Annual Financial Report
7 April 2015
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
2014. 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.morningstar.co.uk/uk/NSM. The document is also
available on the Company's website: www.capita.co.uk.
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 26 February 2015. That information, together with the
information set out below, which is extracted from the Annual Report and
Accounts 2014, is provided in accordance with the 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 2014. Page and note references
below refer to the corresponding pages and/or notes in the Annual Report and
Accounts 2014.
Principal risks and uncertainties
Risk management
Controlled risk taking is fundamental to the organisation's success, ensuring
that risks and rewards are balanced in the pursuit of sustainable, profitable
growth. Capita is not risk averse, it looks to actively manage risks which it
has scrutinised and has an appetite for within our underlying risk and
tolerance framework.
We believe that conducting our business with integrity, applying a high level
of skill, care and diligence to what we do, services the interests of all our
stakeholders. This allows us to grow in a controlled manner, and achieve our
business goals.
The risks Capita faces evolve over time as a result of both the changing size
and complexity of our business and its services but also through changes in the
external legal, economic and regulatory environment. In 2014, we have seen the
following developments in the wider risk environment:
* increased understanding of the extent of `cyber' threats facing UK plc
including the activity of hacktivists and those seeking fraudulent access
to funds, data and information
* increased European regulation in areas such as data protection and asset
management
* economic pressures raising litigation risk around asset performance
* UK regulatory developments around `conduct' requiring greater focus on end
customer outcomes in financial services and utility industries
* increased focus on environmental risks through carbon pricing and energy.
Our risk management activities seek to protect the business from unnecessary
risk exposure, whilst still allowing divisional and business management to
operate with sufficient flexibility to react to market needs. It also helps us
demonstrate to clients, end customers and regulators how we take our
responsibilities seriously.
As Capita's business model devolves certain authority and responsibility to
business management at all levels, risk management is primarily the
responsibility of those who are in the best position to understand and act
effectively. They apply risk management in line with the Group-wide Risk Policy
set to reflect the risk appetite set by the Board and within an industry
standard `three lines of defence' model.
Principal risk categories
We operate a total of 22 risk categories which are kept under regular review.
Those deemed to have significant potential impact or exposure, as identified
through the Group's Risk Management Framework, are detailed below:
Key risk Potential risks and Mitigating activities 2014 developments
categories impacts include
Business * Changes to the * Focus on widening * Successful entry
environment political, scope of existing to new markets
commercial or contracts and sectors for
market landscape Capita including
affect the * Focus on 11 mortgage
viability of diverse public and administration,
Capita's private sector electronic
businesses. Key markets monitoring and
elements of AXELOS, our
Capita's business * Continual work to public sector
model fail to diversify business subsidiary
adjust to operation across partnership with
changing market new private/public the Cabinet
needs on a timely sector markets and Office
basis and become market segments.
diluted or * Actively
obsolete monitored
potential
* Actions of political and
competitors other
impact Capita's developments
competitive
position. * Focus from CEO
on innovation
and
responsiveness
to change.
Operational * Failure to meet * Operating * Significant and
delivery contractual performance complex projects
terms, milestones indicators in now brought
and service level place for all within single
agreements in business and key division to
major contracts contracts share management
expertise and
* Delivery of * Robust contractual learnings
contracts fail to and governance regarding robust
meet quality, mechanism oversight and
cost or support help
performance * MOB and Risk focus right
expectations Committee management
challenge and oversight and
* Financial client oversight support
service penalties
* Risk-based * Refreshed risk
* Mismanagement of independent governance
complex client assurance (GIA) through new
relationship framework to
structures * Cross-relationship track issues and
operational, mitigate
* Loss of contract. technical and earlier.
commercial
oversight and
governance.
Duty of care * Failure to * Safeguarding * Successful
provide adequate policy, process introduction of
duty of care to and standards Group-wide
staff, Safeguarding
stakeholders, * Widespread focus policy
clients and end on `conduct risk'
customers of our and the delivery * New health &
services of end customer safety and
outcomes property portal
* End customer for reporting
detriment * Rigorously applied and issue
Group-wide health tracking/
* Adverse impact on and safety policy, resolution.
wellbeing of our process, training
employees and audits
* Failure of health * Incident
and safety management system
compliance that includes
issues around duty
* Failure of of care
clinical
governance in our * Robust operational
health-related monitoring and
businesses. oversight of our
health-related
activities.
Technical * Failure to * Adoption of * Appointment of
infrastructure provide adequate industry standard CIO to take
and resilience IT services to managed service forward greater
support core standards and development of
services and controls Group's IT
business needs strategy and
* Robust business central
* Loss of core continuity/ provisioning
systems/ disaster recovery
technology with programme * Commencement of
long term impact Group-wide
on client * Deployment of business impact
delivery issue detection assessments to
software and draw up single
* System resilience resolution view of
and stability practices resilience
does not meet issues
service delivery * Adoption, where
needs or appropriate, of * Acquisitions of
expectations ISO27001 standards Updata and other
IT/ network
* Legacy system * Investment into firms strengthen
maintenance upgraded core IT our core network
infrastructure. provision
* Inadequate
business * Development of
continuity/ cloud capability
disaster recovery and move of core
arrangement. systems
commenced in
2014.
Information * Exposures and * Group-wide * Refresh of our
security subsequent policies and Group
contractual and procedures Information
regulatory Security
penalties brought * Single information standards
about through security framework
failure to * Group-wide
protect * Risk Committee information
information/ data oversight at all threat
assets of Capita, business levels assessment with
our clients or assistance of
end customers * Staff training and third party
from loss, theft, monitoring consultancy
alteration or programme
destruction * Recognition of
* Incident importance of
* Failure in the management system Cyber Security
mechanisms to risks by Board.
secure or recover * Cross-Group forum
sensitive to evaluate issues
information and effective
controls
* Loss or theft of
intellectual * Local divisional
property skilled specialist
information
* Cyber crime. security resource.
Human * Failure to * Comprehensive * Further roll out
resources attract, manage succession of our vetting
or retain planning process to new
sufficient, Capita
skilled or * Continual businesses and
experienced staff development and internal movers
performance to sensitive
* Morale issues management roles
impact
productivity and * Extensive training * Refresh of
innovation and development `Speak Up'
for all staff and Public Interest
* Costs of management Disclosure
increased/ Policy
excessive * Comprehensive
turnover of staff screening/vetting * Talent
process in line management
* Impact on with roles initiatives
Capita's launched to
credibility as an * Whistleblowing identify and
employer line to ensure any nurture existing
significant staff Capita talent.
* Key person issues can be
reliance/ reported and
management escalated
stretch. appropriately.
Partnerships/ * Contractual * Group outsourcing * Refresh and
third parties/ dispute with (material roll-out of
outsourcing contracted firms suppliers) policy revamped
material
* Disruption to * Review of key suppliers policy
supply chain third party
contracts by * Greater controls
* Service commercial teams over contract
interruption documentation
where reliance is * Monitoring of key and retention
placed on the outsourced
resilience of services Service * AXELOS public
partner, third Level Agreements sector
party or (SLAs) subsidiary
outsourced partnership with
relationship * Partnership Cabinet Office
governance launched January
* Partners and/or 2014.
third parties do * Business
not act within resilience
the intended arrangement of
limits of their third parties in
authority or do place to protect
not perform in a key services.
manner consistent
with Capita's
strategies and
objectives
* Liabilities for
actions of third
parties
* Failure in third
parties
governance/
inappropriate
business
practices.
Integration, * Planned synergies * Due diligence on * Refreshed
transition and failing to broad approach to
change achieve targets categorisation of business
risk exposures integration
* Detrimental focusing on
impact on growth * `Black Hat' local management
and performance governance process ownership with
of business appropriate
* Group Board review oversight.
* Integration and approval of
challenges acquisition and
resulting in significant bids
increased
operational risks * Commercial and
contractual terms
* Mispricing of closely reviewed
long term major to ensure clarity
contracts
* Early adoption of
* Impairment of MOB & risk
goodwill and management
intangible assets processes
through
underperformance * Emerging risk
or unforeseen review and
developments in appropriate
acquired escalation
businesses
* Integration and
* Multi-stakeholder transition process
relationships
* Strong financial
* Mismanagement of controls operated
priority by unified
deliverables and financial
business as structure and
usual. system
* Robust change gap
analysis
activities and
remediation
planning.
Financial * Risk of financial * Strong financial * Group Internal
exposure loss or failure controls operated Audit reviews of
to operate within by a unified completeness of
financial targets finance structure income across
as a consequence and system spread of
of external or businesses
internal * Monthly finances
vulnerabilities reviewed in MOB * Introduction of
"My Purchasing"
* Adverse effect on * Rigorous capital process to
business expenditure strengthen
financial approval and procurement
performance from, monitoring controls and
e.g. mispricing, controls link to
performance invoicing.
issues, client * Robust procurement
dispute or process to further
changing market strengthen
landscape expenditure
controls
* Adverse investor
impact (share * Business disposal.
price).
Legal risk * Failure to comply * Commercial and * New Commercial
with legislative, contractual terms Risk Awareness
contractual, closely reviewed training
fiduciary, to ensure clarity launched for
statutory and/ or wider business
judicial * Contractual leadership to
requirements warranty enhance
knowledge of key
* Criminal * Monitoring and contracting
liability. tracking of process and
legislative commercial risk
requirements management.
across all Capita
jurisdictions
* Proactive and
reactive Group
legal support.
Financial * Financial impact * Board led * Appointment of
crime of fraud anti-corruption new Group Head
and anti-fraud of Financial
* Significant civil culture; zero Crime Prevention
and criminal tolerance approach to better
penalties in with robust coordinate Group
cases of bribery/ disciplinary policies and
corruption and process standards
subsequent
potential * Formal risk * Enhanced
prohibition from assessment of policies and
public sector vulnerabilities oversight of
contracts financial crime
* Appropriate risks in Group
* Exposure to policies and to reflect
parties procedures in growth of Capita
exploiting place including a into new sectors
vulnerabilities Group-wide and
through a variety whistleblowing jurisdictions
of fraudulent or policy
criminal acts * Refresher
* Comprehensive training
* Failure in training of senior undertaken for
supervision or management across Board and senior
corrective Capita management on
actions bribery risks.
associated with * Fraud
financial crime. investigations
team to
investigate and
prosecute cases,
identify root
causes and embed
remedial work.
Regulatory * Non-compliance of * Appropriate * Introduction of
risk our businesses policies and consumer credit
with the processes regulation by
requirements of FCA managed
regulated bodies * Monitoring by across Group
in the UK or compliance teams firms
overseas in Group,
Divisions and * Ongoing
* Regulatory, Business units and relationship
financial and Internal Audit with FCA
contractual oversight maintained
penalties
* Supervisory teams * New regulator
* New regulatory for Group firms
* Rigorously applied with the
requirements for environmental purchase of a
emerging Capita policy and process Solicitors
businesses Regulatory
* Measure and manage Authority
* Non-compliance carbon footprint supervised firm
with exposure and
environmental achieve energy * Further
regulations. reduction development of
knowledge of our
* Reduction in paper exposures to
use and increase Ofcom, Ofgem
in recycling. regulatory
regimes.
Brand and * Internal or * Centralised * Further
reputation external proactive PR team strengthening of
activities and management
events affect * Incident support control around
Capita's brand or by internal PR key contracts
reputation team such as the
Recruitment
* Failure to * Reactive PR Partnering
maintain client strategy in Project to
or market sector association with provide even
trust in the business, clients greater line of
Capita brand and public sector sight for Board
subsidiary
* Threat of hostile partnerships * Greater
or sustained understanding
media attention * Investor relations across business
towards Capita strategy to of activities of
businesses and develop and central PR team
activities or maintain open
corporate actions relationships with * Re-launch of
investment Capita values,
* Adverse investor community. emphasising
impact. service delivery
excellence and
fair treatment
of customers
* Increased
recognition of
potential brand
and reputation
risks through
specific
inclusion on the
risk framework.
Related party transactions
Compensation of key management personnel
2014 2013
£m £m
Short term employment 9.0 8.1
benefits
Pension 0.2 0.2
Share based payments 6.8 6.0
Total 16.0 14.3
Gains on share options exercised in the year by Capita plc executive directors
were £6.6m (2013: £5.2m) and by key management personnel £2.1m (2013: £1.1m),
totalling £8.7m (2013: £6.3m).
During the year, the Group rendered administrative services to Smart DCC Ltd, a
wholly owned subsidiary which is not consolidated. The Group received £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 154.
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 2015 was as below:
Shareholder No. of shares % of voting rights
Marathon Asset Management LLP 22,933,805 3.46
Woodford Investment Management LLP 35,060,250 5.30
Invesco Asset Management 68,877,348 10.41
Veritas Asset Management LLP 48,291,643 7.30
Legal & General Investment 19,920,066 3.01
Management
Statement of Directors' responsibility
The Directors confirm that, to the best of their knowledge:
a. the consolidated financial statements in this report, which have been
prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union, IFRIC interpretations and those
parts of the Companies Act 2006 applicable to companies reporting under
IFRS, give a true and fair view of the assets, liabilities, financial
position and profit of the Group taken as a whole;
b. the parent company financial statements in this report, which have been
prepared in accordance with United Kingdom Accounting Standards (UK GAAP)
and applicable law, give a true and fair view of the assets, liabilities,
financial position and profit of the Company; and
c. the management report contained in this report includes a fair review of
the development and performance of the business and position of the Company
and the Group taken as a whole, together with a description of the
principal risks and uncertainties that they face.
By order of the Board
A Parker G M Hurst*
Chief Executive Group Finance Director
25 February 2015
Forward-looking statement
The Directors present the annual report for the year ended 31 December 2014
which includes the strategic report, governance and audited Group accounts for
the year. Pages 1 to 108 of the 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
information which may be of interest to the reader. Such additional materials
do not form part of the report.
Contact: Francesca Todd, Group Company Secretary, 020 7202 0641
*G M Hurst retired from the Board on 28 February 2015
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