Annual Financial Report

RNS Number : 9627N

Close Brothers Group PLC

04 October 2021

 

Annual Financial Report

Close Brothers Group plc (the "group" or "Close Brothers") announces that it has today published its Annual Report and Accounts 2021 (the "Annual Report"). The document is available to view on the group's website at:

https://www.closebrothers.com/investor-relations/investor-information/results-reports-and-presentations  

In accordance with Listing Rule 9.6.1, a copy of the document has also been submitted to the UK Listing Authority and will shortly be available for inspection on the National Storage Mechanism at:

https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The Annual Report will be sent to shareholders on or around 14 October 2021, together with the Notice of Annual General Meeting. The 2021 Annual General Meeting ("AGM") will be held as a combined physical and electronic meeting. The physical meeting will be held at 10 Crown Place, London EC2A 4FT on Thursday 18 November 2021, commencing at 11am. Shareholders will also be able to participate in the meeting electronically, and facilities will be provided to enable shareholders to vote on the resolutions to be proposed and ask questions. Further details on how shareholders can join the meeting electronically will be set out in the Notice of AGM.

As a result of the ongoing Coronavirus (COVID-19) pandemic, shareholders are strongly encouraged to attend the AGM electronically. Full details of how to participate electronically will be set out in the Notice of AGM. In order to protect the health of shareholders and employees, additional measures will be put in place for those attending the AGM in person. Where shareholders wish to attend the meeting in person and they can do so safely and in accordance with the prevailing Government guidance, they are asked to pre-register their attendance. Further details will be set out in the Notice of AGM.

The Board encourages shareholders to vote on the resolutions to be proposed at the AGM by proxy in advance of the deadline to be set out in the Notice of AGM. Further details regarding voting by proxy will be set out in the Notice of AGM.

The Board will continue to monitor closely the impact of the pandemic, including any changes in public health guidance. It may be necessary for the group to make changes to the format or location of the meeting, or to limit attendance at the physical meeting. Any changes to the AGM will be communicated to shareholders before the meeting through the group's website ( www.closebrothers.com/investor-relations/shareholder-information/annual-general-meeting ) and, where appropriate, by announcement through a regulatory information service.

The information included in the Appendix to this announcement has been extracted from the Annual Report and is reproduced here solely for the purposes of complying with the requirements of Disclosure Guidance and Transparency Rule ("DTR") 6.3.5 in respect of how to make annual financial reports available to the public.

The content of this announcement, including the Appendix, should be read in conjunction with the group's preliminary results announcement for the year ended 31 July 2021, which was released on 28 September 2021 and is available on the group's website at:

https://www.closebrothers.com/investor-relations/investor-information/results-reports-and-presentations

Together, these announcements constitute the material required by DTR 6.3.5 to be communicated in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full Annual Report. Defined terms used in the Appendix refer to terms as defined in the Annual Report. Page numbers and cross references in the Appendix refer to pages and sections of the Annual Report.

Enquiries: Alex Dunn, Company Secretary & Head of Legal (Corporate & Bank Retail)

020 3857 6057

About Close Brothers

Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading.  We employ over 3,700 people, principally in the UK. Close Brothers Group plc is listed on the London Stock Exchange and is a member of the FTSE 250.
 

Appendix

Directors' Responsibility Statement

The directors, whose names and functions are listed on pages 68 and 69, are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and the company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law). Additionally, the Financial Conduct Authority's Disclosure Guidance and Transparency Rules require the directors to prepare the group financial statements in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

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 period. In preparing the financial statements, the directors are required to:

·	select suitable accounting policies and then apply them consistently;
·	state whether applicable international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union have been followed for the group financial statements and whether United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and applicable law, have been followed for the company financial statements (together the 'relevant financial reporting frameworks'), subject to any material departures disclosed and explained in the group and company financial statements;
·	make judgements and accounting estimates that are reasonable and prudent; and
·	prepare the group and company financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business.

The directors are 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.

The directors are also responsible for keeping adequate accounting records that are sufficient to show and explain the group's 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 and the Directors' Remuneration Report comply with the Companies Act 2006.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors confirms that, to the best of their knowledge:

·	the group and company financial statements, which have been prepared in accordance with the relevant financial reporting frameworks, give a true and fair view of the assets, liabilities, financial position and profit or loss of the group and company respectively;
·	the Strategic Report, together with the Directors' Report and the Corporate Governance Report, includes a fair review of the development and performance of the business and the position of the group and company, together with a description of the principal risks and uncertainties that they face; and
·	the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the group's and company's position and performance, business model and strategy.

Principal Risks and Uncertainties

Pages 60 to 67 of the Annual Report contain the following statement on principal risks together with the emerging risks and uncertainties faced by the group. Further information on the group's approach to risk can be found in the Risk Report (which forms part of the Strategic Report in the Annual Report) on pages 56 to 67 of the Annual Report.

Principal Risks

The following pages set out the principal risks that may impact the group's ability to deliver its strategy, how we seek to mitigate these risks, and relevant key developments, both over the last year and anticipated for the next financial year.

While we constantly monitor our portfolio for emerging risks, the group's activities, business model and strategy remain unchanged. As a result, the principal risks that the group faces and our approach to mitigating them remain broadly consistent with prior years. This consistency has underpinned the group's track record of trading successfully and supporting our clients over many years.

The summary should not be regarded as a complete and comprehensive statement of all potential risks faced by the group, but reflects those which the group currently believes may have a significant impact on its future performance.

Business Risk

Risk

The group operates in an environment where it is exposed to an array of independent factors. Its profitability is impacted by the broader UK economic climate, changes in technology, regulation and customer behaviour, cost movements and competition from traditional and new players, varying in both nature and extent across its divisions.

Changes in these factors may affect the bank's ability to write loans at its desired risk and return criteria, result in lower new business volumes in Asset Management, impact levels of trading activity at Winterflood or result in additional investment requirements/higher costs of operation.

Risk Management and Mitigation 

The group's long track record of successful trading is supported by a consistent and disciplined approach to pricing and credit quality, both in competitive markets and through periods of heightened risk. This allows us to continue to support our customers at all stages in the financial cycle.

We build long-term relationships with our clients and intermediaries based on:

·	speed and flexibility of services;
·	our local presence and personal approach;
·	the experience and expertise of our people; and
·	our offering of tailored and client-driven product solutions.

This differentiated approach and the consistency of our lending results in strong customer relationships and high levels of repeat business.

We are further protected by the diversity of our businesses and product portfolio, which provides resilience against competitive pressure or market weakness in any one of the sectors we operate in.

Change/Outlook

No change

Covid-19 has had a significant impact on the UK economy. While the near-term outlook has improved, there remains significant, ongoing uncertainty regarding the future economic trajectory and the resulting impact on our customers and clients.

A number of support measures for individuals and businesses introduced during the pandemic are planned to come to an end during the second half of 2021 and their long-term effectiveness and impact on the broader competitive environment remain uncertain.

The group has therefore planned for a range of different economic and business scenarios to ensure it has the resources and operational capability to continue to perform effectively through this period of uncertainty. We continue to focus on supporting our customers, maintaining underwriting standards and investing in our business.

Further commentary on the market environment and its impact on each of our divisions is outlined on pages 42 to 55. Our business model is set out on pages 12 to 14.

Capital Risk

Risk

The group is required to hold sufficient regulatory capital (including equity and other loss-absorbing debt instruments) to enable it to operate effectively. This includes meeting minimum regulatory requirements, operating within risk appetites set by the board and supporting its strategic goals.

Risk Management and Mitigation 

Capital risk is measured using CET1, Tier 1 and total capital ratios, determined in line with regulatory capital adequacy requirements. These ratios, and associated metrics, are actively monitored, and reported quarterly to the regulator. They are also disclosed annually in the group's Pillar 3 disclosures as well as in the Annual Report - see pages 44 and 45.

Both actual and forecast capital adequacy is reported through the group's governance framework with oversight from the Capital Adequacy Committee. Annually, as part of the ICAAP, the group also undertakes its own assessment of its capital requirements against its principal risks (Pillar 2a) together with an assessment of how capital adequacy could be impacted in a range of stress scenarios (Pillar 2b). Under both assessments, the group ensures that it maintains sufficient levels of capital adequacy.

The group retains a range of capital risk mitigants, the most notable being its strong capital generating capacity, arising from its track record of sustained profitability. The group also maintains access to capital markets and during the year successfully renewed and increased its Tier 2 capital instruments.

Change/Outlook

Risk decreased

While Covid-19 may continue to impact capital due to lower than expected profits, action by authorities to support lending through the use of CBILS and similar schemes has led to a reduction in RWAs. This is expected to continue in the near to medium term.

Further commentary on the group's capital is outlined in note 22 on pages 167 to 169.

Conduct Risk

Risk

The group's relationship-focused model amplifies the importance of exhibiting strong behaviours in order to ensure positive outcomes for our customers.

Failing to treat customers fairly, to safeguard client assets or to provide advice and products which are in clients' best interests, also has the potential to damage our reputation and may lead to legal or regulatory sanctions, litigation or customer redress. This applies to current, past and future business.

Risk Management and Mitigation 

The group is committed to treating all customers fairly and delivering appropriate customer outcomes.

We seek to mitigate conduct risk by:

·	providing straightforward and transparent products and services to our clients and customers;
·	maintaining a clear governance and approval process for both existing and new products to ensure they meet the needs for which they are designed;
·	employing appropriate arrangements to confirm regulatory requirements and guidance aimed at ensuring positive client and customer outcomes are sufficiently embedded within business practices. A programme of risk-based monitoring is also employed to verify adherence; and
·	utilising a range of regularly reviewed conduct risk measures to identify and respond to adverse thematic trends.

Change/Outlook

Risk increased

Regulatory focus and prioritisation of conduct risk continues to increase. Over the course of the last year legislation has been introduced for Debt Respite (Breathing Space) to be provided to qualifying customers while the FCA has finalised its guidance around vulnerable customers and issued proposals for a new Customer Duty, all of which directly impact the group. Workstreams have been established to ensure the group can meet all requirements and regulatory expectations.

Credit Risk

Risk

As a lender to businesses and individuals, the bank is exposed to credit losses if customers are unable to repay loans and outstanding interest and fees. At 31 July 2021 the group had loans and advances to customers amounting to £8.4 billion.

The group also has exposure to counterparties with which it places deposits or trades, and also has in place a small number of derivative contracts to hedge interest rate and foreign exchange exposures.

Risk Management and Mitigation 

We seek to minimise our exposure to credit losses from our lending by:

·	applying strict lending criteria when testing the credit quality and covenant of the borrower;
·	maintaining consistent and conservative loan to value ratios with low average loan size and short-term tenors;
·	lending on a predominantly secured or structurally protected basis against identifiable and accessible assets;
·	maintaining rigorous and timely collections and arrears management processes; and
·	operating strong control and governance both within our lending businesses and with oversight by a central credit risk team.

Our exposures to counterparties are mitigated by:

·	excess liquidity of £1.3 billion placed with the Bank of England;
·	continuous monitoring of the credit quality of our counterparties within approved set limits; and
·	Winterflood's trading relating to exchange traded cash securities being settled on a delivery versus payment basis. Counterparty exposure and settlement failure monitoring controls are also in place.

Change/Outlook

No change

Credit losses have reduced in the year to 31 July 2021, although uncertainty remains and we continue to closely monitor Covid-19 impacts.

Forbearance levels have decreased from those observed at the peak of the pandemic; however, they remain above historical, pre-pandemic levels. Although the economic outlook has improved, the trajectory in the short to medium term remains uncertain. In addition, the cessation of various government support schemes could have an impact on both consumers and businesses and the impact of this on our customers will be closely observed. These factors could result in higher credit losses in the future.

Assumptions relating to the Novitas business provisions have been updated. Other counterparty exposures are broadly unchanged, with the majority of our liquidity requirements and surplus funding placed with the Bank of England.

Further commentary on the credit quality of our loan book is outlined on pages 47 to 51. Further details on loans and advances to customers and debt securities held are in notes 11 and 12 on pages 155 to 159 of the financial statements.

Our approach to credit risk management and monitoring is outlined in more detail in note 28 on pages 176 to 189.

Funding and Liquidity Risk

Risk

The Banking division's access to funding remains key to support our lending activities and the liquidity requirements of the group.

Risk Management and Mitigation 

Our funding approach is based on the principles of "borrow long, lend short" and diversity by source and channel. This approach provides resilience and flexibility.

Total available funding is kept well in excess of the loan book to ensure funding is available when needed.

A strong liquidity position is maintained to ensure that we remain comfortably within both internal risk appetites and regulatory requirements. Liquidity risk is assessed on a daily basis to ensure adequate liquidity is held and remains readily accessible in stressed conditions.

Funding and liquidity risks are reviewed at each meeting of the bank's Asset and Liability Committee.

Change/Outlook

No change

While economic uncertainty has the potential to impact funding markets, the group remains conservatively funded and continues to have access to a wide range of funding sources and products.

During the last year, a 10-year £350 million senior unsecured bond was issued, deepening our investor base and franchise into the debt capital market. Fixed Rate ISAs and further Notice Accounts were also launched to strengthen and broaden our savings proposition.

Elevated levels of liquidity have been maintained, predominantly via deposits placed with the Bank of England, to ensure the maintenance of sufficient headroom to both internal and external liquidity requirements. Liquidity has now started to normalise, trending towards pre-Covid-19 levels.

Further commentary on funding and liquidity is provided on pages 44 and 45. Further financial analysis of our funding is shown in note 19 on page 166 of the financial statements.

Market risk

Risk

Market volatility impacting equity and fixed income exposures, and/or changes in interest and exchange rates, have the potential to impact the group's performance.

Risk Management and Mitigation 

Our policy is to minimise interest rate risk by matching fixed and variable interest rate assets and liabilities and using swaps where appropriate. The capital and reserves of the group do not have interest rate liabilities and as such are not hedged.

When measuring interest rate risk in the Banking book the following components are considered:

·	repricing risk: the risk presented by assets and liabilities that reprice at different times and rates;
·	embedded optionality risk: the risk presented by contract terms embedded in certain assets and liabilities; and
·	basis risk: the risk presented when yields on assets, and costs on liabilities, are based on two different bases.

Two core measures are subsequently monitored on a monthly basis: Earnings at Risk ("EaR") and Economic Value ("EV").

Foreign exchange exposures are generally hedged using foreign exchange forwards or currency swaps with exposures monitored daily against approved limits.

Winterflood is a market maker providing liquidity to its clients in equity and fixed income instruments. Trading is predominantly short term, with most transactions settling within two days. Trading positions are monitored on a real time basis.

Change/Outlook

No change

Interest rate risk is broadly unchanged. Base rates remain low, though with reduced expectation of negative rates compared to this time last year.

The traded market risk environment continues to be affected by Covid-19 and its impact on the economy, although this is becoming less prominent with focus now shifting to emerging inflation risks.

Further detail on the group's exposure to market risk is outlined in note 28 on pages 186 to 188 of the financial statements.

The sensitivity analysis on interest rate exposures shown in note 28 on page 187 demonstrates the limited level of exposure to interest rate and foreign exchange movements.

Operational Risk

Risk

The group is exposed to various operational risks through its day-to-day operations, all of which have the potential to result in financial loss or adverse impact.

Losses typically crystallise as a result of inadequate or failed internal processes, people, models and systems, or as a result of external factors.

Impacts to the business, customers, third parties and the markets in which we operate are considered within a maturing framework for resilient delivery of important business services.

Legal and regulatory risks are also considered as part of operational risk. Failure to comply with existing legal or regulatory requirements, or to adapt to changes in these requirements in a timely fashion, may have negative consequences for the group. Similarly, changes to regulation can impact our financial performance, capital, liquidity and the markets in which we operate.

Risk Management and Mitigation 

The group seeks to maintain its operational resilience through effective management of operational risks, including by:

·	sustaining robust operational risk management processes, governance and management information;
·	identifying key systems, third party relationships, processes and staff, informing investment decisions;
·	investing in technology to provide reliable and contemporary customer service offerings and effective model outputs;
·	attracting, retaining and developing high quality staff through the operation of competitive remuneration and benefit structures and an inclusive environment that embraces diversity and recognises behaviours aligned to our cultural attributes;
·	investing in cyber security including expertise, tools and staff engagement;
·	maintaining focus on personal data protection;
·	adopting fraud prevention and detection capabilities aligned with our risk profile; and
·	planning and rehearsing strategic and operational responses to severe but plausible stress scenarios.

Legal and regulatory risks are mitigated by:

·	responding in an appropriate, risk-based and proportionate manner to any changes to the legal and regulatory environment as well as those driven by strategic initiatives;
·	implementing appropriate and proportionate policies, standards and procedures designed to capture relevant regulatory and legal requirements;
·	providing clear advice on legal and regulatory requirements, including in relation to the scope of regulatory permissions and perimeter guidance;
·	delivering relevant training to all staff, including anti-money laundering, anti-bribery and corruption, conduct risk, data protection and information security. This is augmented by tailored training to relevant employees in key areas;
·	deploying a risk-based monitoring programme designed to assess the extent to which compliant practices are embedded within the business;
·	maintaining, where possible, constructive and positive relationships and dialogue with regulatory bodies and authorities; and
·	maintaining a prudent capital position with headroom above minimum capital requirements.

Change/Outlook

No change

The continued impacts of Covid-19 may lead to risks associated with people, third party suppliers, operational process execution, information security and fraud. The group continues to utilise its operational risk management framework to manage these risks with oversight by relevant risk committees.

The volume and complexity of regulatory and legal requirements applicable to the group continues to increase, with management focused on responding in a timely manner to changing expectations.

Notwithstanding these stresses, improvements continue to be made across the operational risk framework, including further enhancement of information security management and strengthening of the firm's operational resilience. Process improvements, including through the use of robotic process automation, continue to reduce the likelihood of manual errors occurring.

We continue to invest in experienced people and relevant systems and processes to help us navigate the increasingly complex regulatory and legal landscape. Arrangements in place to mitigate these risks continue to evolve in their sophistication, application and effectiveness.

Reputational Risk

Risk

Protection and effective stewardship of the group's reputation are fundamental to its long-term success.

Detrimental stakeholder perception could lead to impairment of the group's current business and future goals. This could arise from any action or inaction of the company, its employees or associated third parties.

Risk Management and Mitigation 

Reputational risk monitoring and management are embedded throughout the organisation, including via:

·	focus on employee conduct, with cultural attributes embedded throughout the group;
·	supplier and intermediary conduct management through the relationship lifecycle;
·	new product approval and existing product review processes for business products and services;
·	a proactive approach to environmental, social and governance matters;
·	embedding of reputational risk management within the management frameworks of other risk types; and
·	proactive communication and engagement with investors, analysts and other market participants.

A key responsibility of the group's board is to define, promote and monitor the company's culture, and adherence to our cultural framework is reported regularly to the board via the group's culture dashboard; see page 85 of the Corporate Governance Report.

Change/Outlook

No change

The group's strong culture, consideration of all stakeholders and commitment to open and transparent communication continue to mitigate potential reputational risk, including the heightened business, conduct and operational risks arising from Covid-19. Our prudent business model also continues to act as a natural mitigant of reputational risk.

The group's focus on acting responsibly and sustainably enables it to respond and adapt to a range of stakeholder expectations with regard to sustainable practices and address heightened public interest in businesses taking a proactive, responsible approach to their operations, products and services. Internal oversight of matters relating to employees, the environment, wider society and community impact at both an operational and strategic level ensure the group gives due considerations to the reputational impact of its actions.

Note: While Defined Benefit Pension Obligation Risk, Tax Risk and Intra-Group Risk are also classified internally as Principal Risks, none are deemed sufficiently material to impact the group's ability to deliver its strategy. The group's defined benefit pension scheme was closed to new entrants in 1996 and to future accrual in 2012. For further information see note 25 on pages 171 and 172.

Emerging Risks and Uncertainties

In addition to day-to-day management of its principal risks, the group utilises an established framework to monitor its portfolio for emerging risks, consider broader market uncertainties, and support its organisational readiness to respond.

This incorporates input and insight from both a top-down and bottom-up perspective:

·	Top-down: identified by directors and executives at a group level via the Group Risk and Compliance Committee and the board.
·	Bottom-up: identified at a business level and escalated, where appropriate, via risk updates into the Group Risk and Compliance Committee

Group-level emerging risks are monitored by the Group Risk and Compliance Committee on an ongoing basis, with agreed actions tracked to ensure the group's preparedness should an emerging risk crystallise.

Emerging risks and uncertainties currently tracked by the group are detailed below.

Risk

Economic Uncertainty

Mitigating Actions and Key Developments

The group's business model aims to ensure that we are able to trade successfully and support our clients in a wide range of economic conditions. By maintaining a strong financial position we aim to be able to absorb short-term economic downturns, respond to any increase in activity or market demand, and in so doing, build long-term relationships by supporting our clients when it really matters.

The group focuses on quality and returns rather than overall growth or market share and continues to invest in the business for the long term, to support our customers and clients through the cycle.

We test the robustness of our financial position by carrying out regular stress testing on our performance and financial position in the event of adverse economic conditions. The group's strategic priorities are regularly reviewed and updated to ensure the group continues to focus on those that support the business model and adapt to changes in the external operating environment.

Outlook

Covid-19 has notably impacted economic activity and there remains ongoing uncertainty regarding the future economic trajectory in the UK and across global markets more generally. Notwithstanding the resilience of our model, we are continuing to plan for a range of different economic and business scenarios to ensure we have the resources and capability to continue to perform effectively.

Further commentary on the attributes and resilience of the group's diversified business model is shown on pages 12 to 14 with commentary on the market environment and its impact on each of our divisions outlined on pages 42 to 55.

Risk

Financial Loss Resulting from the Physical or Transitional Impacts of Climate Change

Mitigating Actions and Key Developments

A multi-year programme of work is underway to implement an appropriate and regulatory compliant climate risk framework, overseen by a Climate Risk Steering Committee. Regular updates are provided to the Risk Committee, which retains oversight responsibility, while senior management responsibility is assigned to the group chief risk officer.

For further detail on the firm's action to date with regard to climate risk, see pages 31 to 33.

Outlook

Climate risk represents an area of increasing focus, both within the group and across the industry more broadly. We continue to closely monitor regulatory developments as well as emerging best practice and are exploring various avenues to leverage this as appropriate to support framework development.

The short-dated tenor of our lending book and strong resilience capabilities mitigate current risk exposure, however work to further review the risks and opportunities posed by climate change remains ongoing. This includes continued review of our credit assessment approach in the Banking division, with a view to ensuring appropriate consideration of climate risk as part of the underwriting process.

Outputs from this review will further shape the group's strategic response and support our planned alignment with the evolving recommendations of the Task Force on Climate-related Financial Disclosures ("TCFD").

Risk

Transition from LIBOR

Mitigating Actions and Key Developments

A programme is in place to transition the firm away from the use of LIBOR in loan documentation, Treasury transactions and other forms of contract in favour of alternative Risk-Free Rates ("RFRs").

The scope of this work encompasses both new contracts and existing contracts that mature after 31 December 2021, the deadline set by the Prudential Regulatory Authority and the Financial Conduct Authority.

Outlook

We continue to make good progress in making relevant changes to loan documentation to move away from the use of LIBOR and, where necessary, have upgraded our processing systems. We will continue to support industry initiatives relating to the transition from LIBOR and remain on track to effect the necessary changes by 31 December 2021.

Risk

Disruption from Scottish Independence

Mitigating Actions and Key Developments

Monitoring is in place to track changes in the political landscape with regard to Scottish independence.

In the event that Scotland does vote for independence in a future referendum, we are confident that any resulting disruption can be managed effectively with minimal impact on business operations.

Outlook

Various movements in the support for Scottish independence have been observed in opinion polls over the last year. We continue to monitor developments closely.

Risk

Legal and Regulatory Change

Mitigating Actions and Key Developments

The group maintains an established horizon scanning and monitoring framework to identify regulatory and legal changes that could materially impact its operations, including legislative and regulatory reform, changes in regulatory practice and case law developments. The group engages regularly with regulators in the jurisdictions in which it operates, including the PRA and FCA in the UK, as well as industry bodies and external advisers to understand relevant changes.

High-level gap and impact analyses are undertaken to assess new compliance requirements and identify any changes required to the group's systems and controls, processes and procedures, with programmes of work initiated to address any identified issues. The extent and nature of this work ranges from simple isolated remedial activity to large multi-year projects, depending on the complexity and scale of the change.

Outlook

A sustained increase in legal and regulatory change has been experienced in recent years and this is expected to continue in the short to medium term, including as a result of the continued implementation of existing EU legislation into UK law, and possible future regulatory and legal divergence. Further change is also expected as governments and regulators continue to respond to the impact of Covid-19 and prepare for equivalent events that may occur in the future. Changes in regulation are also expected in other priority areas identified by regulators in the UK, the Republic of Ireland and other jurisdictions in which the group operates.

Risk

Evolving Working Practices

Mitigating Actions and Key Developments

Colleagues not deemed essential workers have predominantly worked remotely since the onset of the Covid-19 pandemic, although teams are now coming back together, where permissible within local public health rules, on both an ad hoc and permanent working pattern basis.

Notwithstanding, the group now assesses the appropriateness of its work patterns on an ongoing basis through consideration of four key principles: customer and client outcomes; risk appetite; culture and collaboration; and employee choice.

Utilising this framework, hybrid patterns of office and remote working are now being supported for certain additional roles that did not regularly have this flexibility prior to the pandemic.

Outlook

Public health requirements regarding the extent of allowable office-based working may require the company to continue adapting its approach over time.

Extensive work has been completed to risk assess hybrid working patterns, enabling the identification and mitigation of any risks arising.

Management continues to monitor market expectations regarding work patterns. Evolving colleague expectations may present competitive threats and/or opportunities regarding staff attraction, retention and engagement going forward.

Risk

Technological Change and New Business Models

Mitigating Actions and Key Developments

Technological change and new business models have the potential to impact the group's market position and future profitability. While regulation remains a barrier to entry for many potential new competitors, consumer expectations continue to evolve, challenging existing capabilities and traditional approaches. Competitors are adapting in response, while new financial technology companies continue to develop alternative business models.

Notwithstanding this, the group prides itself on its deep knowledge of its customers and clients and the industries/sectors in which they operate. Market developments are closely monitored to identify and understand emerging dynamics as well as the evolving preferences of our customers.

Outlook

The group is continuing to invest in strategic data capabilities as part of our business and technology strategies. Data governance remains a key focus as part of this as we look to further manage and exploit our data assets.

Our businesses, particularly within Retail, also continue to prioritise digital channels and messaging to enhance/improve the customer journey and associated experience.

The group is also focused on upskilling current staff and strategic provider partnerships to support the digital transformation of our businesses where appropriate.

Partnerships between existing financial institutions and large technology houses present an opportunity that the group can further explore.

Risk

Supply Chain Risk

Mitigating Actions and Key Developments

The group's third party management framework ensures a risk-based approach is adopted with regard to the identification, classification and management of the many potential business impacts that can result from failures in the supply chain.

Through the identification of inherent risks at the outset of all third party engagements, appropriate due diligence is completed prior to onboarding, suitably robust contracts are put in place and effective lifecycle management is implemented.

Ongoing reporting of key risk and performance indicators coupled with periodic supplier reviews from our third party monitoring team help to manage supply chain risk. Oversight of all material suppliers is retained via the Group Risk and Compliance Committee while continuity of service is a key focus for all critical relationships through resilience and substitutability planning.

The group is also continuing to build out its understanding of supply chain concentration risk across material third and fourth parties.

Outlook

While Covid-19 has undoubtedly strained supply chains globally, this has proved more moderate in the Financial Services sector and less so for the group given its relatively low level of reliance on offshore service provision.

Notwithstanding, further evolution of the group's third party management framework is required to keep pace with the evolving regulatory landscape over the short to medium term, noting this remains an area of heightened regulatory focus, particularly with respect to material suppliers.

In addition, the group is currently responding to other related new/pending regulatory requirements including, but not limited to, operational resilience.

Related party transactions

Page 170 of the Annual Report discloses the following related party transactions.

Transactions with key management

Details of directors' remuneration and interests in shares are disclosed in the Directors' Remuneration Report on pages 97 to 125.

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the group's key management are the members of the group's Executive Committee, which includes all executive directors, together with its non-executive directors.

The table below details, on an aggregated basis, key management personnel emoluments:

	2021 £ million	2020 £ million
Emoluments Salaries and fees  Benefits and allowances  Performance related awards in respect of the current year: Cash  Deferred	4.6 0.4 5.3 2.5	4.0 0.4 3.6 1.5
	12.8	9.5
Share-based awards	2.6	0.9
	15.4	10.4

Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £3.5 million (2020: £4.2 million).

Key management have banking and asset management relationships with group entities which are entered into in the normal course of business. Amounts included in deposits by customers at 31 July 2021 attributable, in aggregate, to key management were £0.2 million (31 July 2020: £0.3 million).

 

END

 

 

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