, or available for sale reserve as appropriate.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 253
Quantitative information about significant unobservable inputs in Level 3 valuations
The table below lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs as at
30 September 2019.
FAIR VALUE
£M
VALUATION TECHNIQUE
UNOBSERVABLE INPUTS
LOW RANGE
HIGH RANGE
OTHER FINANCIAL ASSETS
AT FVTPL
Equity investments
Debt investments
8
6
Discounted cash flow
Discounted cash flow
Contingent litigation risk
Funds under management attrition rate
0%
10%
100%
20%
Sensitivity of Level 3 fair value measurements to reasonably possible alternative assumptions
Where valuation techniques use non-observable inputs that are significant to a fair value measurement in its entirety, changing these inputs
will change the resultant fair value measurement.
The most significant input impacting the carrying value of the FVTPL-debt investment is the ‘Funds Under Management attrition’ rate.
The Group currently assumes an annual 15% attrition rate. If this rate was 20% the fair value would reduce by £1m; if it was 10% the fair
value would increase by £2m.
Other than these significant Level 3 measurements, the Group has a limited remaining exposure to Level 3 fair value measurements and
changing one or more of the inputs for fair value measurements in Level 3 to reasonable alternative assumptions would not change the
fair value significantly with respect to profit or loss, total assets, total liabilities or equity on these remaining Level 3 measurements.
3.19 Acquisition of Virgin Money Holdings (UK) PLC
On 15 October 2018, the Group acquired all the voting rights in Virgin Money Holdings (UK) PLC by means of a scheme of arrangement
under Part 26 of the UK Companies Act 2006 for a purchase consideration of £1,532m. This comprised the fair value of approximately
541m new CYBG PLC ordinary shares in exchange for all Virgin Money Holdings (UK) PLC shares at a ratio of 1.2125 CYBG shares for each
Virgin Money Holdings (UK) PLC share. Immediately following completion, Virgin Money Holdings (UK) PLC shareholders owned
approximately 38% of the Combined Group (on a fully diluted basis).
The fair value of the shares issued was calculated using the CYBG PLC market price of 286.4 pence per share, on the London Stock
Exchange at its close of business on 12 October 2018.
In seeking to address the underlying trends of scale and adaptability within the banking industry, the combination brings together the two
banks to create a national competitor to the large incumbent banks. The combination offers retail and business customers an alternative
to the status quo.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 254
Section 3: Assets and liabilities continued
3.19 Acquisition of Virgin Money Holdings (UK) PLC continued
The table below sets out the fair values of the identifiable net assets and liabilities acquired.
ASSETS
Cash and balances with central banks
Due from other banks
Financial assets at fair value through other comprehensive income(1)(2)
Other financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to customers(3)
Property, plant and equipment
Intangible assets
Deferred tax assets
Other assets
Total assets
LIABILITIES
Due to other banks(3)
Derivative financial instruments
Customer deposits
Debt securities in issue
Deferred tax liabilities
Other liabilities
Total liabilities
Net assets
Fair value of net assets acquired
Fair value of non-controlling interests(4)
Goodwill arising on acquisition
Total consideration(2)(5)
BOOK VALUE AT
15 OCTOBER 2018
£M
FAIR VALUE
ADJUSTMENTS
£M
FAIR VALUE AT
15 OCTOBER 2018
£M
4,146
598
2,028
1
71
37,840
73
172
23
93
45,045
7,171
41
32,111
3,548
–
337
43,208
1,837
–
–
–
–
–
34
(7)
6
22
–
55
(114)
–
10
8
44
1
(51)
106
4,146
598
2,028
1
71
37,874
66
178
45
93
45,100
7,057
41
32,121
3,556
44
338
43,157
1,943
1,943
(422)
11
1,532
(1) Under IFRS 9 ‘Financial Instruments’, debt investments which would previously have been classified in the available for sale category are reclassified to the
new fair value through other comprehensive income category.
(2) Adjusted to remove the CYBG debt securities held by Virgin Money Holdings (UK) PLC.
(3) Included within Loans and advances to customers and Due to other banks is c£300m of fair value assets which will unwind through the income statement
over the next 3 to 5 years.
(4) At the acquisition date, Virgin Money Holdings (UK) PLC had in issue Fixed Rate Resettable AT1 securities issued on the Luxembourg Stock Exchange.
In accordance with IAS 32 these were classified as equity instruments. The Group did not acquire the AT1 securities which remained in issue to third parties,
consequently these represented a non-controlling interest. As the AT1 instruments were actively traded, the fair value of £422m was calculated based on
the market price on the Luxembourg Stock Exchange at its close of business on 12 October 2018.
(5) Includes ‘shares to be issued’ in the future relating to employee share plans in regard to the settlement of the outstanding Virgin Money Holdings (UK) PLC
share awards partially offset by the purchase of ‘own shares’ (note 4.1.5).
At acquisition date, the contractual amount of loans and advances receivable from customers was £37,664m. The best estimate of the
amounts not expected to be collected was £123m. The goodwill arising on the acquisition of Virgin Money Holdings (UK) PLC is mainly
attributable to expected cash flows from new customers and significant synergies which are expected to be realised. The goodwill arising
on acquisition is not expected to be deductible for tax purposes.
The amounts of net interest income and profit before tax contributed to the Group’s consolidated income statement for the year ended
30 September 2019 from the acquired Virgin Money Holdings (UK) PLC business were £559m and £149m respectively. If the acquisition
had occurred on 1 October 2018, the Group’s total net interest income for the year would have increased by £22m to £1,536m and the loss
before tax would have increased by £33m to £265m.
Transaction costs of £48m were incurred by CYBG PLC in relation to the acquisition.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 255
Section 4: Capital
4.1
Equity
Accounting policy
Equity
The financial instruments issued by the Company are treated as equity (i.e. forming part of shareholders’ funds) only to the extent that
they meet the following two conditions:
(a) they include no contractual obligations upon the Company to deliver cash or other financial assets or to exchange financial assets
or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and
(b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no
obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company
exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability.
Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity
as a deduction, net of tax, from the proceeds.
Dividends
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Company’s
shareholders. Interim dividends are deducted from equity when they are no longer at the discretion of the Company.
Proposed final dividends for the year are disclosed as an event after the balance sheet date.
4.1.1 Share capital and share premium
Share capital
Share premium
Share capital and share premium
Ordinary shares of £0.10 each – allotted, called up and fully paid
Opening ordinary share capital
Share for share exchange
Issued under employee share schemes
Closing ordinary share capital
2019
NUMBER
OF SHARES
2018
NUMBER
OF SHARES
886,079,959
540,856,644
7,549,086
1,434,485,689
883,606,066
–
2,473,893
886,079,959
2019
£M
143
3
146
2019
£M
89
54
–
143
2018
£M
89
–
89
2018
£M
88
–
1
89
Acquisition of Virgin Money Holdings (UK) PLC
On 15 October 2018, CYBG PLC issued 540,856,644 £0.10 ordinary shares in exchange for the acquisition of the entire share capital
of Virgin Money Holdings (UK) PLC by means of a scheme of arrangement under Part 26 of the UK Companies Act 2006 for a purchase
consideration of £1.5bn. The nominal value of the shares issued was £54m and the balance of £1,495m was transferred to a merger
reserve in accordance with Section 612 of the Companies Act.
The holders of ordinary shares are entitled to dividends as declared from time to time and are entitled to one vote per share at meetings
of the shareholders of the Company. All shares in issue at 30 September 2019 rank equally with regard to the Company’s residual assets.
During the year 7,549,086 (2018: 2,473,893) ordinary shares were issued under employee share schemes with a nominal value of £0.7m
(2018: £0.2m).
A final dividend in respect of the year ended 30 September 2018 of 3.1p (2017: 1p) per ordinary share amounting to £45m (2017: £9m),
was paid in February 2019. This dividend was deducted from retained profits in the current year. The Directors have recommended that
no dividend will be paid in respect of the year ended 30 September 2019.
Share premium represents the aggregate of all amounts that have ever been paid above par value to the Company when it has issued
ordinary shares.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 256
Section 4: Capital continued
4.1
Equity continued
A description of the other equity categories included within the consolidated statement of changes in equity, and significant movements
during the year, is provided below:
4.1.2 Other equity instruments
Other equity instruments consist of the following Perpetual Contingent Convertible Notes.
— Perpetual securities (fixed 8% up to the first reset date) issued on 8 February 2016 with a nominal value of £450m and optional
redemption on 8 December 2022.
— Perpetual securities (fixed 8.75% up to the first reset date) issued on 10 November 2016 with a nominal value of £230m and optional
redemption on 10 November 2021. This was held by Virgin Money Holdings (UK) PLC on the date of acquisition and was originally
recognised as a non-controlling interest (note 4.1.6). Following a change in obligor from Virgin Money Holdings (UK) PLC to CYBG PLC
on 20 August 2019, this has been recognised within other equity.
— Perpetual securities (fixed 9.25% up to the first reset date) issued on 13 March 2019 with a nominal value of £250m and optional
redemption on 8 June 2024.
The issues are treated as equity instruments in accordance with IAS 32 ‘Financial Instruments: Presentation’ with the proceeds included
in equity, net of transaction costs of £15m (2018: £Nil). AT1 distributions of £41m were made in the year, £33m net of tax (2018: £36m paid,
£29m net of tax).
4.1.3 Capital reorganisation reserve
The capital reorganisation reserve of £839m was recognised on the issuance of CYBG PLC ordinary shares in February 2016 in exchange
for the acquisition of the entire share capital of the Group’s previous parent company, CYB Investments Limited (CYBI). The reserve reflects
the difference between the consideration for the issuance of CYBG PLC shares and CYBI’s share capital and share premium.
4.1.4 Merger reserve
A merger reserve of £633m was recognised on the issuance of CYBG PLC ordinary shares in February 2016 in exchange for the acquisition
of the entire share capital of CYBI. An additional £1,495m was recognised on the issuance of CYBG PLC ordinary shares in October 2018
in exchange for the acquisition of the entire share capital of Virgin Money Holdings (UK) PLC. The merger reserve reflects the difference
between the consideration for the issuance of CYBG PLC shares and the nominal value of the shares issued.
4.1.5 Other reserves
Own shares held
Virgin Money Holdings (UK) PLC established an Employee Benefit Trust (EBT) in 2011 in connection with the operation of its share plans.
On the date of acquisition by CYBG PLC, the shares held in the EBT were converted to CYBG shares at a ratio of 1.2125 CYBG shares for
each Virgin Money Holdings (UK) PLC share. The investment in own shares as at 30 September 2019 is £1m (2018: £Nil). The market value
of the shares held in the EBT at 30 September 2019 was £1m (2018: £Nil).
Deferred shares reserve
The deferred share reserve comprises shares to be issued in the future relating to employee share plans in regard to the settlement of
outstanding Virgin Money Holdings (UK) PLC share awards, which will be settled through the issuance of Virgin Money UK PLC shares
at a future date in line with the vesting profile of the underlying plans.
Equity-based compensation reserve
The Group’s equity based compensation reserve records the value of equity settled share based payment benefits provided to the Group’s
employees as part of their remuneration that has been charged through the income statement and adjusted for deferred tax.
Asset revaluation reserve
The asset revaluation reserve includes the gross revaluation increments and decrements arising from the revaluation of land and buildings.
Available for sale (AFS) reserve
The AFS reserve recorded the gains and losses arising from changes in the fair value of AFS financial assets prior to 1 October 2018.
On adoption of IFRS 9 ‘Financial Instruments’ with the removal of the AFS category for financial assets, part of the balance on the reserve
was transferred to the FVOCI reserve with £3m released to retained earnings (note 5.4).
Fair value through other comprehensive income (FVOCI) reserve
The FVOCI reserve records the unrealised gains and losses arising from changes in the fair value of financial assets at fair value through
other comprehensive income. The movements in this reserve are detailed in the consolidated statement of comprehensive income.
On adoption of IFRS 9 ‘Financial Instruments’ with the removal of the AFS category for financial assets, £4m of the balance on the AFS
reserve was transferred to the FVOCI reserve (note 5.4).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 257
Cash flow hedge reserve
The cash flow hedge reserve represents the effective portion of cumulative post-tax gains and losses on derivatives designated as cash
flow hedging instruments that will be recycled to the income statement when the hedged items affect profit or loss.
At 1 October
AMOUNTS RECOGNISED IN OTHER COMPREHENSIVE INCOME:
Cash flow hedge – interest rate risk
Effective portion of changes in fair value of interest rate swaps
Amounts transferred to the income statement
Taxation
Cash flow hedge – Foreign exchange risk
Effective portion of changes in fair value of cross currency swaps
Amounts transferred to the income statement
Taxation
At 30 September
2019
£M
(39)
14
–
(3)
59
(57)
–
(26)
2018
£M
(1)
(58)
9
11
–
–
–
(39)
4.1.6 Non-controlling interests
At the acquisition date, Virgin Money Holdings (UK) PLC had in issue Fixed Rate Resettable AT1 securities issued on the Luxembourg
Stock Exchange. In accordance with IAS 32 these are classified as equity instruments. The Group did not acquire the AT1 securities which
remained in issue to third parties, consequently these represented a non-controlling interest. As the AT1 instruments are actively traded,
the fair value on acquisition of £422m was calculated based on the market price on the Luxembourg Stock Exchange at its close of
business on 12 October 2018. Following the change in obligor from Virgin Money Holdings (UK) PLC to CYBG PLC on 20 August 2019,
this has been recognised within other equity (note 4.1.2).
Distributions to non-controlling interests of £33m were made in the year, £26m net of tax (2018: £Nil).
4.2 Equity based compensation
Accounting policy
The Group operates a number of equity settled share based compensation plans in respect of services received from certain of its
employees. The fair value of the services received is recognised as an expense. The total amount to be expensed is measured by reference
to the fair value of the Company’s shares, performance options or performance rights granted, including, where relevant, any market
performance conditions and any non-vesting conditions. The impacts of any service and non-market performance vesting conditions are
not included in the fair value and instead are included in estimating the number of awards or options that are expected to vest.
The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be
satisfied. A corresponding credit is recognised in the equity based compensation reserve, adjusted for deferred tax. In some circumstances,
employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of
recognising the expense during the period between the start of the service period and the grant date.
At the end of each reporting period, the Group revises its estimates of the number of shares, performance options and performance rights
that are expected to vest based on the non-market and service vesting conditions. The impact of the revision to original estimates, if any,
is recognised in the income statement, with a corresponding adjustment to the equity based compensation reserve.
The equity settled share based payment charge for the year is £4m (2018: £9m).
CYBG awards
The Group made a number of awards under its share plans:
PLAN
DEP(3)
ELIGIBLE EMPLOYEES
Selected employees
NATURE OF AWARD
Conditional rights to shares
LTIP
Selected senior employees
Conditional rights to shares
VESTING CONDITIONS(1)
Continuing employment or leaving
in certain limited circumstances
Continuing employment or leaving
in certain limited circumstances
and achievement of delivery of the
Group’s strategic goals and growth
in shareholder value
GRANT DATES(2)
2016, 2017 and 2018
2017 and 2018
SIP
All employees
Non-conditional share award
Continuing employment
2016 and 2017
(1) All awards are subject to vesting conditions and therefore may or may not vest.
(2) The year in which grants have been made under the relevant plan.
(3) Grants made under the DEP are made the year following the financial year to which they relate.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 258
Section 4: Capital continued
4.2 Equity based compensation continued
Further detail on each plan is provided below:
DEP
Under the plan employees were awarded conditional rights to CYBG PLC shares. The shares are subject to forfeiture conditions including
forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. Awards include:
— the upfront and deferred elements of bonus awards where required to comply with the PRA Remuneration Code or the Group’s
deferral policy;
— buyout of equity from previous employment for senior new hires; and
— Demerger awards which are also subject to the achievement of performance conditions over a three-year period. Details of the
performance conditions are set out in the Directors’ remuneration report.
LTIP
Under the plan, employees were awarded conditional rights to CYBG PLC shares. The shares are subject to forfeiture conditions including
forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements.
The performance conditions of the plan must be met over a three-year period. The measures reflect a balanced approach between
financial and non-financial performance and are aligned to the organisation’s strategic goals. Measures, relative weightings and the
quantum for assessing performance are outlined in the Directors’ remuneration report section.
SIP
Eligible employees at the date of the award, were awarded Group shares, which are held in the Share Incentive Plan Trust (SIP Trust).
Awards are not subject to performance conditions and participants are the beneficial owners of the shares granted to them, but not the
registered owners. Voting rights over the shares are normally exercised by the registered owner at the direction of the participants. For the
2015 Demerger award, leavers (with the exception of gross misconduct) retain their awards but they must withdraw their shares from the
SIP Trust.
Awards/rights made during the year
PLAN
DEP
2015 Demerger
2015 Bonus
2015 Commencement
2016 Bonus
2016 Commencement
2017 Bonus
2017 Commencement
2018 Bonus
LTIP
2016 LTIP
2017 LTIP
2018 LTIP
SIP
2015 Demerger
2017 Free Share
2019 Free Share
NUMBER
OUTSTANDING AT
1 OCTOBER
2018
NUMBER
AWARDED
NUMBER
FORFEITED
NUMBER
RELEASED
NUMBER
OUTSTANDING AT
30 SEPTEMBER
2019
AVERAGE FAIR
VALUE OF AWARDS
AT GRANT
PENCE
2,038,052
54,953
25,685
21,403
57,271
592,807
68,167
–
2,232,391
2,314,487
–
1,297,152
906,141
–
–
–
–
–
–
–
–
1,634,582
–
–
5,857,259
–
–
2,343,888
(223,829)
–
–
–
–
(31,943)
(34,324)
–
(203,923)
(207,534)
(61,455)
(512)
(477)
(84,870)
(1,785,999)
(54,953)
(25,685)
(10,700)
(36,867)
(329,794)
(28,734)
(1,462,777)
–
–
–
(270,148)(1)
(68,688)
(48,216)
28,224
–
–
10,703
20,404
231,070
5,109
171,805
2,028,468
2,106,953
5,795,804
1,026,492
836,976
2,210,802
196.96
195.17
194.67
266.03
266.03
313.20
313.20
192.35
266.03
313.20
190,47
194.67
313.20
202.53
(1) Shares withdrawn from SIP Trust on leaving the Group.
Determination of grant date fair values
Participants of the DEP and LTIP plans are not entitled to dividends until the awards vest, but the number of shares which vest may
be increased to reflect the value of dividends that would have been paid up to the end of the holding period for the awards, subject to
the extent permitted under the relevant remuneration regulation. Accordingly, the grant date fair value of the awards with only service
conditions and/or non-market performance conditions has been taken as the market value of the Company’s ordinary shares at the grant
date. Where awards are subject to non-market performance conditions, an estimate is made of the number of awards expected to vest
in order to determine the overall share-based payment charge to be recognised over the vesting period.
The Group has not issued awards under any CYBG plan with market performance conditions.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 259
Section 5: Other notes
5.1 Contingent liabilities and commitments
Accounting policy
Financial guarantees
The Group provides guarantees in the normal course of business on behalf of its customers. Guarantees written are conditional
commitments issued by the Group to guarantee the performance of a customer to a third party and are primarily issued to support direct
financial obligations such as commercial bills or other debt instruments issued by a counterparty. The rating of the Group as a guarantee
provider enhances the marketability of the paper issued by the counterparty in these circumstances. Financial guarantee contracts are
initially recorded at fair value which is equal to the premium received, unless there is evidence to the contrary.
The expected credit loss requirements of IFRS 9 as set out in note 3.2 are equally applicable to loan commitments and financial
guarantee contracts.
Operating lease commitments
The leases entered into by the Group are primarily operating leases, with operating lease rentals charged to the income statement on a
straight line basis over the period of the lease. The Group discloses its obligations for future minimum payments under non-cancellable leases.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations
where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised on the balance
sheet but are disclosed unless they are remote.
The table below sets out the amounts of financial guarantees and commitments which are not recorded on the balance sheet. Financial
guarantees and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments
to extend credit. The amounts do not represent the amounts at risk at the balance sheet date but the amounts that would be at risk should
the contracts be fully drawn upon and the customer defaults. Since a significant portion of guarantees and commitments is expected to
expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements.
Financial guarantees
Guarantees and assets pledged as collateral security:
Due in less than 3 months
Due between 3 months and 1 year
Due between 1 year and 3 years
Due between 3 years and 5 years
Due after 5 years
2019
£M
24
24
6
11
48
113
2018
£M
26
36
10
2
45
119
OTHER CREDIT COMMITMENTS
Undrawn formal standby facilities, credit lines and other commitments to lend at call
15,158
7,016
The Group’s loan commitments and financial guarantee contracts attracted expected credit losses of £5m at 30 September 2019. The balance
calculated on adoption of IFRS 9 is disclosed in note 5.4.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 260
Section 5: Other notes continued
5.1 Contingent liabilities and commitments continued
Capital commitments
The Group had future capital expenditure which had been contracted for, but not provided for, at 30 September 2019 of £0.2m (2018: £1m).
Operating lease commitments
LEASES AS LESSOR
Future minimum lease payments under non-cancellable operating leases:
Within 1 year
Between 1 year and 5 years
Over 5 years
LEASES AS LESSEE
Future minimum lease payments under non-cancellable operating leases:
Within 1 year
Between 1 year and 5 years
Over 5 years
2019
£M
2018
£M
2
4
1
7
35
135
244
414
1
4
1
6
29
96
124
249
Other contingent liabilities
Conduct risk related matters
There continues to be significant uncertainty and thus judgement is required in determining the quantum of conduct risk related liabilities,
with note 3.16 reflecting the Group’s current position in relation to redress provisions including those for PPI. The final amount required
to settle the Group’s potential liabilities for these, and other conduct related matters, is materially uncertain. Contingent liabilities include
those matters where redress is likely to be paid and costs incurred but the amounts cannot currently be estimated.
The Group will continue to reassess the adequacy of provisions for these matters and the assumptions underlying the calculations at each
reporting date based upon experience and other relevant factors at that time.
Legal claims
The Group is named in and is defending a number of legal claims arising in the ordinary course of business. No material adverse impact
on the financial position of the Group is expected to arise from the ultimate resolution of these legal actions.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 261
5.2 Notes to the statement of cash flows
ADJUSTMENTS INCLUDED IN THE LOSS BEFORE TAX
Interest receivable
Interest payable
Depreciation and amortisation (note 2.4)
Derivative financial instruments fair value movements
Impairment losses on credit exposures (note 3.2)
Software impairments and write-offs
Other non-cash movements
Gain on sale of 50% (less one share) consideration in Virgin Money UTM
Equity based compensation
CHANGES IN OPERATING ASSETS
Net (increase)/decrease in:
Balances with supervisory central banks
Due from other banks
Derivative financial instruments
Financial instruments at fair value through other comprehensive income
Financial assets at fair value through profit or loss
Loans and advances to customers
Defined benefit pension assets
Other assets
CHANGES IN OPERATING LIABILITIES
Net increase/(decrease) in:
Due to other banks
Derivative financial instruments
Financial liabilities at fair value through profit or loss
Customer deposits
Provisions for liabilities and charges
Defined benefit pension obligations
Other liabilities
2019
£M
(2,432)
918
108
17
252
132
1
(35)
4
(1,035)
(20)
274
64
(33)
103
(2,663)
(74)
138
(2,211)
(20)
(128)
(11)
2,837
128
–
(171)
2,635
2018
£M
(1,113)
262
89
(3)
41
–
–
–
9
(715)
(31)
339
18
–
117
(1,488)
–
(14)
(1,059)
(1,053)
(16)
(11)
1,186
(223)
(14)
9
(122)
For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than three months
maturity from the date of acquisition. This includes cash and liquid assets and amounts due to other banks (to the extent less than
90 days).
Cash and balances with central banks (note 3.4)
Other assets
Due to other banks
Other liabilities
2019
£M
10,113
43
(20)
(17)
10,119
2018
£M
6,498
86
(12)
(30)
6,542
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 262
Section 5: Other notes continued
5.3 Related party transactions
Following the acquisition of Virgin Money Holdings (UK) PLC, the Group has a number of additional related entities. No comparative
information is required where the entity only became a related party during the period.
Assets with related entities
INVESTMENTS IN JOINT VENTURES AND ASSOCIATES
Virgin Money Unit Trust Managers Limited(1)
OTHER ASSETS
Amounts due from Virgin Money Unit Trust Managers Limited(1)
Total assets with related entities
LIABILITIES WITH RELATED ENTITIES
CUSTOMER DEPOSITS
The Virgin Money Foundation
OTHER LIABILITIES
Group pension deposits(2)
Commissions and charges due to Virgin Atlantic Airways Limited(3)
Trademark licence fees due to Virgin Enterprises Limited(4)
Total liabilities with related entities
NON-INTEREST INCOME
Net fees and commissions to Virgin Atlantic Airways Limited
Share of post-tax result of Virgin Money Unit Trust Managers Limited(1)
Gain on sale of 50% (less one share) consideration in Virgin Money Unit Trust Managers Limited
to Aberdeen Standard Investments(1)
OPERATING AND ADMINISTRATIVE EXPENSES
Trademark licence fees to Virgin Enterprises Limited(4)
Costs recharged to Virgin Money Unit Trust Managers Limited(1)
Donations to the Virgin Money Foundation(5)
Total income statement
2019
£M
2018
£M
8
2
10
1
17
6
4
28
(15)
(1)
35
(11)
2
(2)
8
–
–
–
–
36
–
–
36
–
–
–
–
–
–
–
(1) The Group entered into a joint venture with Aberdeen Standard Investments (ASI), under the terms of which ASI acquired 50% (less one share) of the
Group’s investments and pensions business. This new joint venture is Virgin Money Unit Trust Managers Limited.
(2) The Group and the Trustee to the pension scheme have entered into a contingent Security Arrangement which provides additional support to the Scheme
by underpinning recovery plan contributions and some additional investment risk. The security is in the form of a pre-agreed maximum level of assets
that are set aside for the benefit of the Pension Scheme in certain trigger events. These assets are held by Red Grey Square Funding LLP, an insolvency
remote consolidated structured entity. The Group incurred costs in relation to pension scheme administration. These costs, which amounted to £0.1m
(2018: £0.3m), were charged to the Group sponsored scheme. Information on the pension schemes operated by the Group is provided in note 3.12.
Pension contributions of £83m (2018: £18m) were made to the Scheme (note 3.12).
(3) The Group incurs credit card commissions and air mile charges with Virgin Atlantic Airways Limited (VAA) in respect of an agreement between the two
parties. £4m of cash costs payable to VAA have been deferred on the balance sheet.
(4) Licence Fees of £11m were payable to Virgin Enterprises Limited for the use of the Virgin Money brand trademark. This contract was previously held
by Virgin Money Holdings (UK) plc. However, following the acquisition of Virgin Money Holdings (UK) PLC, the contract was renewed directly between
CYBG plc and Virgin Enterprises Ltd.
(5) The Group has made donations to the Virgin Money Foundation to enable it to pursue its charitable objectives. The Group has also provided a number of
support services to the Virgin Money Foundation on a pro bono basis, including use of facilities and employee time. The estimated gift in kind for support
services provided during the year was £0.6m and is included in the total value disclosed above.
The Group paid £0.2m of ordinary dividends to Virgin Group Holdings Ltd.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 263
Compensation of key management personnel (KMP)
KMP comprises Directors of the Company and members of the Executive Leadership Team.
Salaries and short-term benefits
Other long-term employee benefits
Termination benefits
Equity based compensation(1)
2019
£M
14
–
5
2
21
(1) Basis of the expense recognised in the year in accordance with IFRS 2 ‘Equity based compensations’, including associated employers’ NIC.
The following information regarding Directors’ remuneration is presented in accordance with the Companies Act 2006.
Aggregate remuneration
2019
£M
5
2018
£M
9
–
–
1
10
2018
£M
5
In addition to the above, £0.5m (2018: £0.4m) was expensed relating to LTIP. None of the Directors were members of the Group’s defined
contribution pension scheme during 2019 (2018: none). None of the Directors were members of the Group’s defined benefit pension
scheme during 2019 (2018: none). None of the Directors hold share options and none were exercised during the year (2018: none).
Transactions with KMP
KMP, their close family members and any entities controlled or significantly influenced by the KMP have undertaken the following
transactions with the Group in the normal course of business. The transactions were made on the same terms and conditions as applicable
to other Group employees, or on normal commercial terms.
Loans and advances
Deposits
2019
£M
4
3
2018
£M
2
3
No provisions have been recognised in respect of loans provided to the KMP (2018: £Nil). There were no debts written-off or forgiven
during the year to 30 September 2019 (2018: £Nil). Included in the above are four (2018: six) loans totalling £1m (2018: £2m) made to
Directors. In addition to the above, there are guarantees of £Nil (2018: £Nil) made to Directors and their related parties.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 264
Section 5: Other notes continued
5.4 Transition to IFRS 9 ‘Financial Instruments’ from IAS 39 ‘Financial Instruments: Recognition and Measurement’
and the adoption of IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 9
IFRS 9 replaced IAS 39 as the accounting standard for financial instruments and was adopted (except for the hedge accounting
requirements) by the Group with effect from 1 October 2018. The requirements of IFRS 9 allow for the transitional adjustments to
be reflected through the opening retained earnings line, without the need to produce comparative information on an IFRS 9 basis.
The following table summarises the locations of the policies and key judgement areas and impact on the Group’s financial position
of adopting IFRS 9 on 1 October 2018(1):
DETAIL
New accounting standards
Loans and advances to customers
Impairment provisions on credit exposures
Critical accounting estimates and judgements in relation to expected credit
losses (ECL)
Financial assets and liabilities at fair value through profit or loss (FVTPL)
Financial assets at fair value through other comprehensive income (FVOCI)
Financial assets available for sale (AFS)
Other relevant credit risk disclosures
LOCATION
Note 1.9
Note 3.1
Note 3.2
Note 3.2
Note 3.5
Note 3.7
Note 3.8 – and only applicable for the year ended
30 September 2018 as this category for financial assets
was removed with the introduction of IFRS 9
Pages 144 to 157 of the Risk report
The carrying amount of the Group’s financial assets and financial liabilities at 30 September 2018 under IAS 39 and at 1 October 2018 under
IFRS 9 are as follows:
MEASUREMENT UNDER IAS 39
MEASUREMENT UNDER IFRS 9
IAS 39 CARRYING
AMOUNT £M(2)
IFRS 9 CARRYING
AMOUNT £M
FINANCIAL ASSETS
Cash and balances with central banks
Due from other banks
Financial assets available for sale(3)
Amortised cost
Amortised cost
Available for sale
Loans and advances to customers
at fair value through profit or loss
Derivative financial instruments
Loans and advances to customers
FINANCIAL LIABILITIES
Other financial liabilities at fair value
Amortised cost
Amortised cost
Fair value through profit or loss
Fair value through other
comprehensive income
Fair value through profit or loss
Fair value through profit or loss
Fair value through profit or loss
Amortised cost
Fair value through profit or loss
Amortised cost
6,573
693
1,562
n/a
362
262
32,748
6,573
693
11
1,551
362
262
32,719
Fair value through profit or loss
Fair value through profit or loss
15
15
(1) The acquisition of Virgin Money Holdings (UK) PLC on 15 October 2018 has no impact or effect on the Group’s disclosures on the transition to IFRS 9,
which is based on the Group balance sheet position as at 30 September 2018 which was prior to the acquisition.
(2) The prior year comparative has been restated in line with the current year presentation (note 1.10).
(3) The Group’s listed securities, comprising of UK Government Securities, and other listed securities (e.g. bonds issued by supra-nationals and AAA rated
covered bonds), are held in a business model that is ‘to hold to collect and sell’ and classified at fair value through other comprehensive income. The
Group’s unlisted securities, and other financial assets held as available for sale have been classified at fair value through profit or loss.
The changes required (net of deferred tax) to the Group’s financial assets and liabilities on adoption of IFRS 9 have been adjusted through
the Group’s retained earnings figure for 30 September 2018.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 265
Initial adoption approach
The methodology and nature of the key judgements applied on the initial adoption of IFRS 9 were consistent with the Group policy
as outlined in detail in note 3.2, and are therefore not repeated here.
Consistent with the Group’s approach to the application of economic scenarios to the ECL calculation at 30 September 2019, similar
scenarios fed into the ECL calculation at 1 October 2018. The Group applied the following weightings to the chosen scenarios at
1 October 2018:
Mild upside
Base case
25%
60%
Severe downside 15%
Refer to note 3.2 for further detail regarding the approach and comparison of the weightings applied at 1 October 2018 and
30 September 2019.
Future macroeconomic conditions
A range of future macroeconomic conditions is used in the scenarios over a five-year forecast period and reflects the best estimates of
future conditions under each scenario. The Group has identified the following key macroeconomic conditions as the most significant inputs
for IFRS 9 modelling purposes: UK GDP growth, CPI inflation, house prices, bank rates, unemployment rates and CRE capital values. These
are assessed and reviewed by an internal panel on a six-monthly basis to ensure appropriateness and relevance to the ECL calculation.
Where model inputs are not reflective of the current market conditions at the date of the financial statements, the Group may reflect these
through the use of temporary adjustments to the ECL calculation using expert credit judgement.
The simple forward-looking five-year averages for the key model inputs used in the ECL calculations at 1 October 2018 are:
1 October 2018
Mild upside
Base case
Severe downside
UK GDP GROWTH
%
CPI INFLATION
%
HOUSE PRICES
%
BANK RATE
%
ILO UNEMPLOYMENT
%
2.6
2.1
0.6
2.4
1.9
0.8
4.9
4.3
(1.7)
2.5
1.1
0.1
3.3
4.2
6.2
The revised simple forward-looking five-year averages for the key model inputs used in the ECL calculations at 30 September 2019 are:
30 September 2019
Mild upside
Base case
Severe downside
UK GDP GROWTH
%
CPI INFLATION
%
HOUSE PRICES
%
BANK RATE
%
ILO UNEMPLOYMENT
%
2.7
1.8
0.2
2.3
1.7
0.8
5.8
2.9
(4.6)
2.0
0.9
0.4
3.4
3.8
5.8
IFRS 15
The Group also adopted IFRS 15 ‘Revenue from Contracts with Customers’ with effect from 1 October 2018.
The requirements of IFRS 15 allow for the transitional adjustments to be reflected through the opening retained earnings line, without
the need to produce comparative information on an IFRS 15 basis.
The majority of the Group’s income was either not in scope for IFRS 15 or was being recognised in a way that was consistent with the
requirements of the new standard. The limited exception to this was income recognised in relation to the Group’s rights to future
commission on the deferred consideration receivable. This was held as an ‘other’ available for sale financial asset under IAS 39 and
reclassified to FVTPL on transition to IFRS 9 as detailed in this note. As a result of this remeasurement, a further £1m of future commission
income was recognised on transition to IFRS 15, which has been reflected in increases to both other assets and retained earnings
on transition.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 266
Section 5: Other notes continued
5.4 Transition to IFRS 9 ‘Financial Instruments’ from IAS 39 ‘Financial Instruments: Recognition and Measurement’
and the adoption of IFRS 15 ‘Revenue from Contracts with Customers’ continued
Quantitative impact of IFRS 9 and IFRS 15 on adoption at 1 October 2018
The change to the carrying amounts of the Group’s assets, liabilities, reserves and retained earnings as at 30 September 2018 as a result
of the IFRS 9 and IFRS 15 reclassifications and remeasurements required on 1 October 2018 are as follows:
IAS 39
CARRYING
AMOUNT AS AT
30 SEPT 2018(1)
£M
IFRS 9 –
RECLASSIFICATIONS
£M
IFRS 9 –
REMEASUREMENT
IN ECL
£M
IFRS 9 –
RELEASE OF
AVAILABLE FOR
SALE RESERVE
£M
IFRS 15
REMEASUREMENT
£M
CARRYING
AMOUNT AS AT
1 OCT 2019
£M
ASSETS
Financial assets available for sale
Financial assets at fair value through
other comprehensive income
Other financial assets at fair value
Loans and advances to customers
Deferred tax
Other assets
EQUITY
Available for sale reserve
FVOCI reserve
Retained earnings
1,562
(1,562)
–
362
32,748
206
338
(7)
–
(2,873)
1,551
11
–
–
–
4
(4)
–
–
–
–
(29)
7
–
–
–
22
–
–
–
–
–
–
3
–
(3)
–
–
–
–
–
1
–
–
(1)
–
1,551
373
32,719
213
339
–
(4)
(2,855)
(1) The prior year comparative has been restated in line with the current year presentation (note 1.10).
The move to IFRS 9 has resulted in a net £19m decrease in retained earnings at 1 October 2018 primarily due to the change in the
measurement in impairment losses, which are now calculated on an ECL basis as opposed to the incurred loss methodology used in IAS 39.
The gross impairment loss adjustment of £29m as at 1 October 2018 includes £5m of ECLs calculated on the Group’s loan commitments
and financial guarantee contracts. In addition, while an ECL calculation is also performed on the Group’s financial assets held at FVOCI,
the resultant impairment provision is not material enough to be reported separately in the above tables.
5.5 Pillar 3 disclosures
Basel III Capital Requirements Directive IV
Pillar 3 disclosure requirements are set out in Part Eight of the CRR. The consolidated disclosures of the Group, for the 2019 financial year,
will be issued concurrently with the Annual Report and Accounts and will be found at www.virginmoneyukplc.com/investor-relations/
results-and-reporting/financial-results/.
5.6 Post balance sheet events
FSMA Part VII transfer of trade and assets from Virgin Money PLC to Clydesdale Bank PLC
On 26 September 2019, at a hearing in the Court of Session in Edinburgh, the Court approved a banking business transfer scheme under
Part VII of the Financial Services and Markets Act 2000. The scheme effective date was 21 October 2019, and in accordance with the court
approval, on this date the business of Virgin Money PLC was transferred to Clydesdale Bank PLC for a cash consideration of £10m. The
transfer of the trade and assets is a business transfer under common control and has no impact on the consolidated Group financial results.
Change in Company name
CYBG PLC changed its name to Virgin Money UK PLC on 30 October 2019. The registered office address of the Company has changed
from Merrion Way to Jubilee House, Gosforth, Newcastle upon Tyne, NE3 4PL.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 267
COMPANY
BALANCE SHEET
AS AT 30 SEPTEMBER
ASSETS
Investments in controlled entities
Due from related entities
Financial assets at fair value through profit or loss
Financial assets available for sale
Current tax assets
Other assets
Total assets
LIABILITIES
Debt securities in issue
Due to other banks
Due to related entities
Other liabilities
Total liabilities
EQUITY
Share capital and share premium
Other equity instruments
Merger reserve
Other reserves
Retained earnings
Total equity
Total liabilities and equity
The Company made a profit of £75m (2018: profit of £34m) during the year.
The notes on pages 270 to 275 form an integral part of these financial statements.
NOTE
6.2
6.6
6.3
6.6
4.1
6.5
6.5
6.5
6.5
2019
£M
4,325
2,287
7
–
2
–
6,621
2,257
104
21
7
2,389
146
919
2,128
24
1,015
4,232
6,621
2018
£M
2,268
1,314
–
1
1
30
3,614
1,276
110
41
1
1,428
89
450
633
9
1,005
2,186
3,614
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 268
COMPANY STATEMENT
OF CHANGES IN EQUITY
At 1 October 2017
Profit for the year
Other comprehensive income, net of tax
Total comprehensive income for the year
Dividends paid to ordinary shareholders
AT1 distributions paid (net of tax)
Transfer from equity based compensation reserve
Ordinary shares issued
Equity based compensation expensed
As at 30 September 2018
Profit for the year
Other comprehensive income, net of tax
Total comprehensive income for the year
Acquisition of Virgin Money Holdings (UK) PLC
Dividends paid to ordinary shareholders
AT1 distributions paid (net of tax)
Transfer from equity based compensation reserve
Equity based compensation expensed
Settlement of Virgin Money Holdings (UK) PLC
share awards
AT1 issuance
As at 30 September 2019
OTHER RESERVES
NOTE
6.5
6.5
SHARE
CAPITAL
AND
SHARE
PREMIUM
£M
88
–
–
–
–
–
–
1
–
89
–
–
–
54
–
–
–
–
OTHER
EQUITY
INSTRUMENTS
£M
450
–
–
–
–
–
–
–
–
450
–
–
–
–
–
–
–
–
MERGER
RESERVE
£M
633
–
–
–
–
–
–
–
–
633
–
–
–
1,495
–
–
–
–
EQUITY
BASED
COMPENSA-
TION
RESERVE
£M
8
–
–
–
–
–
(7)
–
9
10
–
–
–
–
–
–
(8)
4
DEFERRED
SHARES
RESERVE
£M
–
–
–
–
–
–
–
–
–
–
–
–
–
23
–
–
–
–
CASH
FLOW
HEDGE
RESERVE
£M
(2)
–
1
1
–
–
–
–
–
(1)
–
–
–
–
–
–
–
–
RETAINED
EARNINGS
£M
1,002
34
–
34
(9)
(29)
7
–
–
1,005
75
2
77
–
(45)
(33)
8
–
TOTAL
EQUITY
£M
2,179
34
1
35
(9)
(29)
–
1
9
2,186
75
2
77
1,572
(45)
(33)
–
4
3
–
146
6.5
–
469
919
–
–
2,128
(4)
–
19
–
–
6
–
–
(1)
1
2
1,015
–
471
4,232
The notes on pages 270 to 275 form an integral part of these financial statements.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 269
COMPANY STATEMENT
OF CASH FLOWS
FOR THE YEAR ENDED 30 SEPTEMBER
OPERATING ACTIVITIES
Profit on ordinary activities before tax
Adjustments for:
Changes in operating assets
Due from other banks
Current tax assets
Changes in operating liabilities
Due to other banks
Other liabilities
Interest receivable
Interest payable
Costs recharged from subsidiary
Net (decrease)/increase in amounts due to related entities
Tax received – Group relief
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in controlled entities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Interest received
Interest paid
Issuance of medium-term notes/subordinated debt
Net decrease in amounts due from related entities
AT1 issuance
Ordinary dividends paid
AT1 distributions
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
2019
£M
82
–
(1)
(17)
–
(72)
75
2
(12)
1
58
(475)
(475)
64
(63)
976
467
(988)
(45)
(41)
370
(47)
36
(11)
Cash and cash equivalents comprise the following balances with less than three months’ maturity from the date of acquisition.
Due from related parties (note 5.3)
At 1 October 2018
Cash flows:
Issuances
Drawdowns
Repayments
Non cash flows:
Movement in accrued interest
Unamortised costs
Other movements
At 30 September 2019
The notes on pages 270 to 275 form an integral part of these financial statements.
2019
£M
28
DEBT
SECURITIES
IN ISSUE
£M
1,276
976
–
–
12
(3)
(4)
2,257
INTERCOMPANY
LOANS
£M
–
–
15
(15)
–
–
–
–
2018
£M
40
511
–
–
(2)
(33)
36
1
(504)
1
50
–
–
34
(34)
497
(487)
–
(9)
(36)
(35)
15
21
36
2018
£M
36
TOTAL
£M
1,276
976
15
(15)
12
(3)
(4)
2,257
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 270
Section 6: Notes to the Company financial statements
6.1 Company basis of preparation
The Company is incorporated in the UK and registered in England and Wales.
The Company financial statements of CYBG PLC, the Parent Company (the Company), which should be read in conjunction with the Group
Directors’ report, have been prepared on a going concern basis in accordance with IFRSs as adopted by the EU and with those parts of the
Companies Act 2006 applicable to companies reporting under IFRS.
No individual income statement or statement of comprehensive income is presented for the Company, as permitted by Section 408 of the
Companies Act 2006.
Basis of measurement
The financial information has been prepared under the historical cost convention. The preparation of the financial statements in conformity
with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the
reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period
in which the estimates are revised and in any future periods affected.
The accounting policies of the Company are the same as those of the Group which are set out in the notes to the consolidated financial
statements except that the Company has no policy in respect of consolidation. These accounting policies have been applied consistently
to all periods presented in these financial statements.
6.2 Company investments in controlled entities
Accounting policy
The Company’s investments in controlled entities are valued at cost or valuation less any provision for impairment. Such investments are
reviewed annually for potential evidence of impairment, or more frequently when there are indications that impairment may have occurred.
Losses relating to impairment in the value of shares in controlled entities are recognised in the income statement.
At 30 September
2019 £M
4,325
2018 £M
2,268
The table below represents the wholly owned subsidiary undertakings of the Group and Company as at 30 September 2019:
NATURE OF
BUSINESS
CLASS OF
SHARE HELD
PROPORTION
HELD
COUNTRY OF
INCORPORATION
REGISTERED OFFICE
FINANCIAL
YEAR END
Banking
Ordinary
100%
Scotland
Holding
company
Ordinary
100%
England
30 St Vincent Place,
Glasgow, G1 2HL
20 Merrion Way, Leeds,
Yorkshire, LS2 8NZ
WHOLLY OWNED SUBSIDIARY
UNDERTAKINGS
DIRECT HOLDINGS
Clydesdale Bank PLC
CYB Investments Limited
INDIRECT HOLDINGS
CGF No 9 Limited
Clydesdale Bank Asset
Finance Limited
CYB Intermediaries Limited
St Vincent (Equities) Limited
Leasing
Ordinary
100%
Scotland
Leasing
Ordinary
100%
Scotland
Insurance
intermediary
Investment
company
Ordinary
100%
England
Ordinary
100%
Scotland
Virgin Money Giving Limited Charitable
donations
Banking
Virgin Money Holdings
(UK) PLC
Virgin Money Management
Services Limited
Virgin Money Personal
Financial Service Limited
Service
company
Insurance
intermediary
Ordinary
100%
England
Ordinary
100%
England
Ordinary
100%
England
Ordinary
100%
England
30 September
30 September
30 September
30 September
30 September
30 September
31 December
31 December
31 December
31 December
30 St Vincent Place,
Glasgow, G1 2HL
30 St Vincent Place,
Glasgow, G1 2HL
20 Merrion Way, Leeds,
Yorkshire, LS2 8NZ
30 St Vincent Place,
Glasgow, G1 2HL
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
NOTES TO THE COMPANY FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 271
WHOLLY OWNED SUBSIDIARY
UNDERTAKINGS
Virgin Money PLC
Yorkshire Bank Home
Loans Limited
CB Nominees Limited
Clydesdale Bank
(Head Office)
Nominees Limited
CYB SSP Trustee Limited
CLASS OF
SHARE HELD
PROPORTION
HELD
COUNTRY OF
INCORPORATION
REGISTERED OFFICE
NATURE OF
BUSINESS
Banking
Mortgage
finance
Dormant
In liquidation
Ordinary
100%
England
Ordinary
100%
England
Limited by
guarantee
Limited by
guarantee
100%
100%
Scotland
Scotland
Dormant
Ordinary
100%
England
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
20 Merrion Way, Leeds,
Yorkshire, LS2 8NZ
30 St Vincent Place,
Glasgow, G1 2HL
Saltire Court,
20 Castle Terrace,
Edinburgh, EH1 2DB
20 Merrion Way, Leeds,
Yorkshire, LS2 8NZ
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
30 St Vincent Place,
Glasgow, G1 2HL
20 Merrion Way, Leeds,
Yorkshire, LS2 8NZ
30 St Vincent Place,
Glasgow, G1 2HL
20 Merrion Way, Leeds,
Yorkshire, LS2 8NZ
FINANCIAL
YEAR END
31 December
30 September
30 September
30 September
30 September
31 December
31 December
30 September
30 September
30 September
30 September
Northern Rock Limited
Dormant
Ordinary
100%
England
Virgin Money
Nominees Limited
YCB DC Trustee Limited
YCBPS Property Nominee
Company Limited
Yorkshire and Clydesdale
Bank Pension Trustee Limited
Yorkshire Bank PLC
Dormant
Ordinary
100%
England
Dormant
Ordinary
100%
Scotland
Dormant
Ordinary
100%
England
Dormant
Ordinary
100%
Scotland
Dormant
Ordinary
100%
England
The following transactions of significance occurred during the year which increased the value of the Company’s investments in its
controlled entities:
— on 15 October 2018, the Company acquired all the voting rights in Virgin Money Holdings (UK) PLC by means of a scheme of
arrangement under Part 26 of the UK Companies Act 2006 for a purchase consideration of £1,532m (note 3.19). Following completion,
the investment in Virgin Money Holdings (UK) PLC was transferred to Clydesdale Bank PLC in return for the Company acquiring
Clydesdale Bank PLC shares equal to the fair value determined for the Virgin Money Holdings (UK) PLC shares. This resulted in the
Company’s investment in Clydesdale Bank PLC increasing by £1,532m;
— on 13 March 2019, the Company acquired perpetual securities (fixed 9.25%) with a principal amount of £250m from Clydesdale Bank
PLC. These are carried at cost in accordance with IAS 27. These are perpetual securities with no fixed maturity or redemption date
and are structured to qualify as AT1 instruments under CRD IV; and
— on 20 August 2019, in preparation for FSMA Part VII (note 5.6) the Company acquired a further £230m of ordinary share capital
in Clydesdale Bank PLC.
The Group has interests in two charitable foundations:
— Yorkshire and Clydesdale Bank Foundation, a charitable foundation registered in Scotland as a company limited by guarantee.
Clydesdale Bank PLC acts as a guarantor for £10 and is the main donor; and
— The Virgin Money Foundation, a charitable foundation registered in England as a company limited by guarantee. The Company acts
as a guarantor for £1 and Virgin Money PLC is a donor.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 272
Section 6: Notes to the Company financial statements continued
6.2 Company investments in controlled entities continued
The Company also has an interest in a number of structured entities:
OTHER CONTROLLED ENTITIES
AS AT 30 SEPTEMBER 2019
Clydesdale Covered Bonds No. 2 LLP
Eagle Place Covered Bonds LLP
NATURE
OF BUSINESS
Acquisition of mortgage loans
Acquisition of mortgage loans
COUNTRY OF
INCORPORATION
England
England
Gosforth Funding 2014-1 PLC
Issuer of securitised notes
England
Gosforth Funding 2015-1 PLC
Issuer of securitised notes
England
Gosforth Funding 2016-1 PLC
Issuer of securitised notes
England
Gosforth Funding 2016-2 PLC
Issuer of securitised notes
England
Gosforth Funding 2017-1 PLC
Issuer of securitised notes
England
Gosforth Funding 2018-1 PLC
Issuer of securitised notes
England
Gosforth Holdings 2014-1 Limited
Holding company
Gosforth Holdings 2015-1 Limited
Holding company
Gosforth Holdings 2016-1 Limited
Holding company
Gosforth Holdings 2016-2 Limited
Holding company
Gosforth Holdings 2017-1 Limited
Holding company
Gosforth Holdings 2018-1 Limited
Holding company
Gosforth Mortgages Trustee
2014-1 Limited
Gosforth Mortgages Trustee
2015-1 Limited
Gosforth Mortgages Trustee
2016-1 Limited
Gosforth Mortgages Trustee
2016-2 Limited
Gosforth Mortgages Trustee
2017-1 Limited
Gosforth Mortgages Trustee
2018-1 Limited
Lanark Funding Limited
Trust
Trust
Trust
Trust
Trust
Trust
England
England
England
England
England
England
England
England
England
England
England
England
Funding company
England
Lanark Holdings Limited
Holding company
England
Lanark Master Issuer PLC
Issuer of securitised notes
England
Lanark Trustees Limited
Mortgages trustee
England
REGISTERED OFFICE
20 Merrion Way, Leeds, LS2 8NZ
Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Fifth Floor, 100 Wood Street,
London, EC2V 7EX
Third Floor, Suite 2, 11-12 St. James’s
Square, London, SW1Y 4LB
Third Floor, Suite 2, 11-12 St. James’s
Square, London, SW1Y 4LB
Third Floor, Suite 2, 11-12 St. James’s
Square, London, SW1Y 4LB
Third Floor, Suite 2, 11-12 St. James’s
Square, London, SW1Y 4LB
FINANCIAL
YEAR END
30 September
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
30 September
30 September
30 September
30 September
NOTES TO THE COMPANY FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 273
OTHER CONTROLLED ENTITIES
AS AT 30 SEPTEMBER 2019
NATURE
OF BUSINESS
Lannraig Funding Limited
Funding company
COUNTRY OF
INCORPORATION
England
Lannraig Holdings Limited
Holding company
England
Lannraig Master Issuer PLC
Issuer of securitised notes
England
Lannraig Trustees Limited
Mortgages trustee
Jersey
Red Grey Square Funding LLP
Security provider
England
REGISTERED OFFICE
35 Great St. Helen’s, London,
EC3A 6AP, United Kingdom
35 Great St. Helen’s, London,
EC3A 6AP, United Kingdom
35 Great St. Helen’s, London,
EC3A 6AP, United Kingdom
44 Esplanade, St Helier, Jersey,
JE4 9WG, Channel Islands
35 Great St. Helen’s, London,
EC3A 6AP, United Kingdom
FINANCIAL
YEAR END
30 September
30 September
30 September
30 September
30 September
Details of the Group’s interests in consolidated structured entities associated with securitisation and covered bond arrangements
are set out in note 3.3.
The Group also has a participating interest in the following undertakings as either an associate (A) or a joint venture (JV):
NAME OF UNDERTAKING
Eagle Place Covered Bonds Finance Limited
Salary Finance Loans Limited
Virgin Money Unit Trust Managers Limited
STATUS
A
JV
JV
% OF SHARE CLASS HELD BY
IMMEDIATE PARENT COMPANY
(OR BY THE GROUP
WHERE THIS VARIES)
20%
50%
50% (and one share)
REGISTERED OFFICE ADDRESS
(UK UNLESS STATED OTHERWISE)
35 Great St. Helen’s, London, EC3A 6AP
One Hammersmith Broadway, London, W6 9DL
Jubilee House, Gosforth, Newcastle-Upon-Tyne, NE3 4PL
Investment in Virgin Money Unit Trust Managers Limited
Following receipt of all regulatory approvals and conclusion of contractual negotiations, the investments and pensions joint venture with
Aberdeen Standard Investments was completed on 31 July 2019. The Group recognised a gain on sale of £35m within non-interest income
(note 2.3) from the disposal of 50% (less one share) of its interest in Virgin Money Unit Trust Managers Limited. Investments in joint
ventures are recognised in the consolidated financial statements within other assets.
6.3 Company debt securities in issue
Subordinated debt
Medium-term notes
2019
£M
731
1,526
2,257
2018
£M
479
797
1,276
Information on subordinated debt and medium-term notes is provided in note 3.14 to the consolidated financial statements.
The fair value hedge adjustment included in note 3.14 is not applicable at Company level.
On 20 August 2019, following a consent exercise with the noteholders, a medium-term note issued by Virgin Money Holdings (UK) PLC
changed obligor and transferred to the Company at a fair value of £347m.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 274
Section 6: Notes to the Company financial statements continued
6.4 Company fair value of financial instruments
Fair value of financial instruments carried at amortised cost
The tables below show a comparison of the carrying amounts of financial assets and liabilities measured at amortised cost as reported
on the balance sheet and their fair values where these are not approximately equal.
There are various limitations inherent in this fair value disclosure particularly where prices may not represent the underlying value
due to dislocation in the market. Not all of the Company’s financial instruments can be exchanged in an active trading market.
COMPANY
FINANCIAL ASSETS
Due from related entities
FINANCIAL LIABILITIES
Debt securities in issue
30 SEPTEMBER 2019
30 SEPTEMBER 2018
CARRYING
VALUE
£M
FAIR
VALUE
£M
FAIR VALUE MEASUREMENT USING:
LEVEL 1
£M
LEVEL 2
£M
LEVEL 3
£M
CARRYING
VALUE
£M
FAIR
VALUE
£M
FAIR VALUE MEASUREMENT USING:
LEVEL 1
£M
LEVEL 2
£M
LEVEL 3
£M
2,287
2,318
–
2,318
2,257
2,302
2,302
–
–
–
1,315
1,325
–
1,325
1,276
1,279
1,279
–
–
–
Notes
The Company’s fair values disclosed for financial instruments at amortised cost are based on the following methodologies and assumptions:
Amounts due from related entities – The fair value of subordinated debt and medium-term notes due from related entities is derived from
quoted market prices of the debt security in issue after accounting for differences in credit spread. All other amounts due from related
entities are redeemable at call and therefore carrying value approximates fair value.
Debt securities in issue – The fair value of subordinated debt is taken directly from quoted market prices.
The Company also holds £1m of debt investments measured at fair value, which were purchased from Clydesdale Bank PLC at
30 September 2018. These investments are categorised as Level 3, as the valuations incorporate significant unobservable inputs.
Valuation is based on the transaction price which the Company believes is the best representation of an exit price. The significant
unobservable input is the recoverable amount which could range from 0 to 100%.
6.5 Company reserves
6.5.1 Cash flow hedge reserve
As at 30 September 2019, the cash flow hedge reserve comprised crystallised fair value losses arising from a matured cash flow hedge
of £1m (2018: £1m). This hedge relationship was entered into to mitigate the interest rate risk exposure prior to the issuance of the
subordinated debt. The hedge matured at the date of issue. The balance on the cash flow hedge reserve within the statement of changes
in equity is net of tax.
The crystallised fair value losses will be amortised from the cash flow hedge reserve to the income statement over the life of the
subordinated debt. In respect of this, a £Nil loss (2018: £0.8m loss) was recycled to the income statement during the year.
6.5.2 Other equity instruments and reserves
Information on other equity instruments and other reserves is provided in note 4.1 to the Group’s consolidated financial statements.
Included within retained earnings is the profit for the year ended 30 September 2019 of £75m (2018: profit of £34m).
6.5.3 Available distributable items
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements.
At 30 September 2019, the Company had accumulated distributable reserves of £1,015m (2018: £1,005m).
NOTES TO THE COMPANY FINANCIAL STATEMENTSVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 275
6.6 Company related party transactions
During the year there have been transactions between the Company, controlled entities of the Company, and other related parties.
The Company receives and provides a range of services from/to its principal subsidiary undertaking, Clydesdale Bank PLC, including loans
and deposits.
Amounts due from controlled entities of the Company
Medium-term notes
Subordinated debt
Other receivables
Cash and cash equivalents
Total amounts due from related entities
2019
£M
1,551
732
4
–
2,287
2018
£M
797
480
1
36
1,314
On 20 August 2019, the Company purchased £350m of 3.6262% fixed rate reset callable medium-term notes with a final maturity date
of 20 April 2026 from Clydesdale Bank PLC. Medium-term notes comprise dated, unsecured loans and are issued by Clydesdale Bank PLC.
On 3 September 2019, the Company purchased £400m of 4% fixed rate reset callable medium-term notes with a final maturity date of
3 September 2027 from Clydesdale Bank PLC. Medium-term notes comprise dated, unsecured loans and are issued by Clydesdale Bank
PLC. These securities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors
of the issuer, other than creditors whose claims rank junior to the claims of the holders of the medium-term note liabilities, including those
of subordinated debt holders.
On 14 December 2018, the Company purchased £250m of 7.875% fixed rate reset callable subordinated debt with a final maturity date
of 14 December 2028 from Clydesdale Bank PLC. Subordinated debt comprises dated, unsecured loan capital and is issued by Clydesdale
Bank PLC. These securities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other
creditors of the issuer, other than creditors whose claims rank junior to the claims of the holders of subordinated liabilities.
Amounts due to controlled entities of the Company
Bank account held with controlled entity of the Company
Other payables
Total amounts due to related entities
2019
£M
11
10
21
2018
£M
–
41
41
Other related party transactions
As discussed in note 4.2 to the consolidated financial statements, the Group provides share based compensation to employees through
a number of schemes, all in relation to shares in the Company. The cost of providing these benefits is recharged to the employing company,
Clydesdale Bank PLC. Recharges are calculated based on the fair value of awards expensed in the period in accordance with IFRS 2:
‘Share based payments’. The key management personnel of the Company are the key management personnel of the Group, with relevant
disclosures given in note 5.3 to the consolidated financial statements. The Company has no employees (2018: Nil).
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTSFINANCIAL STATEMENTS 276
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019FINANCIAL STATEMENTS 277
ADDITIONAL
INFORMATION
Measuring financial performance – glossary
Glossary
Abbreviations
Country by country reporting
Shareholder information
Forward-looking statements
278
281
285
286
287
288
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 278
MEASURING FINANCIAL
PERFORMANCE – GLOSSARY
Financial performance measures
As highlighted in the Strategic report, the Financial results section and the Risk report, the Group utilises a range of performance measures(1)
to assess the Group’s performance. These can be grouped under the following headings:
— profitability;
— asset quality; and
— capital optimisation.
The performance measures used are a combination of statutory, regulatory and alternative performance measures; with the type
of performance measure used dependent on the component elements and source of what is being measured.
Statutory performance measures (S)
These are used when the basis of the calculation is derived from a measure that is required under generally accepted accounting principles
(GAAP). An example of this would be references to earnings per share.
Regulatory performance measures (R)
These are used when the basis of the calculation is required and specified by the Group’s regulators. Examples of this would be the
leverage ratio and the Tier 1 ratio.
Alternative performance measures (A)
These are used when the basis of the calculation is derived from a non-GAAP measure – also referred to as APMs. Examples of this would
be the statutory cost to income ratio and the statutory return on tangible equity.
Where a performance measure refers to an ‘underlying’ metric, the detail on how this measure is arrived at, along with management’s
reasoning for excluding the item from the Group’s current underlying performance rationale, can be found on page 280, directly following
this section. These adjustments to the Group’s statutory results made by management are designed to provide a more meaningful
underlying basis.
Descriptions of the performance measures used, including the basis of calculation where appropriate, are set out below:
Profitability:
TERM
Net interest margin (NIM)
TYPE
A
Statutory return on tangible
equity (RoTE)
Statutory return on assets
Statutory basic earnings per share
(EPS)
Underlying RoTE
Underlying CIR
Underlying return on assets
Underlying basic EPS
A
A
S
A
A
A
A
DEFINITION
Underlying net interest income as a percentage of average interest earning assets for a given period.
Underlying net interest income of £1,433m (2018: £1,457m) is divided by average interest earning
assets for a given period of £86,362m (2018: £81,934m) (which is then adjusted to exclude short-term
repos used for liquidity management purposes, fair value adjustments, amounts received under the
Conduct Indemnity and not yet utilised, and any associated income). As a result of the exclusions
noted above, average interest earning assets used as the denominator have reduced by £Nil
(2018: £187m) and the net interest income numerator has reduced by £Nil (2018: £3m).
Statutory profit/(loss) after tax attributable to ordinary equity holders as a percentage of average
tangible equity (total equity less intangible assets, AT1 and non-controlling interests) for a given period.
Statutory profit/(loss) after tax as a percentage of average total assets for a given period.
Statutory profit/(loss) after tax attributable to ordinary equity shareholders including tax relief on any
distributions made to other equity holders and non-controlling interests, divided by the weighted
average number of ordinary shares in issue for a given period (excluding own shares held).
Underlying profit after tax attributable to ordinary equity holders, including tax relief on any
distributions made to other equity holders and non-controlling interests, as a percentage of average
tangible equity (total equity less intangible assets, AT1 and non-controlling interests) for a given period.
Underlying operating and administrative expenses as a percentage of underlying total operating
income for a given period.
Underlying profit after tax as a percentage of average total assets for a given period.
Underlying profit after tax attributable to ordinary equity holders divided by the weighted average
number of ordinary shares in issue for a given period.
(1) The term ‘financial performance measure’ covers all metrics, ratios and percentage calculations used to assess the Group’s performance and is
interchangeable with similar terminology used in the Annual Report and Accounts such as highlights, key metrics, key performance indicators (KPIs)
and key credit metrics.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 279
TERM
TYPE
DEFINITION
Underlying profit after tax
attributable to ordinary equity
holders
A
Underlying profit before tax of £539m (2018: £581m) less tax charge of £77m (2018: £101m), less AT1
distributions (net of tax relief) of £33m (2018: £29m), less distributions to non-controlling interests
(net of tax relief) of £26m (2018:£25m) and was equal to £403m (2018: £426m). The underlying tax
charge is calculated by applying the statutory tax rate for the relevant period to the taxable items
adjusted on the underlying basis.
Asset quality:
TERM
Impairment charge to average
customer loans (cost of risk)
TYPE
A
Total provision to customer loans
Indexed loan to value (LTV) of the
mortgage portfolio
A
A
Capital optimisation:
TERM
Common Equity Tier 1 (CET1) ratio
Tier 1 ratio
Total capital ratio
CRD IV leverage ratio
TYPE
R
R
R
R
UK leverage ratio
Tangible net asset value (TNAV)
per share
Pro forma tangible net asset value
(TNAV) per share
R
A
A
Pro forma underlying basic earnings
per share
A
Loan to deposit ratio (LDR)
Liquidity coverage ratio (LCR)
Net stable funding ratio (NSFR)
R
R
R
DEFINITION
Impairment losses on credit exposures plus credit risk adjustment on fair value loans to average
customer loans (defined as loans and advances to customers, other financial assets at fair value
and due from customers on acceptances).
Total impairment provision on credit exposures as a percentage of total customer loans at a given date.
The mortgage portfolio weighted by balance and indexed using the MIAC Acadametrics indices for the
Clydesdale Bank PLC portfolio while the Virgin Money Holdings (UK) PLC portfolio is indexed using the
Markit indices.
DEFINITION
CET1 capital divided by RWAs at a given date.
Tier 1 capital as a percentage of RWAs.
Total capital resources divided by RWAs at a given date.
This is a regulatory standard ratio proposed by Basel III as a supplementary measure to the risk-based
capital requirements. It is intended to constrain the build-up of excess leverage in the banking sector
and is calculated by dividing Tier 1 capital resources by a defined measure of on and off-balance sheet
items plus derivatives.
The Group’s leverage ratio on a modified basis, excluding qualifying central bank claims from the
exposure measure in accordance with the policy statement issued by the PRA in October 2017.
Tangible equity (total equity less intangible assets, AT1 and non-controlling interests) as at the period
end divided by the number of ordinary shares in issue at the year end (excluding own shares held).
Tangible equity (total equity less intangible assets, AT1 and non-controlling interests) as at the period end
divided by the number of ordinary shares in issue at the period end. For comparative periods, the number
of ordinary shares in issue used in the calculation is the number of ordinary shares in issue on 15 October
2018 following the acquisition of Virgin Money Holdings (UK) PLC (excluding own shares held).
Underlying profit after tax attributable to ordinary equity shareholders, including tax relief on any
distributions made to other equity holders and non-controlling interests, divided by the weighted
average number of ordinary shares in issue for a given period (excluding own shares held). The
weighted average number of ordinary shares in issue assumes that the 540,856,644 shares issued
on the acquisition of Virgin Money Holdings (UK) PLC, was completed on 1 October 2017.
Customer loans as a percentage of customer deposits at a given date.
Measures the surplus (or deficit) of the Group’s high quality liquid assets relative to weighted net
stressed cash outflows over a 30-day period. It assesses whether the Group has sufficient liquid
assets to withstand a short-term liquidity stress based on cash outflow assumptions provided
by regulators.
The total amount of available stable funding divided by the total amount of required stable funding,
expressed as a percentage. The Group monitors the NSFR, based on its own interpretations of current
guidance available for CRD IV NSFR reporting. Therefore, the reported NSFR may change over time
with regulatory developments. Due to possible differences in interpretation of the rules, the Group’s
ratio may not be directly comparable with those of other financial institutions.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 280
MEASURING FINANCIAL
PERFORMANCE – GLOSSARY
Underlying adjustments to the pro forma view of performance
On arriving at an underlying basis, the effects of certain items that do not promote an understanding of historical or future trends of
earnings or cash flows are removed, as management consider that this presents more comparable results year-on-year. These items are
all significant and are typically one-off in nature. Additional detail is provided below where considered necessary to further explain the
rationale for their exclusion from underlying performance, in particular for new items in the current year or recurring non-underlying items:
ITEM
Restructuring costs
ACQUISITION COSTS:
2019
£M
(156)
2018
£M
–
Acquisition accounting
(87)
–
Intangible asset write-off
(127)
–
Mortgage EIR adjustments
Virgin Money Holdings (UK) PLC
transaction costs
Total acquisition costs
Legacy conduct
OTHER:
Consent solicitation
80
(55)
–
(39)
(189)
(433)
(39)
(396)
(18)
–
SME transformation
(30)
(16)
Gain on sale of UTM
35
–
UTM transition costs
GMP equalisation cost
Legacy restructuring and separation
(1)
(11)
(5)
–
–
(46)
Virgin Money digital bank termination
costs
Gain on disposal of VocaLink
Gain on disposal of Visa C shares
Total other
–
(3)
4
–
(26)
–
3
(62)
REASON FOR EXCLUSION FROM THE GROUP’S CURRENT UNDERLYING PERFORMANCE
These are part of the Group’s publicised three-year integration plan following the
acquisition of Virgin Money Holdings (UK) PLC and comprise a number of one-off
expenses that are required to realise the anticipated cost synergies.
All costs incurred as a direct result of the acquisition of Virgin Money Holdings (UK) PLC
have been removed from underlying performance due to the scale and nature of the
transaction. Further information on the items is provided below to aid understanding.
This consists principally of the unwind of the IFRS 3 fair value adjustments created on
the acquisition of Virgin Money Holdings (UK) PLC in October 2018 (£23m gain) and the
IFRS 9 impairment impact on acquired assets (£103m charge) with other smaller items
amounting to £7m. These represent either one-off adjustments or are the scheduled
reversals of the accounting adjustments that arose following the fair value exercise
required by IFRS 3. These will continue to be treated as non-underlying adjustments over
the expected three to five-year period until they have been fully reversed.
The charge for the software write-off is significant and has arisen in respect of software
assets which are no longer considered to be of value relative to the Group’s strategy
following the acquisition of Virgin Money Holdings (UK) PLC.
The alignment of accounting practices is a one-off exercise arising from the acquisition.
These costs related directly to the transaction and comprised legal, advisory and other
associated costs required to complete the transaction.
These costs are historical in nature and are not indicative of the Group’s current practices.
One-off costs relating to the change in obligor of senior debt from Virgin Money Holdings
(UK) PLC to CYBG on 20 August 2019.
These costs are significant and considered to be one-off due to the unique growth
opportunities currently available to the Group in respect of its Business lending.
A one-off gain recognised on the disposal of 50% (less one share) of Virgin Money Unit
Trust Managers Limited.
A one-off charge for GMP equalisation in the Group’s defined benefit scheme.
These legacy costs were significant in prior periods and related to the Sustain
programme, and demerger from NAB, both of which completed in the current period.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION GLOSSARY
281
TERM
Additional Tier 1 (AT1)
arrears
average assets
B
Bank
Basel II
Basel III
basis points (bps)
Board
Business lending
Capped Indemnity
carrying value (also referred to as carrying
amount)
collateral
collective impairment provision
Combined Group
commercial paper
Common Equity Tier 1 capital (CET1)
Company/CYBG
Conduct Indemnity Deed
conduct risk
counterparty
Coverage ratio
covered bonds
CRD IV
Credit conversion factor (CCF)
Credit impaired financial assets
Credit risk mitigation (CRM)
credit risk adjustment/credit valuation
adjustment
DEFINITION
Securities that are considered additional Tier 1 capital in the context of CRD IV.
A customer is in arrears when they fail to adhere to their contractual payment obligations resulting
in an outstanding loan that is unpaid or overdue.
Represents the average of assets over the year adjusted for any disposed operations.
The Group’s digital application suite, offering retail customers money management capabilities
across Web, Android and Apple platforms.
Clydesdale Bank PLC.
The capital adequacy framework issued by the Basel Committee on Banking Supervision (BCBS)
in June 2004.
Reforms issued by the BCBS in December 2017 with subsequent revisions.
One hundredth of a percent (0.01%); meaning that 100 basis points is equal to 1%. This term
is commonly used in describing interest rate movements.
Refers to the Virgin Money UK PLC Board or the Clydesdale Bank PLC Board as appropriate.
Lending to non-retail customers, including overdrafts, asset and lease financing, term lending,
bill acceptances, foreign currency loans, international and trade finance, securitisation and
specialised finance.
The indemnity from NAB in favour of the Group in respect of certain qualifying conduct costs
incurred by the Group under the terms of the Conduct Indemnity Deed.
The value of an asset or a liability in the balance sheet based on either amortised cost or fair
value principles.
The assets of a borrower that are used as security against a loan facility.
Impairment assessment on a collective basis for homogeneous groups of loans that are not
considered individually significant and to cover losses which have been incurred but have not yet
been identified on loans subject to individual assessment.
CYBG, now Virgin Money UK PLC, and its controlled entities following the acquisition of Virgin Money
Holdings (UK) PLC.
An unsecured promissory note issued to finance short-term credit requirements. These instruments
have a specified maturity date and stipulate the face amount to be paid to the investor on that date.
The highest quality form of regulatory capital that comprises total shareholders’ equity and related
non-controlling interests, less goodwill and intangible assets and certain other regulatory adjustments.
CYBG PLC up until 31 October 2019 and thereafter Virgin Money UK PLC.
The deed between NAB and CYBG setting out the terms of:
— the Capped Indemnity; and
— certain arrangements for the treatment and management of Relevant Conduct Matters.
The risk of treating customers unfairly and/or delivering inappropriate outcomes resulting in customer
detriment, regulatory fines, compensation, redress costs and reputational damage.
The other party that participates in a financial transaction, with every transaction requiring
a counterparty in order for the transaction to complete.
Impairment allowance as at the period end shown as a percentage of gross loans and advances
as at the period end.
A corporate bond with primary recourse to the institution and secondary recourse to a pool of assets
that act as security for the bonds on issuer default. Covered bonds remain on the issuer’s balance
sheet and are a source of term funding for the Group.
European legislation to implement Basel III. It replaces earlier European capital requirements directives
with a revised package consisting of a new Capital Requirements Directive and a new Capital
Requirements Regulation. CRD IV sets out capital and liquidity requirements for European banks
and harmonises the European framework for bank supervision. See also ‘Basel III’.
Credit conversion factors are used in determining the exposure at default in relation to a credit risk
exposure. The CCF is an estimate of the proportion of undrawn and off-balance sheet commitments
expected to be drawn down at the point of default.
Financial assets that are in default or have an individually assessed provision. This is also referred to
as a ‘Stage 3’ impairment loss and subject to a lifetime expected credit loss calculation. The Group
considers 90 days past due as a backstop in determining whether a financial asset is credit impaired.
Techniques to reduce the potential loss in the event that a customer (borrower or counterparty)
becomes unable to meet its obligations. This may include the taking of financial or physical security,
the assignment of receivables or the use of credit derivatives, guarantees, credit insurance, set-off
or netting.
An adjustment to the valuation of financial instruments held at fair value to reflect the creditworthiness
of the counterparty.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION GLOSSARY
282
TERM
customer deposits
CYBI
default
delinquency
Demerger
Demerger date
derivative
earnings at risk (EaR)
effective interest rate (EIR)
encumbered assets
exposure
Exposure at default (EAD)
fair value
Financial Ombudsman Service
Financial Services Compensation Scheme
(FSCS)
forbearance
funding risk
Group
hedge ineffectiveness
IFRS 9
impairment allowances
impairment losses
interest rate hedging products (IRHP)
Internal Capital Adequacy Assessment
Process (ICAAP)
Internal Liquidity Adequacy Assessment
Process (ILAAP)
Internal Ratings-Based approach (IRB)
investment grade
DEFINITION
Money deposited by individuals and corporate entities that are not credit institutions, and can
be either interest bearing, non-interest bearing or term deposits.
CYB Investments Limited.
A customer is in default when either they are more than 90 DPD on a credit obligation to the Group,
or are considered unlikely to pay their credit obligations in full without recourse to actions such as
realisation of security (if held).
See ‘arrears’.
The demerger of the Group from NAB pursuant to which all of the issued share capital of CYBI was
transferred to CYBG by NAB in consideration for the issue and transfer of CYBG shares to NAB in part
for the benefit of NAB (which NAB subsequently sold pursuant to the IPO) and in part for the benefit
of NAB shareholders under a scheme of arrangement under part 5.1 of the Australian Corporations Act.
8 February 2016.
A financial instrument that is a contract or agreement whose value is related to the value of an
underlying instrument, reference rate or index.
A measure of the quantity by which net interest income might change in the event of an adverse
change in interest rates.
The carrying value of certain financial instruments which amortises the relevant fees over the
expected life of the instrument.
Assets that have been pledged as security, collateral or legally ‘ring-fenced’ in some other way
which prevents those assets being transferred, pledged, sold or otherwise disposed.
A claim, contingent claim or position which carries a risk of financial loss.
The estimate of the amount that the customer will owe at the time of default.
The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction in the principal (or most advantageous) market at the measurement date under current
market conditions.
An independent body set up by the UK Parliament to resolve individual complaints between financial
businesses and their customers.
The UK’s compensation fund of last resort for customers of authorised financial services firms and is
funded by the financial services industry. The FSCS may pay compensation if a firm is unable, or likely
to be unable, to pay claims against it. This is usually because it has stopped trading or has been
declared in default.
The term generally applied to the facilities provided or changes to facilities provided to assist
borrowers, who are experiencing, or are about to experience, a period of financial stress.
A form of liquidity risk arising when the liquidity needed to fund illiquid asset positions cannot
be obtained at the expected terms and when required.
CYBG, now Virgin Money UK PLC, and its controlled entities.
Represents the extent to which the income statement is impacted by changes in fair value or
cash flows of hedging instruments not being fully offset by changes in fair value or cash flows
of hedged items.
The new financial instrument accounting standard which was adopted by the Group with effect
from 1 October 2018.
An expected credit loss provision held on the balance sheet for financial assets calculated in
accordance with IFRS 9. The impairment allowance is calculated as either a 12-month or a lifetime
expected credit loss.
The expected credit losses calculated in accordance with IFRS 9 and recognised in the income
statement with the carrying value of the financial asset reduced by creating an impairment allowance.
Impairment losses are calculated as either a 12-month or lifetime expected credit loss.
This incorporates: (i) standalone hedging products identified in the Financial Services Authority (FSA)
2012 notice; (ii) the voluntary inclusion of certain of the Group’s more complex tailored business loan
(TBL) products; and (iii) the Group’s secondary review of all fixed-rate tailored business loans
(FRTBLs) complaints which were not in scope for the FSA notice.
The Group’s assessment of the levels of capital that it needs to hold through an examination of its
risk profile from regulatory and economic capital viewpoints.
The Group’s assessment and management of balance sheet risks relating to funding and liquidity.
A method of calculating credit risk capital requirements using internal, rather than supervisory,
estimates of risk parameters.
The highest possible range of credit ratings, from ‘AAA’ to ‘BBB’, as measured by external credit
rating agencies.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 283
TERM
DEFINITION
Level 1 fair value measurements
Level 2 fair value measurements
Level 3 fair value measurements
Lifetime expected credit loss
Listing Rules
loan to value ratio (LTV)
Loss given default (LGD)
medium-term notes
Minimum Requirement for Own Funds and
Eligible Liabilities (MREL)
net interest income
Net Promoter Score (NPS)
operational risk
Overall Liquidity Adequacy Rule (OLAR)
pension risk
Personal lending
PPI redress
probability of default (PD)
regulatory capital
Relevant Conduct Matters
residential mortgage-backed securities
(RMBS)
ring-fencing
risk appetite
risk weighted assets (RWA)
sale and repurchase agreement (‘repo’)
Scheme
secured lending
securitisation
Financial instruments whose fair value is derived from unadjusted quoted prices for identical
instruments in active markets.
Financial instruments whose fair value is derived from quoted prices for similar instruments in active
markets and financial instruments valued using models where all significant inputs are observable.
Financial instruments whose fair value is derived from valuation techniques where one or more
significant inputs are unobservable.
The expected credit loss calculation performed on financial assets where a significant increase in
credit risk since origination has been identified. This can be either a ‘Stage 2’ or ‘Stage 3’ impairment
loss depending on whether the financial asset is credit impaired.
Regulations applicable to any company listed on a United Kingdom stock exchange, subject to the
oversight of the UK Listing Authority (UKLA). The Listing Rules set out mandatory standards for any
company wishing to list its shares or securities for sale to the public.
A ratio that expresses the amount of a loan as a percentage of the value of the property on which
it is secured.
The estimate of the loss that the Group will suffer if the customer defaults (incorporating the effect
of any collateral held).
Debt instruments issued by corporates, including financial institutions, across a range of maturities.
MREL is a minimum requirement for institutions to maintain equity and eligible debt liabilities, to help
ensure that when an institution fails the resolution authority can use these financial resources to
absorb losses and recapitalise the continuing business.
The amount of interest received or receivable on assets, net of interest paid or payable on liabilities.
This is an externally collated customer loyalty metric that measures loyalty between a provider,
who in this context is the Group, and a consumer.
The risk of loss resulting from inadequate or failed internal processes, people strategies and systems
or from external events.
An FCA and PRA rule that firms must at all times maintain liquidity resources which are adequate both
as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as
they fall due. This is included in the Group’s risk appetite and subject to approval by the Board as part
of the ILAAP.
The risk that, at any point in time, the available assets to meet pension liabilities are at a value below
current and future scheme obligations.
Lending to individuals rather than institutions and excludes mortgage lending which is reported
separately.
Includes PPI customer redress and all associated costs excluding fines.
The probability that a customer will default over either the next 12 months or lifetime of the account.
The capital which the Group holds, determined in accordance with rules established by the PRA.
The legacy conduct issues covered by the Capped Indemnity, including certain conduct issues
relating to PPI, standalone IRHP, voluntary scope TBLs and FRTBLs and other conduct matters
in the period prior to the Demerger date whether or not known at the Demerger date.
Securities that represent interests in groups or pools of underlying mortgages. Investors in these
securities have the right to cash received from future mortgage payments (interest and principal).
A new regime of rules which require banks to change the way that they are structured by separating
retail banking services from investment and international banking. This is to ensure the economy
and taxpayers are protected in the event of any future financial crises.
The level and types of risk the Group is willing to assume within the boundaries of its risk capacity
to achieve its strategic objectives.
On and off-balance sheet assets of the Group are allocated a risk weighting based on the amount
of capital required to support the asset.
A short-term funding agreement that allows a borrower to create a collateralised loan by selling
a financial asset to a lender. As part of the agreement, the borrower commits to repurchase the
security at a date in the future repaying the proceeds of the loan. For the counterparty (buying the
security and agreeing to sell in the future) it is a reverse repurchase agreement or a reverse repo.
The Group’s defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme.
Lending in which the borrower pledges some asset (e.g. property) as collateral for the lending.
The practice of pooling similar types of contractual debt and packaging the cash flows from the
financial asset into securities that can be sold to institutional investors in debt capital markets.
It provides the Group with a source of secured funding than can achieve a reduction in funding
costs by offering typically ‘AAA’ rated securities secured by the underlying financial asset.
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 284
GLOSSARY
TERM
DEFINITION
Significant increase in credit risk
specific impairment provision
standardised approach
stress testing
structured entities (SE)
subordinated debt
Term Funding Scheme (TFS)
Tier 1 capital
Tier 2 capital
unaudited
underlying capital generation
unsecured lending
value at risk (VaR)
Virgin Money
Virgin Money Holdings
The assessment performed on financial assets at the reporting date to determine whether a 12-month
or lifetime expected credit loss calculation is required. Qualitative and quantitative triggers are
assessed in determining whether there has been a significant increase in credit risk since origination.
The Group considers 30 days past due as a backstop in determining whether a significant increase
in credit risk since origination has occurred.
A specific provision relates to a specific loan, and represents the estimated shortfall between the
carrying value of the asset and the estimated future cash flows, including the estimated realisable
value of securities after meeting securities realisation costs.
In relation to credit risk, a method for calculating credit risk capital requirements using External Credit
Assessment Institutions (ECAI) ratings and supervisory risk weights. In relation to operational risk,
a method of calculating the operational capital requirement by the application of a supervisory
defined percentage charge to the gross income of eight specified business lines.
The term used to describe techniques where plausible events are considered as vulnerabilities
to ascertain how this will impact the own funds or liquidity which a bank holds.
An entity created to accomplish a narrow well-defined objective (e.g. securitisation of financial
assets). An SE may take the form of a corporation, trust, partnership or unincorporated entity.
SEs are often created with legal arrangements that impose strict limits on the activities of the SE.
May also be referred to as an SPV.
Liabilities which rank after the claims of other creditors of the issuer in the event of insolvency
or liquidation.
Launched in 2016 by the BoE to allow banks and building societies to borrow from the BoE at rates
close to base rate. This is designed to increase lending to businesses by lowering interest rates and
increasing access to credit.
A measure of a bank’s financial strength defined by CRD IV. It captures CET1 capital plus other Tier 1
securities in issue, subject to deductions.
A component of regulatory capital, including qualifying subordinated debt, eligible collective
impairment allowances and other Tier 2 securities as defined by CRD IV.
Financial information that has not been subject to validation by the Group’s external auditor.
The amount of capital generated by the business in basis points over a given period, before
non-underlying items are included.
Lending in which the borrower pledges no assets as collateral for the lending (such as credit cards
and current account overdrafts).
A measure of the loss that could occur on risk positions as a result of adverse movements in
market risk factors (e.g. rates, prices, volatilities) over a specified time horizon and to a given level
of confidence.
Virgin Money UK PLC. ‘Virgin Money’ is also used throughout this report when referring to the acquired
business of Virgin Money Holdings (UK) PLC or subsequent integration of the acquired business
within the newly combined Group.
Virgin Money Holdings (UK) PLC
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 285
ABBREVIATIONS
LCR
LDR
LGD
LIBOR
LSE
LTIP
LTV
MREL
MRT
NAB
NIM
NPS
NSFR
OLAR
PBT
PCA
PD
PILON
POCI
PPI
PRA
RAS
RMBS
RMF
RoTE
RPI
RWA
SICR
SIP
SME
SRB
SVR
TCC
TFS
TNAV
TSA
TSR
VAA
VaR
Liquidity coverage ratio
Loan to deposit ratio
Loss Given Default
London Interbank Offered Rate
London Stock Exchange
Long-term incentive plan
Loan to value ratio
Minimum Requirement for Own Funds and Eligible Liabilities
Material Risk Takers
National Australia Bank Limited
Net interest margin
Net promoter score
Net stable funding ratio
Overall liquidity adequacy rule
Profit before tax
Personal current accounts
Probability of Default
Payment in lieu of notice
Purchased or originated credit impaired
Payment protection insurance
Prudential Regulation Authority
Risk Appetite Statement
Residential mortgage-backed securities
Risk Management Framework
Return on Tangible Equity
Retail Price Index
Risk weighted assets
Significant increase in credit risk
Share Incentive Plan
Small or medium sized enterprises
Systemic Risk Buffer
Standard variable rate
Transactional Credit Committee
Term Funding Scheme
Tangible net asset value
Transitional Services Agreement
Total Shareholder Return
Virgin Atlantic Airways
Value at risk
AIRB
ALCO
API
ASX
AT1
BCAs
BCBS
BoE
bps
BTL
CAGR
CCB
CCF
CCyB
CET1
CIR
CMA
CPI
CRD IV
CRM
CRR
CSR
DEP
DPD
DTR
EAD
EaR
EBA
ECL
EIR
EPS
FCA
FIRB
FPC
FRC
FSCS
FSMA
FTE
FVOCI
FVTPL
GDPR
GHG
GMP
HMRC
HQLA
IAS
IASB
ICAAP
IFRS
ILAAP
ILO
IPO
IRB
IRHP
IRRBB
ISDA
JV
Advanced internal ratings-based
Asset and Liability Committee
Application programming interface
Australian Securities Exchange
Additional Tier 1
Business current accounts
Basel Committee on Banking Supervision
Bank of England
Basis points
Buy-to-let
Compound Annual Growth Rate
Capital Conservation Buffer
Credit conversion factor
Countercyclical Capital Buffer
Common Equity Tier 1 Capital
Cost to income ratio
Competition and Markets Authority
Consumer Price Index
Capital Requirements Directive IV
Credit risk mitigation
Capital Requirements Regulation
Corporate social responsibility
Deferred Equity Plan
Days past due
Disclosure and Transparency Rules
Exposure at default
Earnings at risk
European Banking Authority
Expected credit loss
Effective interest rate
Earnings per share
Financial Conduct Authority
Foundation internal ratings-based
Financial Policy Committee
Financial Reporting Council
Financial Services Compensation Scheme
Financial Services and Markets Act 2000
Full time equivalent
Fair value through other comprehensive income
Fair value through profit or loss
General Data Protection Regulation
Greenhouse Gases
Guaranteed Minimum Pension
Her Majesty’s Revenue and Customs
High Quality Liquid Assets
International Accounting Standard
International Accounting Standards Board
Internal Capital Adequacy Assessment Process
International Financial Reporting Standard
Internal Liquidity Adequacy Assessment Process
International Labour Organisation
Initial Public Offering
Internal ratings-based
Interest rate hedging products
Interest rate risk in the banking book
International Swaps and Derivatives Association
Joint venture
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 286
COUNTRY BY COUNTRY
REPORTING
The Capital Requirements (Country by Country Reporting)
Regulations 2013 came into effect on 1 January 2014 and place
certain reporting obligations on financial institutions that are
within the scope of the European Union’s CRD IV. The purpose
of the Regulations is to provide clarity on the source of the Group’s
income and the locations of its operations.
The vast majority of entities that are consolidated within the
Group’s financial statements are UK registered entities. The
activities of the Group are described in the Strategic report.
Average FTE employees (number)
Total operating income (£m)
Loss before tax (£m)
Corporation tax paid (£m)
Public subsidies received (£m)
2019
UK
8,703
1,749
232
7
–
The only other non-UK registered entity of the Group is a Trustee
company that is part of the Group’s securitisation vehicles (Lanark
and Lannraig). Lannraig Trustees Limited is registered in Jersey.
This entity plays a part in the overall securitisation process by
having the beneficial interest in certain mortgage assets assigned
to it. This entity has no assets or liabilities recognised in its financial
statements with the securitisation activity taking place in other UK
registered entities of the structures. This entity does not undertake
any external economic activity and has no employees. The results
of this entity as well as those of the entire Lanark and Lannraig
securitisation structures are consolidated in the financial
statements of the Group.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 287
SHAREHOLDER
INFORMATION
Annual general meeting (AGM)
The AGM of the Company will be held at 9.00am (GMT) on
Wednesday 29 January 2020 at the offices of Clifford Chance LLP,
10 Upper Bank Street, London, E14 5JJ, United Kingdom.
The Notice of AGM is published on the Company’s website
(www.virginmoneyukplc.com).
Shareholder enquiries
The Company’s share register is maintained by the Company’s
Registrar, Computershare. Shareholders with queries relating to
their shareholding should contact Computershare directly using
one of the methods below:
Registrar
Computershare UK
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
United Kingdom BS99 6ZZ
Tel within UK – 0370 707 1172
Tel outside UK – +44 370 707 1172
Email: www.investorcentre.co.uk/contactus
Web: www.investorcentre.co.uk
Computershare Australia
Computershare Investor Services Pty Limited
Yarra Falls
452 Johnston Street
Abbotsford VIC 3067
Australia
Tel within Australia – 1800764308
Tel outside Australia – 03 9415 4142
Email: www.investorcentre.com/contact
Web: www.investorcentre.com/au
Duplicate shareholder accounts
If you receive more than one copy of Company mailings this may
indicate that more than one account is held in your name on the
register. This happens when the registration details of separate
transactions differ slightly. If you believe more than one account
exists in your name you may contact the Company’s Registrar,
Computershare, to request that the accounts are combined.
There is no charge for this service.
Electronic communications
The Company uses its website (www.virginmoneyukplc.com) as its
primary means of communication with its shareholders provided that
the shareholder has agreed or is deemed to have agreed that
communications may be sent or supplied in that manner. Electronic
communications allow shareholders to access information instantly
as well as helping the Company reduce its costs and its impact on
the environment. Shareholders who have consented or are deemed
to have consented to electronic communications can revoke their
consent at any time by contacting the Company’s Registrar,
Computershare.
Shareholders can sign up for electronic communications online
via the following links:
Holders of shares on the London Stock Exchange:
www.investorcentre.co.uk/ecomms
Holders of CDIs on the Australian Securities Exchange:
www.investorcentre.com/au
Corporate website
Information on the Company is available on its website
(www.virginmoneyukplc.com) including:
— financial information – annual and half-yearly reports as well as
trading updates;
— share price information – current trading details and historical
charts;
— shareholder information – investor presentations and share
register profile; and
— news releases – current and historical.
Unsolicited telephone calls and communication
Shareholders are advised to be wary of any unsolicited advice,
offers to buy shares at a discount, or offers of free reports about
the Company. These are typically from overseas based ‘brokers’
who target shareholders, offering to sell them what often turns
out to be worthless or high risk shares. These operations are
commonly known as ‘boiler rooms’ and the ‘brokers’ can be very
persistent and extremely persuasive.
Shareholders are advised to deal with only financial services firms
that are authorised by the FCA. You can check a firm is properly
authorised by the FCA before getting involved by visiting
www.fca.org.uk/register. If you do deal with an unauthorised firm,
you will not be eligible to receive payment under the Financial
Services Compensation Scheme if anything goes wrong. For more
detailed information on how you can protect yourself from an
investment scam, or to report a scam, go to www.fca.org.uk/
scamsmart.
Shareholder interests
as at 30 September 2019
By size of holding:
RANGE
1–1,000
1,001–5,000
5,001–10,000
10,001–100,000
100,001–999,999,999
NO OF
SHAREHOLDERS
134,430
27,775
4,081
2,920
334
169,540
NO OF
%
SHARES
%
3.13
44,956,396
79.29
4.07
58,305,552
16.38
2.04
29,303,502
2.41
4.92
70,549,129
1.72
0.20 1,231,371,110
85.84
100 1,434,485,689 100.00
Indicative financial calendar for 2020
Q1 Trading Update
Annual General Meeting
Interim Results Announcement
Q3 Trading Update
Full Year Results Announcement
28 January 2020
29 January 2020
12 May 2020
4 August 2020
25 November 2020
STRATEGIC REPORTFINANCIAL RESULTSGOVERNANCERISK REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONVIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION 288
FORWARD-LOOKING
STATEMENTS
The information in this document may include forward-looking
statements, which are based on assumptions, expectations,
valuations, targets, estimates, forecasts and projections about
future events. These can be identified by the use of words such
as ‘expects’, ‘aims’, ‘targets’, ‘seeks’, ‘anticipates’, ‘plans’, ‘intends’,
‘prospects’, ‘outlooks’, ‘projects’, ‘forecasts’, ‘believes’, ‘estimates’,
‘potential’, ‘possible’, and similar words or phrases. These forward-
looking statements, as well as those included in any other material
discussed at any presentation, are subject to risks, uncertainties
and assumptions about the Group and its securities, investments
and the environment in which it operates, including, among other
things, the development of its business and strategy, any
acquisitions, combinations, disposals or other corporate activity
undertaken by the Group (including but not limited to the
integration of the business of Virgin Money Holdings (UK) plc and
its subsidiaries into the Group), trends in its operating industry,
changes to customer behaviours and covenant, macroeconomic
and/or geopolitical factors, changes to its Board and/or employee
composition, exposures to terrorist activity, IT system failures,
cybercrime, fraud and pension scheme liabilities, changes to law
and/or the policies and practices of the BoE, the FCA and/or other
regulatory and governmental bodies, inflation, deflation, interest
rates, exchange rates, changes in the liquidity, capital, funding and/
or asset position and/or credit ratings of the Group, future capital
expenditures and acquisitions, the repercussions of the UK’s
referendum vote to leave the European Union (EU), the UK’s exit
from the EU (including any change to the UK’s currency), Eurozone
instability, and any referendum on Scottish independence.
In light of these risks, uncertainties and assumptions, the events
in the forward-looking statements may not occur. Forward-looking
statements involve inherent risks and uncertainties. Other events
not taken into account may occur and may significantly affect the
analysis of the forward-looking statements. No member of the
Group or their respective Directors, officers, employees, agents,
advisers or affiliates gives any assurance that any such projections
or estimates will be realised or that actual returns or other results
will not be materially lower than those set out in this document
and/or discussed at any presentation. All forward-looking
statements should be viewed as hypothetical. No representation
or warranty is made that any forward-looking statement will come
to pass. No member of the Group or their respective Directors,
officers, employees, agents, advisers or affiliates undertakes any
obligation to update or revise any such forward-looking statement
following the publication of this document nor accepts any
responsibility, liability or duty of care whatsoever for (whether
in contract, tort or otherwise) or makes any representation or
warranty, express or implied, as to the truth, fullness, fairness,
merchantability, accuracy, sufficiency or completeness of, the
information in this document.
The information, statements and opinions contained in this
document do not constitute or form part of, and should not be
construed as, any public offer under any applicable legislation
or an offer to sell or solicitation of any offer to buy any securities
or financial instruments or any advice or recommendation with
respect to such securities or other financial instruments.
VIRGIN MONEY ANNUAL REPORT AND ACCOUNTS 2019ADDITIONAL INFORMATION The paper used for this report is
produced using 100% virgin wood fibre
from well‑managed forests. The pulp is
bleached using an Elementary Chlorine
Free (ECF) process and the mill has
both FSC® and PEFC© certification.
www.virginmoneyukplc.com
Virgin Money UK PLC
London Office:
Registered number 09595911
(England and Wales)
Floor 15, The Leadenhall Building
122 Leadenhall Street
London, EC3V 4AB
ARBN 609 948 281
(Australia)
Head Office:
30 St. Vincent Place
Glasgow, G1 2HL
Registered Office:
Jubilee House, Gosforth,
Newcastle upon Tyne,
NE3 4PL
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