Annual Financial Report

4 April 2016

Capita plc

(the "Company")

Annual Financial Report

In compliance with Disclosure and Transparency Rule 4.1, the Company announces the publication of its Annual Financial Report for the year ended 31 December 2015. Pursuant to Listing Rule 9.6.1, a copy of this document has been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do. The document is also available on the Company's website: www.capita.com.

Additional Information

A condensed set of the Company's financial statements and information on important events that have occurred during the financial year and their impact on the financial statements, were included in the preliminary results announcement released on 25 February 2016. That information, together with the information set out below, which is extracted from the Annual Report and Accounts 2015, is provided in accordance with Disclosure and Transparency Rule 6.3.5. This information should be read in conjunction with the Company's preliminary results announcement. This announcement is not a substitute for reading the full Annual Report and Accounts 2015.

Risk management

Capita’s continued growth, history and ongoing innovation, as well as moves into new sectors and locations, evidence that it is not a risk averse business. Key risks are, however, identified and managed through comparison to the Group’s stated risk appetite (see below); where there is sufficient ‘gap’ between our residual risk level and our appetite, we identify and act on opportunities arising, thus making for profitable growth.

A key feature of Capita’s growth has been its ever changing size and complexity. Each new sector and jurisdiction brings new considerations and the overall risk environment, within which we operate, continues to develop. During 2015, we have noted the following significant external risk factors:

• As in 2014, the likely impact of EU Data Protection Regulation upon firms such as Capita which are large scale data processors. We note that there has been an extended period of debate in Brussels on this important regulation and await its finalisation.

• Further public and political concern on ‘cyber’ risks, which is the activity of those who seek to use unauthorised access to systems and records to perpetrate fraud, theft and blackmail. A number of high-profile cases continue to evidence this increased risk which we recognise but also widen to include the security of all forms of commercial and personal data entrusted to us.

• Changes in international tax regimes which necessarily lead to changes for our clients across the world and whose tax policies which we may administer (although not design or advise upon).

As stated, our Risk Management Framework facilitates business management to identify and manage their risks. This is undertaken in reference to 22 risk categories and the appetite thresholds, both agreed by the Board annually. The reporting emanating from this is, in the first instance, for local risk governance to assess and challenge. These consolidate and feed up to Executive Risk Committees (one for each COO) who further assess the level of residual risk in the Divisions.

During 2015, we also introduced a set of ‘corporate risks’ which are higher level articulations of key risks which the Board can track. There are 12 in all, eight which are recognised as risks which can hamper profitable growth and four which, if crystallising to a significant degree, could have an immediate, material detrimental impact on the profit level and/or share price of Capita. Given these are defined and agreed by the Board, we have used them to populate our Principal risks on page 52.

Our risk appetite

Risk appetite, as defined in our risk management framework, is the degree of risk the Company is prepared to accept in the pursuit of its objectives before specific action is deemed necessary to reduce it. In determining the degree of risk appetite, Capita reconciles two thresholds:

• A risk tolerance: defined as the bearable level of variation Capita is willing to accept around specific objectives

• A risk critical limit/concern: defined as the maximum risk Capita can bear and remain effective in delivering its strategy.

Capita has established the tolerance and critical limit/concern risk appetite to help the business to understand the relative significance of any of the business risks faced and better prioritise risk monitoring and control activities. Specifically, risk appetite helps determine the degree of control that needs to be applied to a particular area of risk. To focus risk reporting, emphasis is clearly given to the reporting of risks that are categorised at uncomfortable or critical limit to ensure appropriate action is being taken.

Principal risk categories

Corporate risks to the objectives of Capita plc

We operate a total of 22 risk categories within the risk management framework which are kept under regular review. In accordance with provision C.2.1 of the 2014 revised Code, the Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Board has now defined 12 corporate risks which represent the principal risks to the objectives of Capita plc (our ‘top down’ risks). Our risk governance process maps the output of the 22 categories (‘bottom up’ risks) against these corporate risks and thus ensures these are monitored on an ongoing basis across all levels of the business.

1. Significant failures in internal systems of control

Potential impacts on Capita:

Operational, financial and regulatory risk events

Consequent client loss

Consequent regulatory or legal action

Consequent redress and remediation costs

How are we managing the risk?:

Operation of risk management framework

Operational frameworks, where appropriate, for key processes

‘Three Lines of Defence’ control functions

Comprehensive internal audit programme

Whistleblowing policy

2015 changes:

Continued roll-out of risk management framework across all Capita businesses, including new acquisitions

Strengthening of local risk governance and oversight of internal audit actions

Refresh of risk event/incident reporting process

2. Lack of corporate financial stability

Potential impacts on Capita:

Inability to economically fund ongoing business

Further financial demands from creditors

Inability to pay suppliers, staff

How are we managing the risk?:

Ongoing monitoring of cash flow

Strong treasury function

Comprehensive tax policy and management

2015 changes:

Continued diversification of secure funding sources for growth

Investment in Group financial systems

Consideration of formal credit rating work to open up new funding as required

3. Failures in information security controls

Potential impacts on Capita:

Significant financial penalties Loss of licence

Restrictions on trade

Reputational damage

How are we managing the risk?:

Detailed information security policies and practical standards

Dedicated Group security function

Threat assessment reviews undertaken

Incident management process

2015 changes:

Increased Executive level information security governance

Investment into formal Infosec network across local businesses

Refreshed training for staff

New social media use guidelines and training

4. Legal/regulatory risk

Potential impacts on Capita:

Significant financial penalties Loss of licence

Restrictions on trade

Reputational damage

How are we managing the risk?:

Risk and compliance teams across Group and business level

Co-ordination of regulatory

Executive risk governance focus on regulated businesses

Group legal and commercial teams

Whistleblowing policy

2015 changes:

Work to understand and manage wider regulatory risk in non-FS regulated sectors (for example utilities)

Introduction of ‘Conduct Risk’ Framework to facilitate and track key conduct risks

Non-UK expansion requiring further investment into systems/knowledge

Strengthening of commercial teams and training on standards

5. Adverse financial/business performance

Potential impacts on Capita:

Poor return on capital

Adverse share price impact

Funding issues

How are we managing the risk?:

Strong monitoring of performance through MOB process

Cash conversion discipline applied through management targets

Monitoring of ROCE and cash conversion at Divisional and Group Board

2015 changes:

Group Finance Director focus on ROCE

Initiatives on organic sales and innovation to sustain growth

6. Failure to innovate

Potential impacts on Capita:

Competitor gains

Degradation of markets

Client attraction/retention issues

How are we managing the risk?:

Innovation programme in digitalisation since 2014

Other development of products and services to meet changing market needs

Divisional management cross-working to support innovation

M&A strand on identifying and acquiring ‘innovative’ capability

2015 changes:

Further service development and sales on ‘digital transformation’

Incubator initiatives

Refresh of corporate values emphasising innovation

7. Increased internal business complexity

Potential impacts on Capita:

Diseconomies of scale

Insensitive talent retention and reward processes

System complexities

Opportunity cost in sales and organisational efficiencies

Cost differentials across similar businesses

How are we managing the risk?:

Ongoing review of internal organisation, matching divisional structures to most appropriate go-to-market approach

CIO initiative on internal communications and system enablers

Group services focus on ‘facilitating’ not ‘frustrating’ operational businesses

2015 changes:

Divisional reorganisation to reflect market

Further investment in talent and identification of next generation of leadership

Systems refresh focusing on internal communications efficiency/effectiveness

8. Adverse changes in national, international political landscape

Potential impacts on Capita:

Threats to contract/market environment regardless of service success

How are we managing the risk?:

Continued diversification between public and private sectors

Active tracking of key UK, EU and other policy changes

Continued focus on public sector and trade association relations

2015 changes:

Increased political, economic, social and technological tracking by Exec Risk Committees

9. Operational issues leading to reputational risk

Potential impacts on Capita:

Poor investor view

Market degradation

Client attraction/retention issues

How are we managing the risk?:

Maintenance of Group PR team

Commitment, through corporate values, to openness and encouragement of escalation of significant issues

Proactive communications to investor community

Active relationships with client PR teams

2015 changes:

Further investment in strength of PR teams reflecting growth of Capita

Use of incident reporting processes to support timely escalation

10. Operational IT risk

Potential impacts on Capita:

Operational losses

Uncompetitive propositions

Control failings

How are we managing the risk?:

CIO IT risk register

Executive governance of IT Security risks

IT issues actively tracked in risk management framework

2015 changes:

Significant investment in strengthening Divisional CIO teams to drive local business IT needs

Greater control and oversight of efficacy of IT spend by Group CIO

11. Failure to effectively manage Group’s talent and human resources

Potential impacts on Capita:

Opportunity cost

Costly turnover

Contract issues

Key person risk

Inability to replicate past corporate growth

How are we managing the risk?:

Group Head of Talent and team separate from Group HR

Employee survey to gauge staff concerns

Comprehensive benefits programme to reflect diverse staff population

Regular review of staff turnover and other metrics

2015 changes:

Talent strategy approved by Board

Investment in new talent management systems

Introduction of consistent and formalised approach to succession planning

Pilot of high potential mentoring scheme

Leadership induction introduced

Investment in ‘Investor in Young People’ accreditation

12. Weaknesses in acquisition and contracting life cycle

Potential impacts on Capita:

Unplanned losses

Senior management distraction

Contract degradation

Client issues

How are we managing the risk?:

Proven due diligence process

Operation of ‘Black Hat’ approvals process for all bids, acquisitions

Strong due diligence and acquisition policies under regular review

Employment of dedicated teams for due diligence in key risk areas

Use of outside expertise as required

2015 changes:

Consolidation of sales leads through Group business development to facilitate consistency

Alignment of due diligence risk reporting with risk management framework.

Related party transactions

Compensation of key management personnel                                                                  

	2015	2014
	£m	£m
Short term employment  benefits	11.9	9.0
Pension	0.2	0.2
Share based payments	6.0	6.8
Total	18.1	16.0

Gains on share options exercised in the year by Capita plc Executive Directors were £4.3m (2014: £6.6m) and by key management personnel £3.2m (2014: £2.1m), totalling £7.5m (2014: £8.7m).

During the year, the Group rendered administrative services to Smart DCC Ltd, a wholly owned subsidiary which is not consolidated. The Group received £29.5m (2014: £25.8m) of revenue for these services. The services are procured by Smart DCC on an arm’s length basis under the DCC licence. The services are subject to review by Ofgem to ensure that all costs are economically and efficiently incurred by Smart DCC.

Capita Pension and Life Assurance Scheme is a related party of the Group. Transactions with the Scheme are disclosed in note 32 – Employee benefits on page 151.

The following companies are substantial shareholders in the Company and therefore a related party of the Company (in each case, for the purposes of the Listing Rules of the UK Listing Authority).

The number of shares held on 18 February 2016 was as below:

Shareholder                                         No. of shares                % of voting rights

Invesco Asset Management                                     53,674,295                                           8.08

Veritas Asset Management LLP                               41,859,611                                           6.30

BlackRock Inc                                                        37,899,583                                           5.70

Woodford Investment Management LLP                    36,810,693                                           5.54

Responsibility Statement of Directors in respect of the annual financial statements

The Directors confirm that, to the best of their knowledge:

1. the financial statements prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole;

2. the Directors’ report, including content by reference, includes a fair review of the development and performance of the business and position of the Issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Directors’ statement on the annual report

The Directors consider the annual report taken as a whole, to be fair, balanced and understandable and that it provides the information necessary for the shareholders to assess the Company’s position and performance, business model and strategy.

On behalf of the Board

Francesca Todd
Company Secretary
24 February 2016

Forward-looking statement

The Directors present the annual report for the year ended 31 December 2015 which includes the strategic report, governance and audited accounts for this year. Pages 1 to 104 of this annual report comprise a report of the Directors that has been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law. Where we refer in this report to other reports or material, such as a website address, this has been done to direct the reader to other sources of Capita plc information which may be of interest to the reader. Such additional materials do not form part of the report.

Contact:  Francesca Todd, Company Secretary, 020 7202 0641